We explain what investment is and the types of investments that can be made. In addition, its elements and differences with savings.
What is investment?
In economics, investment is understood as a set of mechanisms for savings, allocation of capital and postponement of consumption, with the objective of obtaining a benefit, a revenue or a profit, that is, to protect or increase the assets of a person or institution.
In other words, investment consists of the use of a surplus of capital in a specific economic or financial activity, or also in the acquisition of high value goods, rather than clinging to “liquid” money. This is done in the hope that the return will be large and the money invested will be recovered in a not too long period.
Thus, investment can be understood from many perspectives, both macro and microeconomic, that is to say: in relation to the financial management of entire countries, or of individuals and companies.
- In the first case, investment is considered part of gross capital formation, one of the determining factors in the constitution of the Gross Domestic Product (GDP). The goods produced by a nation can go to internal consumption, exports or be acquired as investment good.
- In the other, on the other hand, it is understood as the use of a portion of capital to promote some type of economic or financial activity while waiting for a return (profits), or at least to safeguard capital from harmful factors such as inflation. .
Types of investments
In the first place, investments are classified depending on the time in which the return (profitability) is expected to be obtained. It can be spoken like this of:
- Temporary investments. Of a transitory nature, they are made with the ultimate aim of making the capital surpluses of ordinary production become productive, instead of resting in a bank account. They usually last for a period of one year and are usually made in high-quality securities, which can be easily sold quickly.
- Long-term investments. They are made for a period of more than one year, without expecting immediate compensation and maintaining their owner during said period.
Another possible classification distinguishes between public and private investments, according to the profile of the transaction and the subject that carries it out. Likewise, according to the destination of the funds (the object in which it is invested), they can be real estate, stocks, bonds or foreign currency.
Elements of an investment
Investments are made up of the following macroeconomic elements, the sum of which provides the total investment:
- Gross fixed capital formation (GFCF). One of the macroeconomic concepts that measures the value of acquisitions of new and existing fixed assets, less the disposals of assets made by the State or government in question.
- Net fixed capital formation. It is obtained by discounting the consumption of fixed capital (depreciation) to the gross formation of fixed capital, and represents the value of the resources that have been made available for investment in fixed assets,
- Variation of existences. Calculable by comparing stocks at the end of a given period, with their equivalent in a previous year.
Similarly, from a microeconomic point of view, we have the elements:
- Expected performance. Percentage of compensation for the invested capital that is expected to be obtained.
- Accepted risk. The degree of uncertainty about the real return that the investment will yield (including the ability to pay).
- Temporal horizon. Period during which the investment will be maintained: short, medium or long term.
Differences between saving and investing
Saving consists of a postponement of consumption to plan for the future: I stop spending my money today, to guarantee myself a bigger purchase tomorrow. In addition, banks reward their clients with a much lower percentage than that obtained through loans made with their money, thus adding to the client’s assets, which in this case is contained in a bank account.
The investment, on the other hand, converts the surplus liquid money into material goods or shares of a promising company, which either keeps the price-product relationship intact (and therefore does not devalue). It is a much more effective way to protect heritage, although there is always the risk of failure of the financial adventure.