Meaning of Investment in Business | Investment Environment
An individual generally can do any of two things with the income s/he generates: either spend to satisfy current consumption needs or save for some better consumption in the future. But, in reality, individuals tend to spend part of their current income on consumption and save the rest for future consumption. Thus, savings are generated out of the current income left after having satisfied the present consumption need. Investment is an activity that is initiated by individuals generating savings.
In other words, investment is the outcome of savings. However, all savings do not literally mean investment. An investment is the allocation of savings into a course of action that is expected to generate a positive rate of return. We illustrate the meaning of investment in the ensuing paragraph.
An investment is the commitment of savings into any alternative that is expected to generate positive income. For example, if you advance money to others, you may consider it as an investment. The reason is that you expect to receive back the money at some future date along with interest. Similarly, a person may purchase gold with the expectation that its price will increase in the future or purchase an insurance plan for the various benefits it promises in the future.
These examples constitute investments and have one common element: funds are allocated at present with the expectation of some rewards in the future. The rewards, or returns, from investing, are received in either of two basic forms: cash income or increased value.
Now further consider that you place your money in a non-interest-bearing current account of a bank. Can you think of it as an investment? Obviously not. because it fails both tests of the definition- neither does it provide any type of added income, nor does its value appreciate. The value of the cash placed in a current account is likely to decrease because it is eroded over time by inflation.
For the purpose of this text, we define investment as the commitment of a present sum of money to an alternative with the expectation of realizing an additional sum of money in the future. This definition emphasizes two important points. First. the process of investment involves the trading of present income for future income. Second, the objective of investment is to receive a future flow of funds larger than that originally invested. Thus, we invest to gain a positive return.
In many contexts, the term investment is used interchangeably with speculation. However, there are fundamental differences between these two terms. Generally, investment involves less risk than speculation. Similarly, investment is associated with a relatively longer time horizon, while speculation is for a short period of time. Another distinction involves the amount of information available to the individual and the time s/he spends analyzing investment alternatives. In speculation, the individual usually makes a decision based on limited information and analysis.
However, in many contexts, the same securities could be purchased as an investment or a speculation. It depends on the motivation of the buyer. Let us consider an example to clarify it. A friend tells you that currently, the stock of a company is trading at Rs 400 per share. He also informs you that the company is launching a new production setup to satisfy the growing domestic market. If this happens there is the possibility of stock price appreciation up to Rs 1,000 per share. If you buy the stock based on this information, it would be called speculation. The reason is simple- your purchase of securities is motivated by greed and fast return.
Hence, investment is concerned with purchasing something of value that will be appreciated at a fair rate of return commensurate with the risk assumed over a long period of time. Note that speculation is also significant for the capital market because. It adds to the market liquidity of the securities by making frequent purchases and sales of securities. Speculators are involved in the active trading of securities. fiery frequently changes its portfolio of securities helps in creating the market for securities, aids to the liquidity of securities, and contributes to the development of the capital market.