An investment is a commitment of resources in an effort to achieve later benefits. This is mostly financial although it can be done within a business.
Speculation is the most obvious form of return when investing.
One needs to factor in risk when utilizing this approach. Assets can appreciate in price yet they can also decline.
Long term price appreciation is a tool that many use for wealth building.
Another class of investments are known as yield.
Fixed income products tend to be good for a fixed period of time. After that, the initial amount if returned at maturity in addition to the final interest payment.
Some of the different investment vehicles that people can use:
- Exchange Traded Funds (ETFs)
- Real Estate
- Precious Metals including Gold and Silver
- Mutual Funds
An investment is a long term purchase whereas a trade is done with a short term horizon in mind.
Investments regarding an enterprise can take place both in a business or within it.
Many prefer to invest directly in private businesses, seeking a return. This can be in the form of monetary but could also include other forms of payment as time, expertise, or the use of facilities.
This could be structured in a way where the investor has an equity stake in the business.
Within a business, investment is often made by the entity to grow revenues. This can be in the form of entering new markets, developing different products, or hiring more people to gain market share. It could also be the using of capital to buy other companies.
The goal is to increase the cash flow of the business by expanding operations in some way.
Investments are sized up based upon risk. This means comparing them to a standard. Most use the 10-Y U.S. Treasury bond is considered a risk-free investment. All other investments are compared to this asset for the assessing of counterparty risk.
The financial system is based upon trust and measures are taken to ensure it. Regulation is formed around the premise of helping investors feel confident in the system.
Counterparty risk is something many investors overlook. It is only after financial institutions encounter solvency issues that they become concerned. The fallout from the Great Financial Crisis (GFC) showed that investment banks often ignore this risk.
The fate of Lehman Brothers and Bear Stearns show how this can cause implosions to the tune of billions of dollars.
Derivatives are investments vehicles that can be used for a variety of purposes.
Farmers and producers of other commodities often sell their products for pre-arranged prices. The use of the futures market hedges against a price decline.
Another use is for leverage. When investors take positions, a derivative such as an option can leverage the return. This means a larger payoff if the market action aligns with the position taken.