Investments

Investment ( Eng. Investment ) - the allocation of capital for profit ^[1] ^[2] . Investments are an integral part of the modern economy . Investments differ from loans by the degree of risk for the investor ( lender ) - the loan and interest must be repaid on time, regardless of the profitability of the project, investments (invested capital) are returned and generate income only in profitable projects. If the project is unprofitable, investments may be lost in whole or in part.

Investments - cash , securities , other property , including property rights, other rights having a monetary value, invested in objects of entrepreneurial and (or) other activity in order to make a profit and (or) achieve another useful effect ^[3] .

Investment activity - investment and the implementation of practical actions in order to make a profit and (or) achieve another beneficial effect ^[3] .

From the standpoint of the monetary theory of money , funds can be used for consumption or savings . Simple saving takes money out of circulation and creates the prerequisites for crises . Investing involves savings in circulation. It can occur directly or indirectly (the placement of temporarily free funds for a deposit in a bank that it already invests).

Investment Multiplier

Investments in the national economy lead to total GDP growth by a value significantly exceeding the amount of investment. Keynes believed that the amount of initial investment would give a corresponding increase in GDP. But the people who received this money will direct part of it to consumption (which will form an additional GDP growth), and part will go to savings (they will not be exchanged for goods, solvent demand will decrease by this amount). Funds allocated for consumption will be further divided into new consumption (making a new contribution to GDP, albeit for an ever smaller amount) and new accumulation. The following diagram illustrates this. Let the investment create additional demand, generating 100 jobs. The people who get the job will spend part of their income on consumption, which will provide 80 workers with work. These workers, in turn, will direct part of the income to consumption, which will give 64 jobs. And so on until the initial investment is completely absorbed in savings. Consequently, a one-time investment forms the total GDP for many periods as the sum of a decreasing geometric progression $S\to b_{1}{\frac {1}{1-q}}$ ${\ displaystyle S \ to b_ {1} {\ frac {1} {1-q}}}$ where $b_{1}$ ${\ displaystyle b_ {1}}$ equal to the initial investment $q$ ${\ displaystyle q}$ - marginal propensity to consume, $1-q$ ${\ displaystyle 1-q}$ - marginal propensity to save. Coefficient ${\frac {1}{1-q}}$ ${\ displaystyle {\ frac {1} {1-q}}}$ and there is Keynes's multiplier, which shows the possible total effect on GDP from investments for a given marginal propensity to save.

Accelerator is the ratio of investment growth to the relative growth of income, consumer demand and finished products that caused it. The accelerator reflects the ratio of product growth only to induced investment, that is, to new capital. ^[four]

Investment Classification

There are different classifications of investments.

According to the object of investment allocate

Real investments (direct purchase of real capital in various forms):

in the form of tangible assets ( fixed assets , land ), payment for construction or reconstruction;
capital repairs of fixed assets;
investments in intangible assets : patents , licenses , rights of use, copyrights , trademarks , know-how , etc .;
investments in human capital (upbringing, education, science);
acquisition of a ready-made business .

Financial investments (indirect purchase of capital through financial assets):

securities , including through mutual funds ;
loans granted;
leasing (for the lessor).

Venture investment

Speculative investments (buying assets solely for the possible change in price):

Currencies
precious and rare earth metals (in the form of anonymized metal accounts );
securities (stocks, bonds, certificates of joint investment institutions, etc.).

By main investment objectives

Direct investment .
Portfolio investment .
Real investment .
Non-financial investments .
Intelligent investments (associated with the training of specialists, courses and much more).

By investment period

short-term (up to one year);
medium-term (1-3 years);
long-term (over 3-5 years).

By ownership of investment resources

private
state ;
foreign ;
mixed .

By the method of reproduction ^[5]

gross investment - the total amount of invested funds in new construction, the acquisition of means and objects of labor, an increase in inventories and intellectual property;
renovation investments (renewal investments) - investments in the simple reproduction of fixed assets and depreciable intangible assets (usually in the amount of depreciation charges ).
net investment - the amount of gross investment net of depreciation .

