What Is an Investment?
An investment is an asset or item acquired with the goal of generating income or
appreciation. Appreciation refers to an increase in the value of an asset over
time. When an individual purchases a good as an investment, the intent is not to
consume the good but rather to use it in the future to create wealth. An investment
always concerns the outlay of some asset today—time, money, or effort—in hopes of a
greater payoff in the future than what was originally put in.
For example, an investor may purchase a monetary asset now with the idea that the
asset will provide income in the future or will later be sold at a higher price for
a profit. investment always concerns the outlay of some asset today (time, money,
effort, etc.) in hopes of a greater payoff in the future than what was originally
put in.
Types of investment
What are the different types of investments?
There are four main investment types, or asset classes, that you can choose from,
each with distinct characteristics, risks and benefits.
Once you are familiar with the different types of assets you can begin to think
about piecing together a mix that would fit with your personal circumstances and
risk tolerance.
Growth investments
These are more suitable for long term investors that are willing and able to
withstand market ups and downs.
Shares
Shares are considered a growth investment as they can help grow the value of your
original investment over the medium to long term.
If you own shares, you may also receive income from dividends, which are
effectively a portion of a company’s profit paid out to its shareholders.
Of course, the value of shares may also fall below the price you pay for them.
Prices can be volatile from day to day and shares are generally best suited to long
term investors, who are comfortable withstanding these ups and downs.
Also known as equities, shares have historically delivered higher returns than
other assets, shares are considered one of the riskiest types of investment.
Property
Property is also considered as a growth investment because the price of houses and
other properties can rise substantially over a medium to long term period.
However, just like shares, property can also fall in value and carries the risk of
losses.
It is possible to invest directly by buying a property but also indirectly, through
a property investment fund.
Defensive investments
These are more focused on consistently generating income, rather than growth, and
are considered lower risk than growth investments.
Cash
Cash investments include everyday bank accounts, high interest savings accounts and
term deposits.
They typically carry the lowest potential returns of all the investment types.
While they offer no chance of capital growth, they can deliver regular income and
can play an important role in protecting wealth and reducing risk in an investment
portfolio.
Fixed interest
The best known type of fixed interest investments are bonds, which are essentially
when governments or companies borrow money from investors and pay them a rate of
interest in return.
Bonds are also considered as a defensive investment, because they generally offer
lower potential returns and lower levels of risk than shares or property.
They can also be sold relatively quickly, like cash, although it’s important to
note that they are not without the risk of capital losses.
What is Accelerator Theory?
The accelerator theory, a Keynesian concept, stipulates that capital investment
outlay is a function of output. For example, an increase in national income, as
measured by the gross domestic product (GDP), would see a proportional increase in
capital investment spending.
The accelerator theory is an economic postulation whereby investment expenditure
increases when either demand or income increases. The theory also suggests that
when there is excess demand, companies can either decrease demand by raising prices
or increase investment to meet the level of demand. The accelerator theory posits
that companies typically choose to increase production, thereby increasing profits,
to meet their fixed capital to output ratio.
The accelerator theory was conceived by Thomas Nixon Carver and Albert Aftalion,
among others, before Keynesian economics, but it came into public knowledge as the
Keynesian theory began to dominate the field of economics in the 20th century. Some
critics argue against the accelerator theory because it removes all possibility of
demand control through price controls. Empirical research, however, supports the
theory. This theory is typically interpreted to establish new economic policy. For
example, the accelerator theory might be used to determine if introducing tax cuts
to generate more disposable income for consumers—consumers who would then demand
more products—would be preferable to tax cuts for businesses, which could use the
additional capital for expansion and growth. Each government and its economists
formulate an interpretation of the theory, as well as questions that the theory can
help answer.