Question

How does a macroeconomist define “investment”? When you buy stocks or bonds, people often say you made an investment. Would a macroeconomist agree? If not, what are you doing when you buy stocks and bonds?

Answer 1

The income that a person receives may be used for purchasing goods and services that he currently requires or it may be saved for purchasing goods and services that he many require in the future. In other words, income can be what is spent for current consumption or saved for the future consumption. Savings are generated when a person or an oraganisation abstains from present consumption for a future use. The person saving a part of his income tries to find a temperory repository for his savings until they are required to finance his future expenditure. This results in Investment.

Investment is an activity that is engaged in by people who have savings, i.e investments are made from savings, or in other words, people invest their savings. But all savers are not investors. Investment is an activity which is different from saving.

Investment can be defined as " a commitment of funds made in the expectation of some positive rate of return". Expectation of return is an essential element of investment. Since the return is expected to be realised in future, there is a possibility that the return actually is lower than the return expected to be realised. This possibility of variation in the actual return is known as investment risk. Thus, every investment involves return and risk.

Financial and Economic Meaning of Investment

In the financial sense, investment is the commitment of a person's funds to derive future income in the form of interest,divident, premiums, pension benefits or appreciation in the value of their capital. Purchasing of shares, debentures, post office savings certificates, insurance policies are all investments in the financial sense. Such investments generate financial assets.

In the economic sense, investment means the net additions to the economy's capital stock which consists of goods and services of goods and services that used in the production of other goods and services. Investment in this sense implies the formation of new and productive capital in the form of new constructions, plant and machinery, inventories, etc.Such investments generate physical assets.

The two types of investments are, however,related and dependent. The money invested in financial investments are ultimately converted into physical assets. Thus,all investments result in the acquisition of some assets either financial or physical.

Characteristics of Investment

All investments are characterised by certain features.

• Return

All Investments are characterised by the expectation of a return. In fact, investments are made with the primary objective of derving a return. The return may be received in the form of yield plus capital appreciation. The difference between the sale price and the purchase price is capital appreciation. The divident or interest received from the investment is the yield. Different types of investments promise different rates of return. The return from an investment depends upon the nature of the investment, the maturity period and a host of other factors.

• Risk

Risk is inherent in any investment. This risk may relate to loss of capital,delay in repayment of capital,non-payment of interests, or variability of returns. While some investments like government securities and bank deposits are almost riskless, others are more risky. The risk of an investment depends on the following factors:

1. The longer the maturity period, the larger is the risk.
2. The lower the credit worthiness of the borrower, the higher is the risk.
3. The risk veries with the nature of investment. Investments in ownership securities like equity shares carry higher risk compared to investments in debt instruments like debentures and bonds.

Risk and return of an investment are related. Normally, the higher the risk, the higher is the return.

• Safety

The Safety of an investment implies the certainity of return of capital without loss of money. or time.Safety is another feature which an investor desires for his investments. Every investor expects to get back his capital on maturity without the loss and without the delay.

• Liquidity

An investment which is easily saleable or marketable without loss of money and without loss of time is said to possess liquidity. An investor generally prefers liquidity for his investments, safety of his funds, a good returm with minimum risk or maximisation of risk and maximisation of return.

Objectives of Investment

• Maximisation of Return
• Minimisation of risk
• Hedge against inflation

When you buy stock or bonds it is considered as investment by the macro ecconomists. Stocks is one of the popular and simplest type of investment. When you buy stock, you are buying an ownership share in a publicly traded company. A stock is an investment in a specific company. When you purchase a stock- out of that companies' earning and assets. Companies sell shares of stock in their businesses to raise cash; inventors can then buy and sell those shares among themselves. Stocks sometimes earn high return but also come with more risk than other investments. Stocks are ideal long term investments

A bond is a loan you make to a company or government. When you purchase a bond, you are allowing the bond issuer to borrow your money and pay back with interest. Bonds are generally considered less risky than stocks, but they also offer lower returns. The primary risk, as with any loan, is that the issuer could default. Bonds are a fixed income investment because investors expect regular income payments. Interest is generally paid to investors in regular installments- typically once or twice a year- and the total principal is paid off at the bond's maturity date.

There are large number of investment avenues . Some of them are marketable and liquid while others are non marketable. Some of them are highly risky while some others are almost riskless.