We explain what investment is and the types of investments that can be made. Also, its elements and differences with savings.
What is investment?
In economics, investment is understood as a set of savings mechanisms, capital allocation and postponement of consumption with the objective of obtaining a benefit, a revenue or a profit, that is, protecting or increasing 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 instead of holding on to “liquid” money. This is done in the hope that the remuneration will be large and the money invested will be recovered in a not too long period of time.
Investment, thus, can be understood from many perspectives, both macro and microeconomic, that is, 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 be used for domestic consumption, exports or acquired as investment good.
- In the other, however, 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 the capital from harmful factors such as inflation. .
See also: Profitability
Types of investments
Firstly, investments are classified depending on the time in which the return (profitability) is expected to be obtained. It can be spoken of like this:
- Temporary investments Of a transitory type, they are made with the ultimate goal of making capital surpluses from ordinary production become productive, instead of resting in a bank account. They usually last a period of one year and are usually made in high quality values, which can be easily sold quickly.
- Long-term investments. They are made for a period of more than a year, without expecting immediate remuneration and maintaining their ownership during said period.
Another possible classification distinguishes between public and private investments, according to the profile of the transaction and the subject carrying it out. Likewise, according to the destination of the funds (the object in which they are 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 transfers of assets carried out by the State or government in question.
- Net fixed capital formation It is obtained by discounting the consumption of fixed capital (depreciation) from the gross formation of fixed capital, and represents the value of the resources that have been made available for investment in fixed assets.
- Stock variation. 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 actual return that the investment will provide (including the ability to pay).
- Time horizon Period during which the investment will be maintained: short, medium or long term.
Differences between savings and investment
Saving consists of postponing consumption to plan for the future: I stop spending my money today, to guarantee myself a more important purchase tomorrow. In addition, banks reward their clients with a very minor percentage of what they obtained through loans made with their money, thus adding to the client's assets, which in this case is contained in a bank account.
Investment, on the other hand, converts the excess liquid money into material goods or into shares of some 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.
