Concept of Investment
Investment is a conscious act of an individual or any entity that involves deployment of money (cash) in securities or assets issued by any financial institution with a view to obtain the target returns over a specified period of time.
- In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth.
- In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will be sold at a higher price for a profit.
Generally, income and expenditure of an individual never equals. If current income exceeds current desires, people intend to save their surplus. With this surplus they plan to use the saving in another way. In this connections, individuals may have various alternatives. They can deposit the money in bank or purchase government or corporate bonds or invest in stocks or contribute the fund to a provident fund or purchase the real assets like land, building, plants etc. In this way what people think about the use of saving that is known as investment.
Investment refers to the sacrifice of present financial resources with the view to get additional benefit in future. Therefore, investment can be defined as a alternative or best use of the saving. Purchase of real or financial assets is considered as the investment. Such use takes place at present and almost certain. However, returns are generated in future and that are generally uncertain. Therefore, every investment involves some degree of risk which occurs due to several reasons.
Explanation
You don’t need to take an economics or finance course to learn how to invest, but it is important to understand these basic investment concepts.
Risk and return
Return and risk always go together. The higher the potential return, the higher the risk. You should never blindly pursue high-return investments. Bear in mind your investment goal, investment period and risk tolerance. Always choose an investment that is suitable for you.
Risk diversification
Any investment involves risk. You cannot avoid it, but you can manage your risk exposure with the right strategy to reduce the chances of major losses. The simplest and best way is to diversify your investments and spread your risk. An effective way is to diversify your investment to different asset classes, such as stocks, bonds, deposits etc.
Dollar-cost averaging
This is a long-term strategy. You regularly (e.g. monthly) invest a fixed amount, whatever the share price. In the long run this balances out the cost of buying shares and lessens the effect of short-term market fluctuation.
Compound Interest
Your principal (original money paid in) grows because of the interest earned, so you get a higher return. It’s a snowball effect – the longer you invest, the more you benefit from compound interest. Therefore, it is important to start saving and investing early.
Inflation
For the past few decades, there has usually been inflation in Hong Kong. Your investment needs a return rate that matches or beats inflation. If not, then your money will be worth less.
Therefore, we conclude that, invest is a sacrifice of current fund or money or other resources for future benefits. It is the employment of saving or funds with the view of achieving additional income . It involves the commitment of resources that have been saved from current consumption, in the hope that some benefit will produce in future. It involves long term commitment and waiting for a reward. The sacrifice takes place in the present and reward comes later and uncertain.
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