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Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In
finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available which could ...

finance
, the purpose of investing is to generate a return from the invested asset. The return may consist of a gain (profit) or a loss realized from the sale of a property or an investment, unrealized
capital appreciation Capital appreciation is an increase in the price or value of asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can ...
(or depreciation), or investment income such as
dividend A dividend is a distribution of profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit ...

dividend
s,
interest In and , interest is payment from a or deposit-taking financial institution to a or depositor of an amount above repayment of the (that is, the amount borrowed), at a particular rate. It is distinct from a which the borrower may pay the len ...

interest
, or rental income, or a combination of capital gain and income. The return may also include currency gains or losses due to changes in the foreign currency exchange rates.
Investor An investor is a person that allocates capital with the expectation of a future financial return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Types ...
s generally expect higher
returns Return may refer to: In business, economics, and finance * Rate of return, the financial term for the profit or loss derived from an investment * Tax return, a blank document or template supplied by a government for use in the reporting of tax inf ...
from riskier investments. When a low-risk investment is made, the return is also generally low. Similarly, high risk comes with a chance of high returns. Investors, particularly novices, are often advised to diversify their
portfolio Portfolio may refer to: Objects * Portfolio (briefcase), a type of briefcase Collections * Portfolio (finance) In finance, a portfolio is a collection of investments To invest is to allocate money Image:National-Debt-Gillray.jpeg, ...
. Diversification has the
statistical Statistics is the discipline that concerns the collection, organization, analysis, interpretation, and presentation of data Data are units of information Information can be thought of as the resolution of uncertainty; it answers th ...

statistical
effect of reducing overall risk.


Investment and risk

An investor may bear a
risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty Uncertainty refers to Epistemology, epistemic situations involving imperfect or unknown information. It applies to predictions of future events, to ...
of loss of some or all of their
capital Capital most commonly refers to: * Capital letter Letter case (or just case) is the distinction between the letters that are in larger uppercase or capitals (or more formally ''majuscule'') and smaller lowercase (or more formally ''minusc ...
invested. Investment differs from
arbitrage In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
, in which
profit Profit may refer to: Business and law * Profit (accounting) Profit, in accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic en ...
is generated without investing capital or bearing risk.
Savings Wealth is the abundance of valuable financial asset A financial asset is a non-physical asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (ta ...
bear the (normally remote) risk that the financial provider may default.
Foreign currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the most specific sense is money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed t ...
savings also bear
foreign exchange risk Foreign exchange risk (also known as FX risk, exchange rate risk or currency risk) is a financial risk Financial risk is any of various types of risk associated with financingFunding is the act of providing resources to finance a need, program ...
: if the currency of a savings account differs from the account holder's home currency, then there is the risk that the exchange rate between the two currencies will move unfavourably so that the value of the savings account decreases, measured in the account holder's home currency. Even investing in tangible assets like has its risk. And just like with most risk, property buyers can seek to mitigate any potential risk by taking out mortgage and by borrowing at a lower loan to security ratio. In contrast with savings, investments tend to carry more risk, in the form of both a wider variety of risk factors and a greater level of uncertainty. Industry to industry volatility is more or less of a risk depending. In
biotechnology Biotechnology is a broad area of biology, involving the use of living systems and organisms to develop or make products. Depending on the tools and applications, it often overlaps with related scientific fields. In the late 20th and early 21st c ...

biotechnology
, for example, investors look for big profits on companies that have small market capitalizations but can be worth hundreds of millions quite quickly. The risk is approximately 90% of the products researched do not make it to market due to regulations and the complex demands within pharmacology as the average prescription drug takes 10 years and $2.5 billion USD worth of capital.


History

The
Code of Hammurabi The Code of Hammurabi is a Babylonian legal text composed 1755–1750 BC. It is the longest, best-organised, and best-preserved legal text from the ancient Near East. It is written in the Old Babylonian dialect of Akkadian, purportedly by Ham ...

