This article is about investment in finance.

For investment in macroeconomics, see Investment

(macroeconomics). For other uses, see Investment (disambiguation).
"Invest" redirects here. For the term in meteorology, see Invest (meteorology).
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Investment is time, energy, or matter spent in the hope of future benefits actualized within a
specified date or time frame. This article concerns investment in finance.
In finance, investment is buying or creating an asset with the expectation of
capital appreciation, dividends (profit), interest earnings, rents, or some combination of these
returns. This may or may not be backed by research and analysis. Most or all forms of investment
involve some form of risk, such as investment in equities, property, and even fixed interest securities
which are subject, among other things, to inflation risk. It is indispensable for project investors to
identify and manage the risks related to the investment. Investment and investing is distinguished
from other uses of money (such as saving, speculation, donation, gifting), in that the deployment of
money is done for the purposes of obtaining a positive expected return. [1]
Contents
[hide]

1Overview

2History

3Value investment

4Debt equity and free cash flow

5Basics of the profit line

6Capital gains taxes

7Types of financial investment

8See also

9References

10External links

Overview[edit]

In finance, investment is the purchase of an asset or item with the hope that it will generate income
or appreciate in the future and be sold at the higher price. [2] It generally does not include deposits
with a bank or similar institution. The term investment is usually used when referring to a long-term
outlook. This is the opposite of trading or speculation, which are short-term practices involving a
much higher degree of risk. Financial assets take many forms and can range from the ultra safe low
return government bonds to much higher risk higher reward international stocks. A good investment
strategy will diversify the portfolio according to the specified needs.
The most famous and successful investor of all time is Warren Buffett. In March
2013 Forbes magazine had Warren Buffett ranked as number 2 in their Forbes 400 list.[3] Buffett has
advised in numerous articles and interviews that a good investment strategy is long term and
choosing the right assets to invest in requires due diligence. Edward O. Thorpwas a very
successful hedge fund manager in the 1970s and 1980s that spoke of a similar approach.[4] Another
thing they both have in common is a similar approach to managing investment money. No matter
how successful the fundamental pick is, without a proper money management strategy, full potential
of the asset cannot be reached. Both investors have been shown to use principles from the Kelly
criterion for money management.[5] Numerous interactive calculators which use the Kelly criterion can
be found online.[6]
In contrast, dollar (or pound etc.) cost averaging and market timing are phrases often used in
marketing of collective investments and can be said to be associated with speculation.
Investments are often made indirectly through intermediaries, such as pension
funds, banks, brokers, and insurance companies. These institutions may pool money received from
a large number of individuals into funds such as investment trusts, unit trusts, SICAVs etc. to make
large scale investments. Each individual investor then has an indirect or direct claim on the assets
purchased, subject to charges levied by the intermediary, which may be large and varied. It
generally, does not include deposits with a bank or similar institution. Investment usually involves
diversification of assets in order to avoid unnecessary and unproductive risk.

History[edit]
The Code of Hammurabi (around 1700 BC) provided a legal framework for investment, establishing
a means for the pledge of collateral by codifying debtor and creditor rights in regard to pledged land.
Punishments for breaking financial obligations were not as severe as those for crimes involving
injury or death.[7]
In the early 1900s purchasers of stocks, bonds, and other securities were described in media,
academia, and commerce as speculators. By the 1950s, the term investment had come to denote
the more conservative end of the securities spectrum, while speculation was applied by financial
brokers and their advertising agencies to higher risk securities much in vogue at that time. Since the

last half of the 20th century, the terms speculation and speculator have specifically referred to higher
risk ventures.

Value investment[edit]
Business revolves around the factor of investing; financially, time, in the future and successful
investors will generally focus on certain fundamental metrics for their gains. A value investor is
aware that when considering the health of a company, the fundamentals associated with it, are a
highly influencing factor. They include aspects related to financial and operational data, preferred by
some of the most successful investors; for example, Warren Buffett and George Soros. The financial
details, such as, earnings per share and sales growth, are essential aids for an investor in
determining stocks trading below their worth.
The price to earnings ratio (P/E), or earnings multiple, is a particularly significant and recognized
fundamental ratio, with a function of dividing the share price of stock, by itsearnings per share. This
will provide the value representing the sum investors are prepared to expend for each dollar of
company earnings. This ratio is an important aspect, due to its capacity as measurement for the
comparison of valuations of various companies. A stock with a lower P/E ratio will cost less per
share, than one with a higher P/E, taking into account the same level of financial performance;
therefore, it essentially means a low P/E is the preferred option.[8]
An instance, in which the price to earnings ratio has a lesser significance, is when companies in
different industries are compared. An example; although, it is reasonable for a telecommunications
stock to show a P/E in the low teens; in the case of hi-tech stock, a P/E in the 40s range, is not
unusual. When making comparisons the P/E ratio can give you a refined view of a particular stock
valuation.
For investors paying for each dollar of a company's earnings, the P/E ratio is a significant indicator,
but the price-to-book ratio (P/B) is also a reliable indication of how much investors are willing to
spend on each dollar of company assets. In the process of the P/B ratio, the share price of a stock is
divided by its net assets; any intangibles, such as goodwill, are not taken into account. It is a crucial
factor of the price-to-book ratio, due to it indicating the actual payment for tangible assets and not
the more difficult valuation, of intangibles. Accordingly, the P/B could be considered a comparatively,
conservative metric.

