What is the investment?

We explain what the investment is and the types of investments that can be made. In addition, its elements and differences with savings.

  1. What is the investment?

In economics, investment is understood as a set of savings mechanisms, location of capitals 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, the investment consists in the use of a surplus of capital in a given economic or financial activity, or also in the acquisition of high-value goods , instead of clinging to “liquid” money. This is done in the hope that the remuneration will be substantial and the money invested will be recovered in a not too long term.

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, the investment is considered part of the 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 domestic consumption, exports or be acquired as an  investment asset .
  • In the other, however, it is understood as the use of a portion of capital to boost some type of economic or financial activity pending a return (profits), or at least to safeguard the capital from harmful factors such as inflation.
  1. Types of investments

Temporary investments are usually made in high quality securities.

First, investments are classified depending on the time in which the return (return) is expected. You can talk like this about:

  • Investments  temporary . Of a transitory type, they are made with the ultimate goal of making surplus capital of ordinary production become productive, instead of relying on a bank account. They usually last for a period of one year and are usually made in high quality values, which can be sold easily quickly.
  • Long term investments . They are made for a period greater than one year, without waiting for immediate compensation and maintaining its owner during said period.

Another possible classification distinguishes between public and private investments, according to the profile of the transaction and the subject that performs it . 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.

  1. Elements of an investment

The investments are composed of the following macroeconomic elements, whose sum provides the total investment:

  • Gross fixed capital formation  (FBCF)  One of the macroeconomic concepts that measures the value of acquisitions of new and existing fixed assets, less the transfers of assets made by the State or the government in question.
  • Training  ne ta fixed capital.  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 provided for investment in fixed assets,
  • Stock variation . Calculable by checking the stocks at the end of a given period, with its equivalent in a previous year.

Similarly, from a microeconomic point of view, we have the elements:

  • Expected return . Compensation percentage for the capital invested 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).
  • Time horizon . Period during which the investment will be maintained: short, medium or long term.
  1. Differences between savings and investment

investment and savings
Saving consists in reducing expenses and saving money for another more important occasion.

Saving consists of a postponement of consumption to plan the future : I stop spending my money today, to guarantee a more important purchase tomorrow. In addition, banks reward their customers with a much lower percentage of what is obtained through loans made with their money, thus adding to the client’s equity , 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 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 you always run the risk of financial failure.

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