What Is an Investment?
An investment is an asset or item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time. When an individual purchases a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth. An investment always concerns the outlay of some asset today—time, money, or effort—in hopes of a greater payoff in the future than what was originally put in.
For example, an investor may purchase a monetary asset now with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit.
- An investment is an asset or item that is purchased with the hope that it will generate income or appreciate in value at some point in the future.
- An investment always concerns the outlay of some asset today (time, money, effort, etc.) in hopes of a greater payoff in the future than what was originally put in.
- An investment can refer to any mechanism used for generating future income, including bonds, stocks, real estate property, or a business, among other examples.
What's an Investment?
How an Investment Works
The act of investing has the goal of generating income and increasing value over time. An investment can refer to any mechanism used for generating future income. This includes the purchase of bonds, stocks, or real estate property, among other examples. Additionally, purchasing a property that can be used to produce goods can be considered an investment.
In general, any action that is taken in the hopes of raising future revenue can also be considered an investment. For example, when choosing to pursue additional education, the goal is often to increase knowledge and improve skills (in the hopes of ultimately producing more income).
Because investing is oriented toward the potential for future growth or income, there is always a certain level of risk associated with an investment. An investment may not generate any income, or may actually lose value over time. For example, it's also a possibility that you will invest in a company that ends up going bankrupt or a project that fails to materialize. This is the primary way that saving can be differentiated from investing: saving is accumulating money for future use and entails no risk, whereas investment is the act of leveraging money for a potential future gain and it entails some risk.
Types of Investments
Within a country or a nation, economic growth is related to investments. When companies and other entities engage in sound business investment practices, it typically results in economic growth.
For example, if an entity is engaged in the production of goods, it may manufacture or acquire a new piece of equipment that allows it to produce more goods in a shorter period of time. This would raise the total output of goods for the business. Taken in combination with the activities of many other entities, this increase in production could cause the nation’s gross domestic product (GDP) to rise.
An investment bank provides a variety of services to individuals and businesses, including many services that are designed to assist individuals and businesses in the process of increasing their wealth.
Investment banking may also refer to a specific division of banking related to the creation of capital for other companies, governments, and other entities. Investment banks underwrite new debt and equity securities for all types of corporations, aid in the sale of securities, and help to facilitate mergers and acquisitions, reorganizations, and broker trades for both institutions and private investors. Investment banks may also provide guidance to companies who are considering issuing shares publicly for the first time, such as with an initial public offering (IPO).
Investing vs. Speculation
Speculation is a distinct activity from investing. Investing involves the purchase of assets with the intent of holding them for the long-term, while speculation involves attempting to capitalize on market inefficiencies for short-term profit. Ownership is generally not a goal of speculators, while investors often look to build the number of assets in their portfolios over time.
Although speculators are often making informed decisions, speculation cannot usually be categorized as traditional investing. Speculation is generally considered a higher risk activity than traditional investing (although this can vary depending on the type of investment involved). Some experts compare speculation to gambling, but the veracity of this analogy may be a matter of personal opinion.
Frequently Asked Questions
How is an investment different from a bet or gamble?
In an investment, you are providing some individual or entity with funds to be put to work growing a business, starting new projects, or maintaining day-to-day revenue generation. Investments, while they can be risky, have a positive expected return. Gambles, on the other hand, are based on chance and not putting money to work. Gambles are highly risky and also have a negative expected return in most cases (e.g., at a casino).
Is investment the same as speculation?
No. An investment is typically a long-term commitment, where the payoff from putting that money to work can take several years. Investments are typically made only after due-diligence and analysis has been undertaken to understand the risks and benefits that could unfold. Speculation, on the other hand, is pure directional bet on the price of something, and often for the short-term.
What are some types of investments I can make?
Most ordinary individuals can easily make investments in stocks, bonds, and CDs. With stocks, you are investing in the equity of a company, which means you invest in some residual claim to a company's future profit flows and often gain voting rights (based on number of shares owned) to give your voice to the direction of the company. Bonds and CDs are debt investments, where the borrower puts that money to use in a pursuit that is expected to bring in cash flows greater than the interest owed to the investors.
Why invest when you can save money with zero risk?
As mentioned, investing is putting money to work in order to grow it. When you invest in stocks or bonds, you are putting that capital to work under the supervision of a firm and its management team. Although there is some risk, that risk is rewarded with a positive expected return in the form of capital gains and/or dividend & interest flows. Cash, on the other hand, will not grow, and may very well lose buying power over time due to inflation. Put simply, without investment, companies would not be able to raise the capital needed to grow the economy.