Code of Hammurabi
(around 1700 BC) provided a legal framework for investment, establishing a means for the pledge of collateral by codifying debtor and creditor rights in regard to pledged land. Punishments for breaking financial obligations were not as severe as those for crimes involving injury or death. In the medieval Islamic world, the
qiradThe qirad (also known as Muqaradah by Hanafi and Hanbali scholars)Sapuan, Noraina Mazuin. "An evolution of Mudarabah contract: a viewpoint from classical and contemporary Islamic scholars." Procedia economics and finance 35, no. 3 (2016): 349-358. wa ...
was a major financial instrument. This was an arrangement between one or more investors and an agent where the investors entrusted capital to an agent who then traded with it in hopes of making a profit. Both parties then received a previously settled portion of the profit, though the agent was not liable for any losses. Many will notice that the ''qirad'' is similar to the institution of the
commenda The commenda was a medieval contract A contract is a legally binding agreement that defines and governs the rights and duties between or among its parties Image:'Hip, Hip, Hurrah! Artist Festival at Skagen', by Peder Severin Krøyer (1888) ...
later used in western Europe, though whether the qirad transformed into the ''commenda'' or the two institutions evolved independently cannot be stated with certainty. Amsterdam Stock Exchange is considered to be the world's oldest stock exchange. Established in 1602 by
Dutch East India Company The Dutch East India Company, officially the United East India Company ( nl, Vereenigde Oost Indische Compagnie; VOC), was a multinational corporation A multinational company (MNC) is a corporate A corporation is an organization—u ...

Dutch East India Company
, the company issued the first shares on the Amsterdam Stock Exchange. In the early 1900s, purchasers of stocks, bonds, and other securities were described in media, academia, and commerce as speculators. Since the
Wall Street crash of 1929 The Wall Street Crash of 1929, also known as the Great Crash, was a major American stock market crash A stock market crash is a sudden dramatic decline of stock In finance, stock (also capital stock) consists of all of the shares In ...
, and particularly by the 1950s, the term investment had come to denote the more conservative end of the securities spectrum, while speculation was applied by financial brokers and their advertising agencies to higher risk securities much in vogue at that time. Since the last half of the 20th century, the terms speculation and speculator have specifically referred to higher risk ventures.


Investment strategies


Value investment

A value investor buys assets that they believe to be undervalued (and sells overvalued ones). To identify undervalued securities, a value investor uses analysis of the financial reports of the issuer to evaluate the security. Value investors employ accounting ratios, such as
earnings per share Earnings per share (EPS) is the monetary value of earningsEarnings are the net benefits of a corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single ...

earnings per share
and sales growth, to identify securities trading at prices below their worth.
Warren Buffett Warren Edward Buffett ( ; born August 30, 1930) is an American business magnate, investor, and philanthropist. He is currently the chairman and CEO of Berkshire Hathaway Berkshire Hathaway () is an American multinational Multinational may ...
and
Benjamin Graham Benjamin Graham (; né Grossbaum; May 9, 1894 – September 21, 1976) was a British-born American economist An economist is a professional and practitioner in the social science Social science is the Branches of science, branch of sci ...
are notable examples of value investors. Graham and Dodd's seminal work, ''Security Analysis'', was written in the wake of the
Wall Street Crash of 1929 The Wall Street Crash of 1929, also known as the Great Crash, was a major American stock market crash A stock market crash is a sudden dramatic decline of stock In finance, stock (also capital stock) consists of all of the shares In ...
. The price to earnings ratio (P/E), or earnings multiple, is a particularly significant and recognized fundamental ratio, with a function of dividing the share price of the stock, by its earnings per share. This will provide the value representing the sum investors are prepared to expend for each dollar of company earnings. This ratio is an important aspect, due to its capacity as measurement for the comparison of valuations of various companies. A stock with a lower P/E ratio will cost less per share than one with a higher P/E, taking into account the same level of
financial Finance is a term for the management, creation, and study of money and investments. Pamela Drake and Frank Fabozzi (2009)What Is Finance?/ref> Specifically, it deals with the questions of how an individual, company or government acquires money ...