By factors determining the volume of demand for investments:

- autonomous, that is, those investments that are not caused by an increase in aggregate demand (that is, national income ), but are the result of innovations, scientific and technological progress ;

- induced, that is, caused by the growth of aggregate demand (national income). ^[6]

The state as an investor

Many well-known economists condemn the practice of public investment in connection with the threat of inefficient allocation of funds. Representatives of the Austrian School of Economics are most consistent in this direction, for example, the books of Ludwig von Mises “Socialism”, “Bureaucracy”.

Investment or speculation

The line between investment and speculation is blurred. Usually, the time factor is indicated by the distinction criterion. If the operation lasts more than a year, it is an investment, and it will give an economic effect a significant period after the investment. If up to a year - this is speculation. For example, the “Modern Economic Dictionary” indicates: ^[7]

Investments - “long-term investments” of state or private capital in one’s own country or abroad in order to generate income in enterprises of various industries, entrepreneurial projects, socio-economic programs, innovative projects .

At the same time, when talking about exchange trading , they are talking about attracting, for example, “ portfolio investors ” who are sensitively monitoring the situation on the market and can leave it, not paying attention to the duration of transactions.

Exchange investments and speculations do not differ in the nature of the agreements concluded, the actions taken, the objectives, legal consequences.

Benjamin Graham proposed that an investment be considered an operation based on a thorough analysis of the facts, prospects, security of invested funds and sufficient income. Everything else was recognized as speculation. ^[eight]

Often, the distinction is made according to the criterion of organizing a new business (real investment, money spent on the purchase of equipment, raw materials, staff training) or participation in an existing business (speculation, money spent on the purchase of corporate rights, securities).

Sometimes the criterion for separation is the purpose of the operation. Speculation is considered an operation for which the goal is the difference in price ( stocks , shares , goods). A transaction can last a long time, but income is generated only once during the sale or repayment of an asset . An investment is considered a transaction, the purpose of which is income in the form of interest ( dividends ) accrued on the acquired asset. Charges are systematic and the circulation time of the purchased asset is not limited.

Attracting Investments

It is believed that to attract investment, an enterprise should:

Have a well-established and promising plan of action for the future. Investors want to know that their contributions will bring profit in the future.
Have a good reputation in society. Investing in a shadow enterprise, investors risk losing profit, therefore, only those enterprises that are credible are chosen.
Conduct an open, that is, transparent activity. For this, accounting reports and work with the media are required.
Much depends on the domestic policy pursued in the country in which the company is located. For deposits, investors choose the most stable countries.

However, in practice, these conditions are necessary for portfolio investors . Investments may well be attracted without these conditions, but with the confidence of the investor in observing his rights to manage capital and profit. Such confidence can be guaranteed not only by laws and transparency of accounting, but also by personal contacts, for example, in the government or parliament, obtaining the right to directly monitor the situation in the enterprise through a controlling stake and the appointment of a controlled director or personal direct management. A significant factor in attracting investment is the ratio of profit and risk. Some investors choose less risk, agreeing to less profit (and vice versa). Raw materials companies generally do not have to choose: go where there is a resource.

In addition, special conditions are sometimes created to attract investment. An example of the creation of such special conditions are special economic zones (SEZs). For example, in Russia , the Lipetsk Special Economic Zone, the Alabuga Special Economic Zone, the Togliatti Special Economic Zone and others are currently created and are operating.

The set of conditions for the investor is sometimes called the "investment climate . "

Pros and cons of attracting investments

At the initial stage, external investment gives companies two main advantages:

capital, allowing you to go to the next stage of development;
improve the quality of management, in particular by strengthening discipline and adjusting strategies ^[9] .

Risk and Profit

Investments are characterized, inter alia, by two interrelated parameters: risk and profitability ( profitability ). As a rule, the higher the risk of investments, the higher should be their expected return . The CAPM model is often used to describe the relationship between risk and profit.

