To put it simply, an investment is investing money in something with the expectation that it will be returned at a profit. The most profitable investments for small amounts of money are self-education.
Investment: basic concepts
Investment (from Latin investire – to invest) is the investment of capital in a business by buying securities or directly from the company(s) in order to obtain additional profits or to influence the affairs of the company.
Investments are money, earmarked bank deposits, shares and other securities, technology, machinery and equipment, credit, any other property or property rights, intellectual property invested in business and other activities for profit (income) and positive social impact.
Investments are a set of costs realized in the form of long-term investments of capital in industry, agriculture, transport and other sectors of the economy.
Investments can be financial (portfolio), real and intellectual.
Financial investments (securities transactions) are investments in financial instruments, i.e. investments in shares, bonds, other securities and bank deposits, assets of other enterprises. With portfolio investments, an investor increases his or her financial capital by receiving dividends — income on securities.
Real investments are usually made for the long-term investment of funds in the productive realm of a given product. It is intended for investments in the creation of new companies and the renovation and modernisation of existing ones. In this case, the enterprise-investor, investing funds, increases its production capital – fixed production assets and working capital necessary for their operation.
Intellectual investment is investment in research and development, know-how, etc.
Making investments and carrying out practical actions in order to obtain future income and achieve other useful effects constitutes investment – essentially, it is the process of converting investment resources into investments.
Investment is a prerequisite for the turnover of funds by an economic operator. In turn, production activities set the stage for new investments.
Investment plays an essential role in the functioning and development of the economy. The change in the volume of investment affects social production and employment, structural changes in the economy, and the development of the economy’s branches and spheres.
During the centrally planned economy in our country, investment was understood only as capital investments, which were considered in two aspects – as an economic category and as a process associated with the movement of monetary resources. But investment is a broader concept; apart from investments in the reproduction of fixed assets, it includes investments in current and financial assets and in certain types of intangible assets. Capital investment is a narrower concept; it can be regarded only as one of the forms of investment.
The most widespread interpretation of the term “investment” is as a long-term investment of capital at home and abroad in the form of real and financial investment, where real investment is an investment of capital in tangible and intangible assets, and financial investment is an investment in financial assets.
In general, investments can be classified according to various attributes: organizational forms, objects of investment activity, types of ownership of resources, the nature of participation in investment.
Depending on the period of investment, long-term investments (in creation and reproduction of fixed assets, in tangible and intangible assets) and short-term investments (in circulating assets: inventories, securities, etc.) are allocated.Long-term investments are connected: with capital construction in the form of new construction, and also reconstruction, expansion and technical re-equipment of operating enterprises and objects of non-production sphere.
A distinction is made between joint ventures, foreign investments, public investments, and private investments, according to the form of ownership.
It is divided into foreign investment and domestic investment, depending on the region in which they are located.
A distinction should be made between indirect investment (where an intermediary is involved) and direct investment (where funds are invested directly in a physical object).
Foreign investment occupies a special place in the global economy. Over the past decades, the question of their share in the economy of any country, whether industrialised, such as the US and Japan, or developing, has been a burning issue. What should be the volume and structure of foreign investment to bring the greatest benefit to the national economy? What are the main criteria for selecting priority areas for domestic and foreign investment?
Foreign investments are divided into direct investments, portfolio investments and other investments.Direct investments are those made by legal or natural persons who wholly own a company or control at least 10% of the company’s shares or equity capital.
Portfolio investments are the purchase of shares, bills of exchange and other debt securities. They represent less than 10% of the total share capital of an enterprise.
Investments not falling within the definition of direct and portfolio investments are classified as other (trade and other loans, bank deposits, etc.).The investment activities of an enterprise are the activities associated with the formation of an investment portfolio, which includes any form of investment.
The investment portfolio is a system of objects of real and financial investments intended for investment activities in accordance with the investment strategy of an enterprise.
The investment portfolio of the company is generally formed on such principles as: – provision of implementation of investment strategy.
Formation of investment portfolio should correspond to investment strategy of enterprise, providing continuity of long-term and medium-term planning of investment activity of enterprise; – Ensuring compliance of portfolio with investment resources, i. e.
– Maintenance of manageability of a portfolio – matching of objects of investment to personnel potential and possibility of realization of operative reinvestment of means.
Investment activity in market conditions of managing is business activity and is carried out in the investment market, consisting of the market of objects of real investments, market of objects of financial investments and market of objects of innovative investments.
State of investment market and its segments is characterized by such indicators as supply and demand, price, competition.
It is extremely important to study market conditions on the investment market, because inadequate decisions can reduce income and sometimes lead to a loss of capital.
– managing a company’s investment portfolio (including diversifying investments, reinvesting capital, etc.).