financial
performance; therefore, it essentially means a low P/E is the preferred option. An instance in which the price to earnings ratio has a lesser significance is when companies in different industries are compared. For example, although it is reasonable for a telecommunications stock to show a P/E in the low teens, in the case of hi-tech stock, a P/E in the 40s range is not unusual. When making comparisons, the P/E ratio can give you a refined view of a particular stock valuation. For investors paying for each dollar of a company's earnings, the P/E ratio is a significant indicator, but the price-to-book ratio (P/B) is also a reliable indication of how much investors are willing to spend on each dollar of company assets. In the process of the P/B ratio, the share price of a stock is divided by its net assets; any intangibles, such as goodwill, are not taken into account. It is a crucial factor of the price-to-book ratio, due to it indicating the actual payment for tangible assets and not the more difficult valuation of intangibles. Accordingly, the P/B could be considered a comparatively conservative metric.


Intermediaries and collective investments

Investments are often made indirectly through
intermediary An intermediary (or go-between) is a third party that offers intermediation services between two parties, which involves conveying messages between principals in a dispute, preventing direct contact and potential escalation of the issue. In law ...
financial institutions. These intermediaries include
pension funds A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides retirement income. Pension funds typically have large amounts of money to invest and are the major investors in listed and private ...
,
bank A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), stat ...

bank
s, and
insurance Insurance is a means of protection from financial loss. It is a form of risk management Risk management is the identification, evaluation, and prioritization of risk In simple terms, risk is the possibility of something bad happening. ...

insurance
companies. They may pool money received from a number of individual end investors into funds such as
investment trust An investment trust is a form of investment fund An investment fund is a way of investment, investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of t ...
s, unit trusts, and
SICAV A SICAV is a collective investment scheme common in Western Europe, especially Luxembourg, Switzerland, Italy, Spain, Belgium, Malta, France, and the Czech Republic. SICAV is an acronym in French language, French for ''société d'investissement à ...
s to make large-scale investments. Each individual investor holds an indirect or direct claim on the assets purchased, subject to charges levied by the intermediary, which may be large and varied. Approaches to investment sometimes referred to in marketing of collective investments include
dollar cost averaging Dollar cost averaging (DCA) is an investment strategy that aims to reduce the impact of Volatility (finance), volatility on large purchases of financial assets such as equities. Dollar cost averaging is also called the constant dollar plan (in the U ...
and
market timing Market timing is the strategy Strategy (from Greek στρατηγία ''stratēgia'', "art of troop leader; office of general, command, generalship") is a general plan to achieve one or more long-term or overall goals under conditions of uncerta ...
.


Famous investors

Investors An investor is a person that allocates capital with the expectation of a future financial return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Type ...
famous for their success include
Warren Buffett Warren Edward Buffett ( ; born August 30, 1930) is an American business magnate, investor, and philanthropist. He is currently the chairman and CEO of Berkshire Hathaway Berkshire Hathaway () is an American multinational Multinational may ...
. In the March 2013 edition of ''
Forbes ''Forbes'' () is an American business magazine owned by Integrated Whale Media Investments and the Forbes family The Forbes family is one of the Boston Brahmins—a wealthy extended American family long prominent in Boston, Massachusett ...

Forbes
'' magazine, Warren Buffett ranked number 2 in their
Forbes 400 The Forbes 400 or 400 Richest Americans is a list published by ''Forbes ''Forbes'' () is an American business magazine owned by Integrated Whale Media Investments and the Forbes family (publishers), Forbes family. Published eight times a ...
list. Buffett has advised in numerous articles and interviews that a good investment strategy is long-term and
due diligence Due diligence is the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party or an act with a certain standard of care Standard may re ...
is the key to investing in the right assets. Edward O. Thorp was a highly successful
hedge fund A hedge fund is a pooled investment fund Image:Financial info.jpg, The values and performance of collective funds are listed in newspapers. An investment fund is a way of investment, investing money alongside other investors in order to benefit ...
manager in the 1970s and 1980s who spoke of a similar approach. The investment principles of both of these investors have points in common with the
Kelly criterion In probability theory Probability theory is the branch of mathematics concerned with probability. Although there are several different probability interpretations, probability theory treats the concept in a rigorous mathematical manner by expressi ...
for money management. Numerous interactive calculators which use the Kelly criterion can be found online.


