INVESTMENT

Investment refers to the acquisition of an asset for the sole purpose of producing future monetary income and/or capital gains. For an individual an investment may consist of the purchase of financial assets such as stocks, bonds, life insurance, and mutual funds, or physical assets such as a house or a car. Economists define investment as the increase in capital goods in an economy. Capital goods are the material or human resources that enable a business to produce a product or service. Investments in capital goods by businesses would include the purchase of factories, buildings, machinery, or a skilled and knowledgeable labor force. Businesses may also invest in research and development projects in order to improve their products or create new ones. For a business a successful investment is considered to be one that increases profits that can be passed on to shareholders which, in turn, raises the value of a company's stock.

A business's decision to invest in a particular item or project is based on two considerations. The first consideration is the expected rate of return on the investment, or how much profit the investment will generate for the business. The expected rate of return can be estimated based on forecasts of potential sales, profits, and expenses. The second consideration is how much risk is involved in obtaining the expected rate of return. Whether an individual or a business makes an investment, evaluation of risk is essential to successful investing. Practically every investment has some capacity for financial loss, but the degree of risk involved can vary greatly. Therefore investors need to estimate how much loss can feasibly be assumed and limit any risks accordingly.

See also: Capital Goods, Profit, Speculation, Stock