Any large investor, especially a foreign one, starts its investment market study with evaluation of macroeconomic indicators characterizing the investment climate of a country which includes the following forecasts:- Dynamics of the gross national product, national income and industrial output; – Dynamics of national income distribution; – Development of privatization processes;
– legislative regulation of investment activities;
– the functioning of the tax and banking systems;
– development of individual investment markets, primarily the stock market and the money market.
If an investor is unwilling or unable to assess the country’s investment climate himself, he can use the assessments of various rating agencies and publications.
The investment process acts as an aggregate movement of investments of various forms and levels. The implementation of the investment process in any type of economy assumes the presence of a number of conditions, the main of which are: sufficient resource potential for the functioning of the investment sphere; the presence of economic entities capable of providing the investment process in the necessary scale; the mechanism for transforming investment resources into objects of investment activity.
In a market economy, the investment process is implemented through the mechanism of the investment market.
The financial market, which is part of the investment market, is a system of trading in various financial instruments (liabilities). The goods here are cash itself (including currency), bank loans and securities.
A financial market is a combination of a primary market, in which financial resources are mobilised, and a secondary market, in which financial resources are redistributed.
Making a profit is the main goal of any investment, but this will require an investment. Of course, unlike a loan, investments are of a loyal nature. The loan must be repaid within the period specified in the agreement, and the investor must repay it when profit is made.
Most people are familiar with the concept, but often only in general terms. Still, for the sake of convenience, a definition was provided at the beginning of this article. Let’s understand it in more detail.The investment funds can either be spent by anyone or left as savings, which can be put into circulation. The system can be set up automatically as the available funds can be transferred to a bank account for further processing.
Investments can be classified as follows: real investments, speculative investments and financial investments. Also, investments are divided by purpose, timing, form of ownership, and type of investment.
The type we are interested in is gross-investments. In terms of the object, they can be divided into tangible, intangible and financial. Concerning the object, several more kinds can be distinguished.
Portfolio – investing funds in a variety of securities. Real ones are investments for the production of certain products. Investors can be either the state or a private person.
Relative investments are: net investments, the establishment or purchase of an entity is assigned entirely to them. Reinvestment, the income that has come from the successful implementation of a new project. These two types of investment are combined into a chain of actions, so they also have a type that combines them: gross investment.
Gross investment is the total of net and reinvestment. Free cash flows equal profits, unless net investment is counted.
Gross investment equals net investment minus depreciation, and reinvestment minus net contribution. In general, the complexity of such investment processes, predetermines their strategic nature, and is also the most difficult economic task.
Portfolio investments offer a wide range of opportunities for generating profits
In portfolio investments, profits are made by increasing the value of the shares acquired and through dividends. The investor invests in securities of different companies for the purpose of diversification.
Types of portfolio investments
Portfolio investments can be classified according to several factors. The first is the returns and risks of the portfolio, form:
High-yield portfolio investments are those that are highly profitable and at the same time threaten with high risks.
Medium-yielding investments. Generate stable, consistent, medium-sized returns. Composed of stocks of reliable companies, have much lower risk.
Combined portfolios. Composed of stocks with varying yields and risk levels.
The following classification depends on timing:
Short-term portfolio investments are those that last from a few hours to six months.
Medium-term – these last from six months to a year.
Long-term ones last one year or more.
Principles of portfolio investment
The first principle is conservatism. If an investor has the right approach to the formation of a portfolio, but the degree of risk is considered not as a loss of the main sum of the invested funds, but to the receipt of the minimum income. In this case, losses that may be sustained from risky investments are offset by solid gains in other stocks.
Liquidity. In practice, situations sometimes arise when it is necessary to add highly liquid securities to a portfolio, at the cost of higher returns. Such an approach makes it possible to act quickly when market conditions change.
Diversification is another principle of portfolio investment. It should be implemented not only on the basis of a number of shares, but also on the basis of their type. For this purpose, a portfolio should consist of stocks of companies which belong to different sectors. Even if such securities do not promise high returns.
Portfolio investment strategies
The strategies that portfolio investments have are passive and active. They depend on the way the assets are managed.
The passive strategy is based on the principle of following the market or stock indices, which are formed with the most liquid securities in mind. Such a strategy means that if you don’t have the necessary basic knowledge or free time, it is sufficient to follow market trends in order to win.
Passive portfolio investment is a strategy which has the following definitions:
It is most often resorted to by conservative investors.
The goal of a passive strategy is to protect funds from inflation, a guaranteed return with minimal risk.
Portfolio management costs are minimal.
The composition of the portfolio remains unchanged, without making any adjustments over a long period of time, usually 6-12 months.
A passive strategy creates a portfolio with excellent diversification and allows very accurate determination of returns, risk and liquidity.
In contrast to active investments, the passive strategy is characterised by minimal transaction costs.
