What is Investment. Understanding the Basic

What is Investment:

Investment is sacrificing your money, time, effort at present, in order to purchase assets, with the purpose to sell at a higher price than the purchase price over the period of time. Assets can be Land, Commodity, Stocks, etc.

Assets can be any resource that has an economic value that can be generated future benefits. Further assets can be tangible, intangible.

Tangible Assets: which can be touched

Intangible Assets: Which cannot be touched.

Example of Tangible Assets:

·         Inventory

·         Land

·         Building

·         Machinery

·         Equipment

·         Accounts Receivable

Example of Intangible Assets:

·         Goodwill

·         Copyrights

·         Trademarks

·         Patents

·         Stocks

·         Bonds

Investment and Risk:

Risk is always associated with investment. In simple terms, risk means bad happening, uncertainty, not getting the desired result. In Finance terms, risk refers to financial loss in an investment decision. Investment rules refer to “Higher the risk higher profit, Lower the risk lower profit”.

Types of Investment: Investment can be of any type which creates wealth. Generally, below are the investment types which anyone can choose for their wealth creation.

·         Shares

·         Property

·         Fixed Interest Income

·         Bond

·         Debt Fund

·         Commodities

Compounding: Understanding the power of compounding. The core of compounding is earning interest on interest. Suppose if your investment earns interest and you reinvest that interest-earning into your investment then you earn Interest on Interest. Suppose you invest $10000 for a period of 10 years and you earn fixed interest of 10% per year. Then your invested value will be:

Amount in Dollar (Compound Interest)					Amount in Dollar (Fixed Interest)
No. of Years	Amount Invested	Interest Earned	Value		No. of Years	Amount Invested	Interest Earned	Value
1	10000	10%	1000		1	10000	10%	1000
2	11000	10%	1100		2	10000	10%	1000
3	12100	10%	1210		3	10000	10%	1000
4	13310	10%	1331		4	10000	10%	1000
5	14641	10%	1464		5	10000	10%	1000
6	16105	10%	1611		6	10000	10%	1000
7	17716	10%	1772		7	10000	10%	1000
8	19487	10%	1949		8	10000	10%	1000
9	21436	10%	2144		9	10000	10%	1000
10	23579	10%	2358		10	10000	10%	1000
TOTAL	159374		15937		TOTAL	100000		10000

The above chart shows that you earn interest Rs 15,937 through the compound interest method while on fixed interest bases you earn Interest of Rs 10,000. Total Value will be Rs 1,59,374 as compared to fixed interest bases where total value will be 1,10,000.

Intermediary:

Mostly Investment is made through an intermediary. These intermediaries are Financial Institutions, Pension Funds, Insurance companies-, etc. These Intermediaries collect money from an individual investor and invested in investment unit and unit trust on a larger scale.  Each individual investor has an indirect claim on the assets purchased by the intermediary.

Tips for Young Investors:

·         Make Investment a habit irrespective of the amount

·         Always Know where you are investing for

·         Understand the risk associated with your investment

·         Always diversify your portfolio

·         Investment is for long term

Top Investors Worldwide:

·         Warren Buffett

·         Benjamin Graham

·         George Soros

·         Carl Icahn

·         Rakesh Jhunjhunwala

·         Peter Lynch

·         John C. Bogle

·         John Templeton

·         Bill Ackman

·         Al Waleed Bin Talal Al Saud