In economics, investments are aimed at increasing the well-being of the person making them. Many people think about joining the ranks of investors, but they are sometimes held back not so much by insufficient funds as by a simple lack of understanding of what investments are and where to start.
What is an investment?
Investment (I) is an immediate expenditure that aims to produce a quantifiable positive effect in the long term. For example, a company invests in:
- to increase productivity (into additional capacity);
- to attract new customers or improve brand image (in an advertising campaign);
- save time (by investing in software to automate tasks);
- reduce costs, i.e. increase profits (investment in a tool for monitoring energy consumption, for example, to find out where and how savings can be made);
- sales support (upgrading outdated equipment);
- modernization of equipment (newer, more efficient, more environmentally friendly, etc.).
From an accounting perspective, it is the acquisition or creation of a long-term asset that is expected to be used in its original form for at least one year. The asset must have a cost of at least $500. The purpose is to increase the value of the company's assets (assets on the balance sheet) and is subject to depreciation, the duration and rate of which depend on its nature (different types of I).
Investment classification
Investment types fall into three categories:
- Tangible: acquisition of movable and immovable property (land, buildings, structures, machinery, equipment).
- Intangible: purchases that increase the price of assets but are not tangible (as opposed to tangible investments), such as patents, licenses, business reputation).
- Financial: the purchase of stocks, bonds, etc. that increase the company's financial assets.
Note that a company's balance sheet shows its assets at their amortized cost at the balance sheet date, known as "net present value." More precisely, it is the cost of their acquisition less depreciation.
What are investments?
There are many ways to invest. You can invest in the Stock Market (SM), in cryptocurrencies or in real estate. The most strategic ways to invest money are:
- In stocks, having a diversified portfolio
- In bonds, which are less risky than stocks
- Buying cryptocurrency, which is a risky investment
- Life insurance
- Diversified, based on stock indices and ETFs
- Forex in the short term
- Art objects for connoisseurs
- Precious metals and gold
- Direct investment in emerging markets
- Risk-free assets
- In real estate
Which investment is the most profitable?
This definition is incorrect today, because the very concept of "most profitable" is incorrect with very rapid changes in the economic situation in the markets. You need to consider what exactly you need: short-term, medium-term or long-term investments. Here are a few examples that are quite profitable at this time:
1. Long-term investments in commercial real estate
Currently, it is a good choice for people with liquid assets who want to receive regular income. It allows invest, for example, in offices, warehouses and shops. The company takes over the rental management, and the real estate objects are rented out to professionals. The net profitability has exceeded 4% for several years. This is a profitable investment, provided that the shares are held for at least ten years and then sold. It is worth choosing objects located in the city center, where the demand for them is highest.
2. Crowdfunding — medium-term investment
Real estate crowdfunding is a quick return calculation (less than three years). It is a riskier investment, but the return is between 8% and 10%.
3. Into gold
Investing in gold and other metals is always worth it as they have always been risk-free havens.
4. Stock market
This is also a profitable option if you are an insider or trust your capital to a trader. It is always risky as the investor buys shares of companies, but it can be the most profitable depending on the market.
Please note: these investments are aimed more at individuals than at companies, which are also capable of being stakeholders in some of them.
What is worth investing in on SM?
Currently, the best I's in the stock market are fairly diversified, but you have to consider the risk of the investment. At the beginning of a bull market, transportation, consumer staples, and financials do well. In the middle, industrials and technology, and at the end, precious metals and energy. At the beginning of a bear market, we see health care and non-cyclical consumer staples. In the middle, we find utilities, and at the end, financials and certain consumer staples that have cyclical value.
Investing in stocks is suitable for everyone, but you need to avoid losses as much as possible.
● Profitability
The average yield of attractive products is currently between 5% and 7%. Since Covid-19, the crisis has led to the emergence of digital companies such as Facebook, Google, Amazon, Apple and Microsoft.
● Advantages
Investing in stocks allows investors to provide strong support to global businesses by investing in diversified sectors.
● Disadvantages
The main risk of investing in stocks is the loss of capital.
How early can companies invest if they want to grow?
Companies grow by making multiple investments. They can use their own funds or external contributions, but their ability to generate profits and the financial resources of their partners play a major role. Therefore, they can choose to self-finance, increase capital or sell assets if they are financed from internal resources. They can also use loans, grants, investment subsidies, leasing or crowdfunding if they want to be financed from external resources.
● Planning
Detailed planning is necessary in advance to ensure that your I will actually lead to the desired success. Investment planning is part of any strategic corporate planning.
Companies use investment planning to analyze whether a particular investment will be economically viable in the long term. It involves analyzing and evaluating possible investment activities, as well as a corresponding schedule. Since many investments require external capital, investment planning is also used for financing. Most lenders agree to provide financing only if they are convinced of the profitability of the investment plan.
● Profitability
The most important aspect of such planning is the assessment of the profitability of investments. These are various calculation methods used by companies to determine the feasibility of a particular investment project. There is a financial ratio designed to measure the profit received from investments. This indicator is called return on investment or ROI (Return on Investment). In financial terms, ROI is used to calculate the return on invested capital.
Investment calculation methods provide an economic basis for every investment decision. They predict the return that a company can expect from its investment. The goal is to find out whether the planned investment will be profitable. In this context, it is also called profitability estimation.
● Profitability
There are two different criteria that can be used to assess the profitability of an investment. If a certain investment makes a positive contribution to the achievement of the company's financial goals, this is called absolute profitability. Investments that do not have a long-term perspective are not profitable and therefore not suitable.
However, there is also the possibility that different investments offer advantages but may be mutually exclusive. In this case, the company seeks relative advantage. This provides information about which investment offers the greatest advantage compared to the alternatives. If available capital is limited, the focus should be on optimizing the use of financial resources.
Investing during a crisis
Crises always cause unrest in financial markets. This has been repeatedly confirmed in the past, when stock prices collapsed in all sectors. However, each crisis becomes a favorable moment for investors to invest capital. Investors often use low stock prices to enter the markets. There are different forms of investment:
● Promotions
Buying stocks when prices are falling is a promising way to generate long-term profits. The prerequisite for this is an investment strategy that takes time into account, rather than simply seeking to invest capital in the short term.
● Foundations
The capital invested in a broadly diversified fund is invested in stocks of different companies and sectors. The risk is directly proportional to the type of fund. Long-term investment is also recommended here. If you are only interested in making quick money, you can lose your funds by spreading the risk too widely.
● Cryptocurrency and gold
Precious metals such as gold and silver have always been a popular form of investment during crises. In the digital age, investors are also increasingly turning their attention to cryptocurrencies (especially Bitcoin), thereby remaining less dependent on the stock market. And here, the higher the profit, the greater the risk.
Conclusion
Choosing the right type of investment is based on your financial goals, risk tolerance, and desired level of return. Long-term investments, such as stocks or real estate, are suitable for stable capital growth, while short-term instruments, such as deposits or bonds, provide quick access to funds with less risk. Successful investing is a balanced approach that takes into account the classification of assets by maturity, risk, and potential return, allowing you to achieve financial stability and growth.