The value of investment risk indicates the probability of loss of investment and income from them. The value of the total integral risk consists of seven types of risk: legislative, political, social, economic, financial , criminal, environmental . At the same time, the average Russian risk is taken per unit, and the real indicators of the regions may deviate.

Investment Climate

The conditions for doing business in a particular country (they are also called the investment climate ) have a great influence on the amount of investments. The most important indicators of a favorable investment climate are guarantees of the observance of property rights, predictability and stability of the business environment ^[10] .

Notes

↑ Raizberg B.A., Lozovsky L. Sh., Starodubtseva Ye. B. Modern economic dictionary. : M. Infra-M, 2006. “Investments” Archived copy of September 23, 2008 on the Wayback Machine (unavailable link from 06/14/2016 [1155 days])
↑ InvestorWords Dictionary: Investing is an investment for economic gain.
↑ ¹ ² Federal Law “On Investment Activities in the Russian Federation in the Form of Capital Investments” dated February 25, 1999
↑ Accelerator (in economics) (neopr.) . www.booksite.ru. Date of appeal April 25, 2019.
↑ Collective of authors. Economics of the company . - Litres, 2017-09-05. - 525 s. - ISBN 9785040187232 .
↑ Autonomous and induced investments (neopr.) .
↑ Investments Archived copy of September 23, 2008 on the Wayback Machine (unavailable link from 06/14/2016 [1155 days]) // Modern Economic Dictionary
↑ Benjamin Graham, Jason Zweig. Reasonable Investor, Ch. 1
↑ Noam Wasserman, 2014 , p. 197.
↑ "Putin's Russia: Sochi or bust", The Economist Feb 1st 2014

Literature

Zvi Body, Alex Kane, Alan Marcus. Investment Principles = Essentials of Investments. - M .: " Williams ", 2004. - 984 p. - ISBN 978-5-8459-1311-1 .
Petrov V.S. Theory and practice of investment analysis of stock assets. Informalization. - M: Market DS, 2008 .-- 480 p. - ISBN 978-5-7958-0201-5 .
Savenok, Vladimir Stepanovich. Personal financial plan. The first step to financial independence. - Peter , 2009 .-- 320 p. - ISBN 978-5-91180-994-2 ..
Factors of investment activity. A chapter from the book “System Monitoring: Global and Regional Development”. M .: Librocom / URSS, 2010 ( ISBN 978-5-397-00917-1 ). S.259-292.
Noam Wasserman. The founder’s main book: Who to take with you, how to share profits, how to distribute roles and other issues that need to be addressed from the very beginning = The Founder's Dilemmas Anticipating and Avoiding The Pitfalls that Can Sink a Startup. - M .: Alpina Publisher , 2014 .-- 364 p. - ISBN 978-5-9614-4445-2 .
Federal Law of February 25, 1999 N 39-ФЗ “On Investment Activities in the Russian Federation in the Form of Capital Investments”

[1] Raizberg B.A., Lozovsky L. Sh., Starodubtseva Ye. B. Modern economic dictionary. : M. Infra-M, 2006. “Investments” Archived copy of September 23, 2008 on the Wayback Machine (unavailable link from 06/14/2016 [1155 days])

[Def_word-2] InvestorWords Dictionary: Investing is an investment for economic gain.

[FZ-3] ¹ ² Federal Law “On Investment Activities in the Russian Federation in the Form of Capital Investments” dated February 25, 1999

[4] Accelerator (in economics) (neopr.) . www.booksite.ru. Date of appeal April 25, 2019.

[5] Collective of authors. Economics of the company . - Litres, 2017-09-05. - 525 s. - ISBN 9785040187232 .

[6] Autonomous and induced investments (neopr.) .

[7] Investments Archived copy of September 23, 2008 on the Wayback Machine (unavailable link from 06/14/2016 [1155 days]) // Modern Economic Dictionary

[8] Benjamin Graham, Jason Zweig. Reasonable Investor, Ch. 1

[_432df27d50292825-9] Noam Wasserman, 2014 , p. 197.

[10] "Putin's Russia: Sochi or bust", The Economist Feb 1st 2014