Active portfolio investment is a strategy, which is characterised by the following working methods:
Regular monitoring of the market, reacting quickly and buying assets.
Rapidly changing portfolio components.
Main activity aims for a level of return that exceeds the market average.
High time and cost performance.
An active portfolio investment strategy is a method more typical of investors who have the appropriate professional knowledge.
Portfolio investment implementation methods
Control and management of investment activities is done independently: portfolio composition, income and risk level.
It is managed and controlled by an investment fund. There are significant advantages in this approach: ease of management, greater investment opportunities, the fund’s scale guarantees lower costs, by keeping income earned in the fund, and interim taxation costs are substantially reduced.
In today’s environment, portfolio investment is a very affordable way to invest your money regardless of the size of your initial capital. With any occupation, you can get serious about building a portfolio and get a level of return that is much higher than the percentage of bank investments and with much less risk.
Private equity – what is it and who benefits from it?
In this article we will look at the concept of ‘direct investment’. Direct investment can be defined as a large sum of money invested over a long period of time in the development of a particular production. The object of investment can be:
manufacturing or non-manufacturing enterprises;
commercial real estate;
goods or inventories;
company assets or the marketing of products.
If you look in the explanatory dictionary, the definition of “direct investment” is an investment made by individuals or companies that own a company or a controlling interest. Generally speaking, any holdings that give them the right to become the manager, or one of the board members, of the enterprise in which the funds have been invested, in order to increase the income as well as to have full control over the operation of that enterprise. In the economic sphere, such investments play the role of monetary investments to become the manager of the enterprise where the money will be invested, which will subsequently generate a certain income.
The banking industry refers to this type of investment as an investment in profitable production or assets in foreign countries. All these definitions of direct investment, in today’s world, say one thing – it is a cash turnover to increase one’s income. Moreover, the more successful a company is, the more people want to become the owner of the majority shareholding and thus want to become an investor in that company. As a rule, a controlling interest is more than 50% of the voting shares.
The principle of direct investment is to invest in the development of the business and its growth. Therefore, the potential investor becomes the holder of a long-term economic contract based on which he/she can control the object of investment, attract new investors and, of course, increase his/her income.
The key element in the Private Equity concept is to have an effective impact on the company’s operations, but only if the investor has the possibility of obtaining a controlling interest. The more investments an investor makes, the more power and rights he has to manage the enterprise he invests in.
Most reputable businessmen do exactly that with their accumulated capital; they invest it in profitable companies and thus ensure a steady flow of funds. Of course, one investment is not enough, because if it fails in one case and the company fails, then parallel investments are bound to succeed.
It is worth noting that such a practice of direct investment, positively affects the economic situation of entire countries, and such investment can be carried out by residents and outside investors. It means that direct investors can be private enterprises, legal entities, governmental structures, which own shares of foreign enterprises.
Private equity is the way to success and capital appreciation.
Before making a direct investment, a potential investor needs to make an important decision about whether the investment is worth the money and what the possible losses and gains could be if the investment turns out to be worth it.
It is also important for a potential investor to understand his possibilities in managing the enterprise, where he intends to invest money and, of course, how the profit of the enterprise will be divided, i.e. what share each participant of the investment project will get. It is also important to understand what limitations await the investor when investing in a particular object.
If the investment is successful and yields a good profit, the investor may choose to reinvest the income earned in order to extend the direct investment agreement and further increase its profit. It is worth noting that if credit funds are to be used for the investment, then the investor should clarify in advance about the guarantee obligations and insurance of the invested funds.
When considering the terms and conditions of the private equity contract, the allocation of obligations and powers for the management of the enterprise must be considered carefully. In this case, special attention must be paid to:
the structural integrity of the enterprise;
the order in which funds or products are received;
the period of operation;
the precise timing of reporting on the financing of the project;
the form of the audit;
allocation of auditor responsibilities for audits;
the timing and order of accrual of dividends;
payment of dividends;
the investor’s right to choose the top manager;
the investor’s right to choose the employees who deserve bonuses.
All of the above responsibilities and rights of the investor, must be included in the contract between all the participants of the investment.
The terms and conditions of cooperation of investors in direct investment transactions.
When entering into a direct investment transaction, the investor has the full right to make their own terms and conditions of cooperation in the agreement. For example, it is possible to limit the possibilities of negotiations with other potential investors, as well as to change the terms of settlement, to make some changes in the procedure of control over the company and the funds invested in it. On top of that: the investor also has the option to initiate additional, individual contract terms. In other words, if an investor wants to open a deposit in his own favour, he can easily do so in order to secure his own settlement guarantees.
