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To invest is to allocate
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 the left corner">174x174px Money is any item or verifiable record that is generally a ...
in the expectation of some benefit/return in the future. In other words, to invest means owning an asset or an item with the goal of generating income from the investment or the appreciation of your investment which is an increase in the value of the asset over a period of time. When you invest it always requires a sacrifice of some present asset that you own today such as time, money, or effort. In [[finance, the benefit from an investing is when you receive a return on your investment. The return may consist of a gain or a loss realized from the sale of a property or an investment, unrealized [[capital appreciation (or depreciation), or investment income such as
dividend A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a proportion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-i ...
s,
interest Interest, in finance and economics, is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct ...
, rental income etc., 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#REDIRECT Exchange rate {{Redirect category shell|1= {{R from other capitalisation ...
.
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 high returns. Investors, particularly novices, are often advised to adopt a particular
investment strategyIn finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio. Individuals have different profit objectives, and their individual skills make different tactics and ...
and diversify their
portfolio Portfolio may refer to: Objects * Portfolio (briefcase), a type of briefcase Collections * Portfolio (finance), a collection of assets held by an institution or a private individual * Artist's portfolio, a sample of an artist's work or a case ...
. Diversification has the
statistical Statistics is the discipline that concerns the collection, organization, analysis, interpretation, and presentation of data. In applying statistics to a scientific, industrial, or social problem, it is conventional to begin with a statistical ...
effect of reducing overall
risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environmen ...
.


Investment and risk

An investor may bear a
risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environmen ...
of loss of some or all of their
capital Capital most commonly refers to: * Capital letter, an upper-case letter in any type of writing * Capital city, the area of a country, province, region, or state, regarded as enjoying primary status, usually but not always the seat of the governm ...
invested. Investment differs from
arbitrage In economics and finance, arbitrage (, ) is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between ...
, in which
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 (real property), a nonpossessory interest ...
is generated without investing capital or bearing risk.
Savings Wealth is the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating old English word ''weal'', which is fro ...
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 in any form when in use or circulation as a medium of exchange, especially circulating banknotes and coins. ...
savings also bear
foreign exchange risk Foreign exchange risk (also known as FX risk, exchange rate risk or currency risk) is a financial risk that exists when a financial transaction is denominated in a currency other than the domestic currency of the company. The exchange risk arises ...
: 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 lik
property
has it's risk. And just like with most risk, property buyers can seek to mitigate any potential risk by taking out mortgag
insurance
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 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 Hammur ...

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
commendaThe commenda was a medieval contract which developed in Italy around the 10th century, and was an early form of limited partnership. The commenda was an agreement between an investing partner and a traveling partner to conduct a commercial enterprise ...
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 Oostindische Compagnie; VOC; id|Persatuan Perusahaan Hindia Timur), was a megacorporation founded by a government-directed consolidation of several rival ...
, 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 that occurred in the autumn of 1929. It started in September and ended late in October, when share prices on the New York Stock Exchange colla ...
, 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 earnings per outstanding share of common stock for a company. In the United States, the Financial Accounting Standards Board (FASB) requires EPS information for the four major categories of the inc ...
and sales growth, to identify securities trading at prices below their worth.
Warren Buffett Warren Edward Buffett ( ; born August 30, 1930) is an American investor, business tycoon, philanthropist, and the chairman and CEO of Berkshire Hathaway. He is considered one of the most successful investors in the world and has a net worth of ...
and
Benjamin Graham Benjamin Graham (; né Grossbaum; May 9, 1894 – September 21, 1976) was a British-born American economist, professor and investor. He is widely known as the "father of value investing", and wrote two of the founding texts in neoclassical invest ...
are notable examples of value investors. Graham and Dodd's seminal work,
Security Analysis Security analysis is the analysis of tradeable financial instruments called securities. It deals with finding the proper value of individual securities (i.e., stocks and bonds). These are usually classified into debt securities, equities, or some ...
, 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 that occurred in the autumn of 1929. It started in September and ended late in October, when share prices on the New York Stock Exchange colla ...
. 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 Earnings per share (EPS) is the monetary value of earnings per outstanding share of common stock for a company. In the United States, the Financial Accounting Standards Board (FASB) requires EPS information for the four major categories of the inc ...
. 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 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 ...
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 ratioThe price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company's current market value to its book value (where ''book value'' is the value of all assets owned by a company). The calculation can be performed in two ways, but the ...
(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 c ...
,
bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Because b ...
s, and
insurance Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss. An entity which provides insurance is known as an insurer, an insurance com ...
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 found mostly in the United Kingdom and Japan. Investment trusts are constituted as public limited companies and are therefore closed ended since the fund managers cannot redeem or create shares. Th ...
s,
unit trust#REDIRECT Unit trust#REDIRECT Unit trust {{R from other capitalisation ...
{{R from other capitalisation ...
s,
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 for ''société d'investissement à capital variable ...
s, etc. 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 on large purchases of financial assets such as equities. Dollar cost averaging is also called the constant dollar plan (in the US), pound-cost averagi ...
and
market timing Market timing is the strategy of making buying or selling decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from ...
.


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. Types ...
famous for their success include
Warren Buffett Warren Edward Buffett ( ; born August 30, 1930) is an American investor, business tycoon, philanthropist, and the chairman and CEO of Berkshire Hathaway. He is considered one of the most successful investors in the world and has a net worth of ...
. In the March 2013 edition of ''
Forbes ''Forbes'' () is an American business magazine owned by Integrated Whale Media Investments and the Forbes family. Published eight times a year, it features original articles on finance, industry, investing, and marketing topics. ''Forbes'' al ...
'' magazine, Warren Buffett ranked number 2 in their
Forbes 400 The Forbes 400 or 400 Richest Americans is a list published by ''Forbes'' magazine of the wealthiest 400 American citizens who own assets in the U.S., ranked by net worth. The 400 was started by Malcolm Forbes in 1982 and the list is published 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. It can be a le ...
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 that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction and risk management techniques in an attempt to improve performance, such as short ...
manager in the 1970s and 1980s who spoke of a similar approach. Some of the most famous property investors in 2021 are Barbara Corcoran, Robert Kiyosaki, Sam Zell, Grant Cordone and Rene' Benko among others. The investment principles of both of these investors have points in common with the
Kelly criterion In probability theory and intertemporal portfolio choice, the Kelly criterion (or Kelly strategy or Kelly bet), also known as the scientific gambling method, is a formula for bet sizing that leads almost surely (under the assumption of known expecte ...
for money management. Numerous interactive calculators which use the Kelly criterion can be found online.


Investment valuation

[[Free cash flow measures the cash a company generates which is available to its debt and equity investors, after allowing for reinvestment in [[working capital and [[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. A high proportion of [[debt, reflected in a high debt-to-equity ratio, tends to make a company's [[earnings, free cash flow, and ultimately the returns to its investors, riskier or [[volatility (finance)|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 *[[Capital accumulation *[[Capital gains tax *[[Diversification (finance) *[[EBITDA *[[Financial risk *[[Foreign direct investment *[[Fundamental analysis *[[Fundamental Analysis Software *[[Hedge fund *[[List of countries by gross fixed investment as percentage of GDP *[[List of economics topics *[[Market sentiment *[[Mortgage investment corporation *[[Rate of return *[[Socially responsible investing *[[Specialized investment fund *[[Time value of money *[[Time-weighted return *[[Mutual_fund|Mutual Fund *[[Real Estate Investment


[[References


External links

* {{Authority control [[Category:Investment|