What is Investment?


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Introduction : Investors choose to hold groups of securities rather than single security that
offers the greater expected returns. They believe that a combination of securities held together
will give a beneficial result if they are grouped in a manner to secure higher return after taking
into consideration the risk element. Traditional portfolio analysis has been of a very subjective
nature but it has proved success to some investors who have made their investments by
making analysis of individual securities through evaluation of return and risk conditions. The
investor has been able to get the maximum return at the minimum risk. The normal method of
calculating the return on individual security is to find out the amount of dividends, price earning
ratios, common holding period and an estimate of the market value of the securities. The
modern portfolio theory believes in the maximisation of return through a combination of
securities. It deals with the relationship between different securities and interrelationships of
risks between them. An investor can achieve a success by making a choice of investment
outlets and combining a security of low risk with another security of high risk.
MEANING OF INVESTMENT : The concept of investment has many meanings.
Investment is the employment of funds with the aim of getting return on it. It is the
commitment of funds which have been saved from current consumption with the hope that
some benefits will receive in future. Thus, it is a reward for waiting for money. Savings of
the people are invested in assets depending on their risk and return.
There are two concepts of investment :
(1) Economic Investment : The concept of economic investment means additions to
the capital stock of the society. The capital stock of society is the goods which are
used in the production of other goods. The term investment implies the formation of
new and productive capital in the form of new construction and producer’s durable
instrument such as Plant and Machinery. Inventories and human capital are also
included in this concept. Thus, an investment, in economic terms, means an increase
in building, equipment, and inventory.
(2) Financial Investment : This is an allocation of monetary resources to assets that are
expected to yield some gain or return over a given period of time. It is a general or
extended sense of the term. It means an exchange of financial claims such as shares
and bonds, real estate, etc. Financial investment involves contracts written on pieces
of paper such as shares and debentures. People invest their funds in shares,
debentures, fixed deposits, National saving certificates, life insurance policies,
provident funds etc. In their view, investment is a commitment of funds to derive
future income in the form of interest, dividends, rent, premiums, pension benefits and
the appreciation of the value of their principal capital. In primitive economies most
investments are of the real variety whereas in a modern economy much investment is
of the financial variety.

The economic and financial concepts of investment are related to each other because
investment is a part of the savings of individuals which flow into the capital market
either directly or through institutions. Thus, investment decisions and financial decisions
interact with each other. Financial decisions are primarily concerned with the
sources of money where as investment decisions are traditionally concerned with
uses or budgeting of money.


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MT UVA BMS

MT UVA- University, Vocational and Affiliated Education for BMS

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