Due to the fact that the investment procedure is a long-term investment of money, any investor wants to realise the maximum possible profit, calculating in advance their benefit and the further recovery of their money from the object of investment. Even during the development of the private equity project and the negotiation of the deal, all investors should discuss in advance the procedure for taking their property out of the general cash flow, and what trade-offs each investor will agree to.
How to determine the financial viability of a private equity investment.
Before making any kind of monetary investment in a project, a realistic appraisal of the investment should be made. Typically, this is done by calculating a project’s profitability and efficiency. To give a true valuation, it is best to get in touch with a reputable appraisal company.
In turn, business valuation experts will determine the amount of venture capital investment that may be needed to create the overall budget of the project and its assets. Also, the appraisal service will determine the share of each participant, its powers and rights in the management of the investment venture.
The fact that everyone who invests has the full right to participate as co-owners of the enterprise where the funds have been invested, should also be taken into account. Therefore, be sure to discuss all terms of cooperation in advance to make sure that the investors are happy. In any case, direct investments are made only if the project will be really worthwhile and promising and the terms and conditions can always be negotiated.
What exactly attracts investors in direct investment.
Any project requiring a large sum of money needs to interest potential investors in its idea, and a brief but effective presentation is prepared for this purpose. A project presentation is a way to explain to investors what the project is all about and what its chances of success are.
Mainly, the project presentation describes the best aspects of the project: its profitability and exclusivity. An animated presentation can take from 10 to 40 minutes, depending on the scale of the project. Investors are typically motivated by numbers, scope and competitiveness.
Therefore, a project’s uniqueness in new emerging markets is important. Since the focus of investors is always on the numbers, special interest falls on the duration of the private equity agreement, preliminary calculations, the number of funds, and, of course, the size of the revenues.
The development of a country, a business or an economy depends directly on investment. But not all entrepreneurs understand what the term means. That’s why we’ve decided to tell you in simple terms what investment is, what it’s for and what it does for business.
The term ‘investment’ refers to medium- and long-term investments in business, production or agriculture. The main purpose of investment is to develop a business and make a profit from it. Many people think it can only be a monetary investment, but that’s not true. The term can cover anything of value: tangible, intangible or financial. For example, transport, shares, investments, shares, equipment, the transfer of property rights, free rent and so on.
Investments can be not only financial – they can also be assets and intellectual propertyIn simple terms, investing is the process of investing capital in order to receive dividends (profits) or achieve certain goals. The flow of value between a company’s divisions and funds has a beneficial effect on the company’s operations and makes it possible to raise new capital.
All businesses and businessmen sooner or later need to raise new resources and therefore this process is considered quite natural. It does not mean that a company will encounter any financial problems, but rather that it is developing and has prospects.
The investment of tangible and intangible assets in enterprises and projects is called investment activity. Specially trained people, called investment managers, are involved in this activity. They judge whether or not it is worthwhile to invest in one company or another, according to their own interests. The interests can be quite different – making a profit, keeping money and assets, capturing markets, eliminating competitors and so on. Businessmen can also carry out such activities by investing available funds and assets into development.
Now that you have understood the definition of investing, it is time to tell you about the key terms of the process:
Investor. An investor is a person who invests available assets in a business or company. He does so based on personal preference or financial/accounting information. The main purpose is to collect dividends.
Principal. This person is the executor of the investment project. This person may be a legal entity or an individual.
User. Users may be ordinary people, entrepreneurs, authorities or anyone else who is going to work with the investment project.
Others. This includes various insurers, financial institutions, intermediaries, etc.
The main purpose of investments is to collect dividends.
Types of investments
Investments can be divided into several types. One way of dividing them is according to their location (domestic and foreign). The domestic ones remain inside the country, the foreign ones go outside the country.
Domestic ones, in turn, are divided into:
Intellectual (ideas, advice, organisational assistance). Intellectual investment also includes contributions to the study of a problem, to technological and scientific development, to the introduction of innovative production and ways of working.
Financial (securities, shares, deposits). This type is often referred to as portfolio investing, as the investor usually forms a complete “portfolio” of capitals from a variety of sources.
Real (long-term investments). These are classic investments aimed at generating profits after the development of a business. They can be made in order to start a new department or production, reorganisation, re-equipment of a workshop and so on.
Now look at external investments. They can be:
Direct (investment by an investor in existing assets or production).
Indirect (work done by an investor through intermediaries).
The investments can also be divided according to their “lifetime” into short-, medium- and long-term investments. The first is usually suitable for improving a company’s inventory, the second for carrying out reforms within the organisation or for promoting products, and the third for expanding existing assets, launching new production, changing equipment and so on. Investments make it possible to expand production, purchase the necessary raw materials, promote one’s products and capture new markets, increase the profit and income of the enterprise.
Decisions on investments are made by specialized analysts
You already know all about investments – what they are and how they work. Now, let’s look at the more complicated terms. One of these terms is investment planning.