Debt equity and free cash flow[edit]

For investment purposes, an essential factor relates to how a company finances its assets,
especially if it involves a sizable value stock and is a situation in which debt/equity ratiohas a
significant influence. Similar to the P/E ratio, the debt/equity ratio, indicates the proportion of
financing, a company has obtained from debt; for example, loans, bonds and equity, such as, the

issuance of shares and stock, which vary between industries. An indication to investors that all is not
financially sound with a company, relates to above-industry debt/equity figures, particularly if an
industry is experiencing a challenging, adverse business environment.
A factor that sometimes remains unaware to investors is that the earnings of a company generally do
not equal the amount of cash generated. This is due to companies reporting their financials
utilising, Generally Accepted Accounting Principles (GAAP). It is a standard framework of guidelines
for the financial accounting practices used in any given jurisdiction. International Financial Reporting
Standards (IFRS) are commonly used, worldwide.
Free cash flow is a metric that determines for an investor the sum of actual cash remaining in a
company after deduction of any capital investments. In general, it is preferable to for a company to
boast a positive free cash flow, but similar to the debt-equity ratio, this metric assumes greater
significance in a difficult business environment. Finance

Basics of the profit line[edit]

Arguably, the most commonly utilized valuation metric is Earnings Before Interest, Tax, Depreciation
and Amortization, generally referred to as EBITDA. This metric relates to the basic profits made,
prior to the influences and intricacies of accounting deductions becoming issues of the true profit line
of a company. This particular metric is recognized as the primary standard of private mergers and
acquisitions.[9]
For a company competing in a high growth industry, an investor could expect a significant acquisition
premium, which is a buyout offer, several times over the most recent EBITDA. In various instances, it
has been known for private equity firms, to pay multiples of up to 6-8 times the EBITDA. However,
some buyers could make the decision that even given these relatively high valuations, the offer from
a buyer does not take into consideration past expenditures and future potential product growth.
In certain cases, an EBITDA may be sacrificed by a company, in order for the pursuance of future
growth; a strategy frequently used by corporate giants, such as, Amazon,Google and Microsoft,
among others. This is a business decision that can impact negatively on buyout offers, founded on
EBITDA and can be the cause of many negotiations, failing. It may be recognized as a valuation
breach, with many investors maintaining that sellers are too demanding, while buyers are regarded
as failing to realize the long-term potential of, expenditure or acquisitions.

Capital gains taxes[edit]

The amount you pay in taxes for long term investments, investments that span over a year long
term, and short term investments such as those that are below a year are different. The long term
investments range from Zero to twenty percent for capital gains and they are regulated by what tax
bracket you are in for income taxes. For the zero to fifteen percent income tax bracket you could

qualify for the zero percent long-term capital gains rate. The next bracket is the fifteen to twenty
percent income tax bracket where you are set at fifteen percent capital gains tax for long term
investments. The next bracket is between twenty and 39.6 percent and that leads to a twenty
percent capital gains tax however with these numbers you should add 3.8 percent for the health care
surtax. The short term capital gains tax is also related to your total taxable income and is taxed at
the same rate as your income and ranges from ten to 39.6 percent.[10]

Types of financial investment[edit]

Types of financial investments include:

Alternative investments

Traditional investments

See also[edit]

Asset

Capital accumulation

Capital gains tax

Diversification (finance)

Foreign direct investment

List of countries by gross fixed investment as percentage of GDP

List of economics topics

Mortgage investment corporation

Rate of return (ROR, a.k.a. ROI)

Risk

Socially responsible investing

Specialized investment fund

Fundamental Analysis

Fundamental Analysis Software

Technical Analysis

References[edit]
1.

Jump up^ Pennies and Pounds. "Are you investing or speculating? (The Real Definition of
Investing)". Pennies and Pounds. Retrieved 1 December 2015.

2.

Jump up^ Editor. "Investment Definition". Investopedia. Retrieved 31 March 2013.

3.

Jump up^ Editor. "Forbes 400: Warren Buffett". Forbes Magazine. Retrieved 1 March 2013.

4.

Jump up^ Thorp, Edward (2010). Kelly Capital Growth Investment Criterion. World
Scientific. ISBN 9789814293495. Retrieved 2010.

5.

Jump up^ "The Kelly Formula: Growth Optimized Money Management". Seeking Alpha.
Healthy Wealthy Wise Project.

6.
7.

Jump up^ Jacques, Ryan. "Kelly Calculator Investment Tool". Retrieved 7 October 2008.
Jump up^ "The Code of Hammurabi". The Avalon Project; Documents in Law, History and
Diplomacy.

8.

Jump up^ "Price-Earnings Ratio - P/E Ratio". Investopedia.

9.

Jump up^ "What is EBITDA".

10.

Jump up^ "Guide to Short-term vs Long-term Capital Gains Taxes (Brokerage Accounts,
etc.)". Intuit Turbo Tax. Turbo Tax. Retrieved 19 November 2015.

External links[edit]
Wikiquote has quotations
related to: Investment
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to Investments.
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Investing at DMOZ