Investment valuation

Free cash flow In corporate finance Corporate finance is the area of finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and i ...
measures the cash a company generates which is available to its debt and equity investors, after allowing for reinvestment in
working capital Working capital (abbreviated WC) is a financial metric which represents available to a business, organization, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is considered a ...
and
capital expenditure Capital expenditure or capital expense (capex or CAPEX) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a capital expenditure ...
. High and rising free cash flow, therefore, tend to make a company more attractive to investors. The debt-to-equity ratio is an indicator of
capital structure Capital structure in corporate finance Corporate finance is the area of finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and manag ...

capital structure
. A high proportion of
debt Debt is an obligation that requires one party, the debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to ...

debt
, reflected in a high debt-to-equity ratio, tends to make a company's
earnings Earnings are the net benefits of a corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law ...
, free cash flow, and ultimately the returns to its investors, riskier or volatile. Investors compare a company's debt-to-equity ratio with those of other companies in the same industry, and examine trends in debt-to-equity ratios and free cashflow.


See also

*
Asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...
*
Capital accumulation Capital accumulation (also termed the accumulation of capital) is the dynamic that motivates the , involving the of money or any with the of increasing the initial monetary of said asset as a whether in the form of , , , or . The aim of cap ...
*
Capital gains tax A capital gains tax (CGT) is a tax on the profit realized on the sale of a non-inventory asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (t ...
* Climate-related asset stranding *
Diversification (finance) In finance, diversification is the process of allocating capital in a way that reduces the exposure to any one particular asset or risk. A common path towards diversification is to reduce risk In simple terms, risk is the possibility of someth ...
*
EBITDA A company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal personality, legal or a mixture of both, with a specific objective. Company members sh ...
*
Financial risk Financial risk is any of various types of risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty Uncertainty refers to Epistemology, epistemic situations involving imperfect or unknown information ...
*
Foreign direct investment#REDIRECT Foreign direct investment A foreign direct investment (FDI) is an investment in the form of a Controlling interest, controlling ownership in a business in one country by an entity based in another country. It is thus distinguished fro ...
*
Fundamental analysis Fundamental analysis, in accounting and finance, is the analysis of a business's financial statements (usually to analyze the business's assets, Liability (financial accounting), liabilities, and earnings); health; and Competition, competitors an ...
*
Fundamental Analysis Software Fundamental analysis software automates analysis that supports fundamental analysts in their review of a company's financial statements and valuation. Features The following are the most common features of fundamental analysis applications. Bac ...
*
Hedge fund A hedge fund is a pooled investment fund Image:Financial info.jpg, The values and performance of collective funds are listed in newspapers. An investment fund is a way of investment, investing money alongside other investors in order to benefit ...
* List of countries by gross fixed investment as percentage of GDP *
List of economics topics The following outline is provided as an overview of and topical guide to economics: Economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distrib ...
*
Market sentiment Market sentiment (also known as investor attention) is the general prevailing attitude of investor An investor is a person that allocates capital with the expectation of a future financial return (profit) or to gain an advantage (interest). Th ...
* Mortgage investment corporation *
Rate of return In finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in t ...
*
Socially responsible investing Sustainable Energy: One of many forms of sustainable investing Socially responsible investing (SRI), social investment, sustainable socially conscious, "green" or ethical investing, is any investment To invest is to allocate money Image ...
* Specialized investment fund *
Time value of money The time value of money is the widely accepted conjecture that there is greater benefit to receiving a sum of money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, ...
*
Time-weighted return The time-weighted return (TWR) is a method of calculating investment return. To apply the time-weighted return method, combine the returns over sub-periods by compounding them together, resulting in the overall period return. The rate of return over ...
*
Mutual Fund A mutual fund is a professionally managed investment fund An investment fund is a way of investment, investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the ri ...


References


External links

* {{Authority control