Module I Theory (6 Hours)

Investment: Attributes, Economic vs. Financial Investment, Investment and

speculation, Features of a good investment, Investment Process. Financial
Instruments: Money Market Instruments, Capital Market Instruments, Derivatives.
Financial Investment
A financial investment allocates resources into a financial asset, such as a bank account, stocks,
mutual funds, foreign currency and derivatives. Ambika Prasad Dash, author of "Security
Analysis and Portfolio Management" explains financial investments are purchases of financial
claims. This type of investment may or may not yield a return. However, businesses gain from
placing money into financial investments because many safe assets, such as an interest-bearing
savings account, may yield enough of a return to protect it from inflation. Essentially, some
financial investments offer protection against rising prices.
Economic Investment
An economic investment puts resources in something that may yield benefits in excess of its
initial cost. Though these resources still include money, investments can also be made in time,
assistance and mentoring. Likewise, assets are not limited to financial instruments. Mike Stabler,
author of "The Economics of Tourism" explains economic growth arises from a broader
definition of an investment, such as an investment in knowledge. An economic investment may
include buying or upgrading machinery and equipment or adding to a labor force. For example,
an economic investment could be a tuition reimbursement program for employees. The
expectation is the company's expense will lead to an employee who will use the education in
ways to benefit the company. Furthermore, offering this benefit may attract a wider, more-skilled
pool of applicants from which the company can choose. States also engage in economic
investments. Art Rolnick of the Minneapolis Federal Reserve explains that every dollar invested
in early education yields $8 worth of benefits in economic growth.
Similarities
In both cases, a company undergoes a cost-benefit analysis to deem the potential return of the
investment. Financial and economic investments also carry risk. Just as a stock may tumble and
cost the business money, investing in training programs could cost the business money if the
employee resigns one month later. Thus, both types of investment require risk assessment. For
financial investments, risk assessment includes analyzing the previous performance of stock and
evaluating its ratios. Studying the risk of an economic investment includes reviewing resumes
and performing reference checks, following up on the credibility of vendors and reviewing
customer reviews on machinery and other costly purchases.

Source:

Financial and economic meaning of investment

Financial investment involves of funds in various assets, such as stock, Bond, Real Estate,
Mortgages etc. Investment is the employment of funds with the aim of achieving additional
income or growth in value. It involves the commitment of resources which have been saved or
put away from current consumption in the hope some benefits will accrue in future. Investment
involves long term commitment of funds and waiting for a reward in the future.
From the point of view people who invest their finds, they are the supplier of Capital and in
their view investment is a commitment of a persons funds to derive future income in the form of
interest, dividend, rent, premiums, pension benefits or the appreciation of the value of their
principle capital. To the financial investor it is not important whether money is invested for a
productive use or for the purchase of secondhand instruments such as existing shares and stocks
listed on the stock exchange. Most investments are considered to be transfers of financial assets
from one person to another.
Economic investment means the net additions to the capital stock of the society which consists of
goods and services that are used in the production of other goods and services. Addition to the
capital stock means an increase in building, plants, equipment and inventories over the amount of
goods and services that existed.
The financial and economic meanings are related to each other because investment is a part of
the savings of individuals which flow into the capital market either directly or through
institutions, divided in new and secondhand capital financing. Investors as suppliers and
investors as users of long-term funds find a meeting place in the market.
So from above we know the term investment. The savers become the investors in the following
term and invest in unique assets:

Other definitions for investment:

Investment may be defined as the purchase by an individual or institutional investor of a
financial or real asset that produces a return proportional to the risk assumed over some future
investment period. F. Amling
Investment defined as commitment of funds made in the expectation of some positive rate of
return. If the investment is properly undertaken, the return will commensurate with the risk the
investor assumes.- Fisher & Jordan

Investment refers to acquisition of some assets. It also means the conversion of money into
claims on money and use of funds for productive income earnings assets. In essence, it means the
use of funds for productive purpose, for securing some objectives like, income, appreciation of
capital or capital gains, or for further production of goods and services with the objective of
securing yield