An investment is an asset or item acquired with the goal of generating income or appreciation.
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What Is an Investment?
An investment is an asset or item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time. When an individual purchases a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth.
An investment always concerns the outlay of some resource today—time, effort, money, or an asset—in hopes of a greater payoff in the future than what was originally put in. For example, an investor may purchase a monetary asset now with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit.
How an Investment Works
The act of investing has the goal of generating income and increasing value over time. An investment can refer to any mechanism used for generating future income. This includes the purchase of bonds, stocks, or real estate property, among other examples. Additionally, purchasing a property that can be used to produce goods can be considered an investment.
In general, any action that is taken in the hopes of raising future revenue can also be considered an investment. For example, when choosing to pursue additional education, the goal is often to increase knowledge and improve skills. The upfront investment of time attending class and money to pay for tuition will hopefully result in increased earnings over the student's career.
Because investing is oriented toward the potential for future growth or income, there is always a certain level of risk associated with an investment. An investment may not generate any income, or may actually lose value over time. For example, a company you invest in may go bankrupt. Alternatively, the degree you investing time and money to obtain may not result in a strong job market in that field.
An investment bank provides a variety of services to individuals and businesses, including many services that are designed to assist individuals and businesses in the process of increasing their wealth. Investment banking may also refer to a specific division of banking related to the creation of capital for other companies, governments, and other entities. Investment banks underwrite new debt and equity securities for all types of corporations, aid in the sale of securities, and help to facilitate mergers and acquisitions.
Investment - FAQs
In an investment, you are providing some individual or entity with funds to be put to work growing a business, starting new projects, or maintaining day-to-day revenue generation. Investments, while they can be risky, have a positive expected return. Gambles, on the other hand, are based on chance and not putting money to work. Gambles are highly risky and also have a negative expected return in most cases (e.g., at a casino).
Not really. An investment is typically a long-term commitment, where the payoff from putting that money to work can take several years. Investments are typically made only after due diligence and proper analysis have been undertaken to understand the risks and benefits that could unfold. Speculation, on the other hand, is a pure directional bet on the price of something, and often for the short-term.
Most ordinary individuals can easily make investments in stocks, bonds, and CDs. With stocks, you are investing in the equity of a company, which means you invest in some residual claim to a company’s future profit flows and often gain voting rights (based on the number of shares owned) to give your voice to the direction of the company. Bonds and CDs are debt investments, where the borrower puts that money to use in a pursuit that is expected to bring in cash flows greater than the interest owed to the investors.