What is investment and why is it needed?
What is investment? In simple words, this is the process of saving and increasing money by investing it in various assets that can generate income. As they say, money must work, and their main property is that money is able to earn money.
Sometimes keeping hard-earned funds “in money" can be an extremely unprofitable occupation, since in this case the savings will slowly depreciate by inflation. Moreover, as practice shows, inflation can be not only a sluggish process, but at some moments it can sharply increase or, as they say in the financial environment, gallop.
In fact, we have already seen a sharp depreciation of money in 1998, 2008 and 2014, when the purchasing power of c.u. decreased sharply. And just competent investment is able to act as a reliable shield against such shocks.
Speaking about investment objects, you need to understand that, in addition to profitability, investments have a number of important parameters, such as risk, liquidity and capital intensity. Moreover, these parameters may change from time to time.
If profitability and risk are intuitive parameters, then liquidity and capital intensity should be analyzed in more detail.
Liquidity is the ability to both make investments and withdraw them quickly and without losing profitability. And indeed, this is important, since money may be needed here and now at some point in time. And, for example, to sell an apartment (purchased for investment purposes), without losing profit, it may take more than one month. Or, withdrawing the deposit before its completion may result in a loss of interest, which reduces the overall return on investment.
Capital intensity is the size of both the entry threshold for certain investment assets and their maximum limit. For example, to make an investment in an existing business, you need n-th amount of millions, and an excessive infusion of money may not give a result, since only certain amounts can be “wrapped” within the framework of a certain business model of the enterprise. And "hypermoney" will already require additional expansion, which is not always possible.
Speaking about risks, it is worth noting that from time to time they may increase. So, for example, buying real estate in a crisis at the “pitting” stage can be more risky, since construction companies can also go bankrupt, and waiting for this pit to be bought out by another developer can be delayed. Even deposits in bank deposits during the license revocation period can from time to time "add adrenaline" to the life of an investor.
Yield is a more volatile parameter, which, as time and the real estate market shows, may sink, and the US dollar may decline against the ruble. But in the process of investing there is a wonderful acquired property – experience and the development of financial literacy. An active investor begins to understand economic realities more and more and begins to choose and manage his investments more and more correctly.
If you answer the question of what is meant by investment, then the answer will be – investing money in investment objects in order to make a profit. And these objects have different properties. Let’s analyze the main objects of investment.
Bank deposits are probably the most traditional investment object with a yield comparable to key rates. The advantages include accessibility and understandability, convenience, as well as the fact that the DIA insures deposits up to 1.4 million USD. The disadvantages include low profitability, which does not save from inflation, low liquidity (penalties for early withdrawal), as well as inelastic conditions. If inflation “suddenly” increased, then the interest on the deposit remains the same, and in order to transfer to another (more profitable deposit), you need to withdraw the existing one (often with a loss of interest). And the fact that the risks of the banking sector usually increase in times of crisis.
Buying a property is considered to be one of the most reliable investment transactions, but this is not always true. Usually they say this because when buying real estate, they mean a long investment period, and it’s not a fact that real estate shows the best results during this period (and everything is known in comparison). Of the pluses, one can single out the fact that, for example, no one will take away a license from an apartment – this is your property. Real estate can be rented out and also receive income, and then pass it on to children. Of the minuses, one can note low liquidity, time costs for transactions of this kind (it is not easy to pick up a worthy object), relatively high cost and the fact that the real estate market can also experience drawdowns. Also, do not forget about the need for specialized knowledge in this area.
Housing cost index in Moscow, rub/sq.m, from 2000 to 2016
Currency is one of the favorite investment instruments and at the same time one of the most difficult investment instruments. As a rule, the population begins to buy currency "at all costs" at a time when it is already beginning to cost a lot, and then sell the cheaper one. For competent investment in currency, extensive knowledge is needed. Moreover, it is more profitable to buy currency on the Moscow Exchange, since bank spreads for conversion operations are very high, and there are instruments on exchange trading that help to hedge (insure) currency risks.
US dollar exchange rate from 2003 to 2016
Business investment in an existing business is a high-quality, predictable and highly profitable investment. If you already have your own business, you understand its risks and, most likely, you can control them, which reduces the risk of such investments. Business margins can also be high. But do not forget that today some business areas are in priority, and tomorrow they may be replaced by others. And high financial literacy helps to understand where the next wave begins. And, of course, you need to be engaged in business, and not to derive passive income, since competitors are not asleep.
Exchange instruments – stocks, bonds, derivative financial instruments, currency, shares, etc. It is worth noting that the Moscow Exchange index (a common barometer of the stock market) has grown since 2000 from around 200 pp. to the level of over 2000 points, that is, by 1000% in 16 years. The stock market can effectively protect an investor from inflation (because the prices of quality assets rise at this time). This investment object has a very low entry threshold – the average lot of shares costs around 2000 conventional units, and the capital intensity is simply fantastic – the average daily turnover in the stock market is hundreds of billions. Securities of companies from various sectors of the economy are represented at exchange trading, which reduces the sectoral investment risk, while liquidity is huge.
Yes, exchange instruments, like all others, are fraught with risk, but risk is a controlled and manageable value with proper management. For this kind of investment, you need to open an account with a brokerage company (a professional bidder on the stock exchange), which is very simple to do. Exchange trading requires certain knowledge, but this knowledge is available and the broker’s employees will share it. It is also worth noting that the investor is not left alone with the securities market (unless he wants to).
Trust management – when the investor’s money is managed by a professional according to a pre-selected strategy.
Advisory management (for investors who want to understand the way of thinking of the pros and learn) – when an investment advisor offers the investor competent ideas for building a portfolio.
Financial products built on the basis of exchange instruments, an example of which can be structural products – investment objects that combine the profitability of the securities market and a predetermined level of risk.
By making such investments, the investor automatically begins to increase the level of financial awareness and better understand economic processes, which positively affects not only the return on investment, but also the results of his direct activities.
So what is the investment for? For the formation of financial stability and independence, a better understanding of economic realities, the fulfillment of financial desires and a happy life, regardless of the situation.