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Types of investments
The term "investment" is used differently in economics and in finance. Economists refer to a real investment (such as a machine or a house), while financial economists refer to a financial asset, such as money that is put into a bank or the market, which may then be used to buy a real asset.
Returns on investments will follow the risk-return spectrum .
Business Management
The investment decision (also known as capital budgeting ) is one of the fundamental decisions of business management: managers determine the assets that the business enterprise obtains. These assets may be physical (such as buildings or machinery), intangible (such as patents , software, goodwill), or financial (see below). The manager must assess whether the net present value of the investment to the enterprise is positive; the net present value is calculated using the enterprise's marginal cost of capital .
A business might invest with the goal of making profit. These are called marketable securities or passive investment. It might also invest with the goal of controlling or influencing the operation of the second company, the investee . These are called intercorporate, long-term and strategic investments. Hence, a company can have none, some or total control over the investee 's strategic, operating, investing and financing decisions. One can control a company by owning over 50% ownership, or have the ability to elect a majority of the Board of Directors .
Economics
In economics , investment is the production per unit time of goods which are not consumed but are to be used for future production. Examples include tangibles (such as building a railroad or factory ) and intangibles (such as a year of schooling or on-the-job training). In measures of national income and output , gross investment I is also a component of Gross domestic product (GDP), given in the formula GDP = C + I + G + NX . I is divided into non-residential investment (such as factories) and residential investment (new houses). "Net" investment deducts depreciation from gross investment. It is the value of the net increase in the capital stock per year.
Investment, as production over a period of time ("per year"), is not capital . The time dimension of investment makes it a flow . By contrast, capital is a stock , that is, an accumulation measurable at a point in time (say December 31st).
Investment is often modeled as a function of income and interest rates, given by the relation I = f(Y, r) . An increase in income encourages higher investment, whereas a higher interest rate may discourage investment as it becomes more costly to borrow money. Even if a firm chooses to use its own funds in an investment, the interest rate represents an opportunity cost of investing those funds rather than loaning them out for interest. |
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