Investment

This article is about investment in nance.

For than most investors would generally consider justied by
investment in macroeconomics, see Investment (macroe- the expected return.[2] An alternative characterization of
conomics). For other uses, see Investment (disambigua- speculation is its short-term, opportunistic nature.
tion).
Invest redirects here. For the term in meteorology, see
Invest (meteorology).
2 Famous investors
To invest is to allocate money (or sometimes another re- Investors famous for their success include Warren Buett.
source, such as time) in the expectation of some benet In March 2013 Forbes magazine, Warren Buett ranked
in the future.
number 2 in their Forbes 400 list.[3] Buett has advised in
In nance, the expected future benet from investment numerous articles and interviews that a good investment
is called a return (to investment). The return may con- strategy is long term and choosing the right assets to invest
sist of capital gain and/or investment income, including in requires due diligence.
dividends, interest, rental income etc. The economic Edward O. Thorp was a highly successful hedge fund
return to an investment is the appropriately discounted manager in the 1970s and 1980s who spoke of a similar
value of the future returns to the investment.
approach.[4]
Investment generally results in acquiring an asset, also The investment principles of both of these investors have
called an investment. If the asset is available at a price points in common with the Kelly criterion for money
worth investing, it is normally expected either to gener- management.[5] Numerous interactive calculators which
ate income, or to appreciate in value, so that it can be sold use the Kelly criterion can be found online.[6]
at a higher price (or both).
Investors generally expect higher returns from riskier
investments. Financial assets range from low-risk, 3 Intermediaries and collective inlow-return investments, such as high-grade government
vestments
bonds, to those with higher risk and higher expected commensurate reward, such as emerging markets stock inInvestments are often made indirectly through
vestments.
intermediary nancial institutions.
These intermeInvestors, particularly novices, are often advised to
diaries include pension funds, banks, and insurance
adopt an investment strategy and diversify their portfolio.
companies. They may pool money received from a
Diversication has the statistical eect of reducing overnumber of individual end investors into funds such as
all risk.
investment trusts, unit trusts, SICAVs etc. to make large
scale investments. Each individual investor holds an
indirect or direct claim on the assets purchased, subject
1 Related terms
to charges levied by the intermediary, which may be
large and varied.
Investment diers from arbitrage, in which prot is gen- Approaches to investment sometimes referred to in marerated without investing capital or bearing risk.
keting of collective investments include dollar cost averand market timing.
aging
An investor may bear a risk of loss of some or all of
their capital invested, whereas in saving (such as in a
bank deposit) the risk of loss in nominal value is normally remote.[1] (Note that if the currency of a savings 4 History
account diers from the account holders home currency,
then there is the risk that the exchange rate between the The Code of Hammurabi (around 1700 BC) provided a
two currencies will move unfavorably, so that the value legal framework for investment, establishing a means for
in the account holders home currency of the savings ac- the pledge of collateral by codifying debtor and creditor
count decreases.)
rights in regard to pledged land. Punishments for breakSpeculation involves a level of risk which is greater ing nancial obligations were not as severe as those for
1

8 CAPITAL GAINS TAXES

crimes involving injury or death.[7]

dicating the actual payment for tangible assets and not

In the early 1900s purchasers of stocks, bonds, and other the more dicult valuation, of intangibles. Accordingly,
securities were described in media, academia, and com- the P/B could be considered a comparatively, conservamerce as speculators. By the 1950s, the term investment tive metric.
had come to denote the more conservative end of the securities spectrum, while speculation was applied by nancial brokers and their advertising agencies to higher risk 6 Free cash ow and capital strucsecurities much in vogue at that time. Since the last half
ture
of the 20th century, the terms speculation and speculator
have specically referred to higher risk ventures.
Free cash ow measures the cash a company generates
which is available to its debt and equity investors, after
allowing for reinvestment in working capital and capital
5 Value investment
expenditure. High and rising free cash ow therefore tend
to make a company more attractive to investors.
Main article: value investing
A value investor buys undervalued securities (and sells
overvalued ones). To identify undervalued securities, a
value investor uses analysis of the nancial reports of the
issuer to evaluate the security. Value investors employ
accounting ratios, such as earnings per share and sales
growth, to identify securities trading at prices below their
worth.

The debt-to-equity ratio is an indicator of capital structure. A high proportion of debt, reected in a high debtto-equity ratio, tends to make a companys earnings, free
cash ow, and ultimately the returns to its investors, more
risky or volatile. Investors compare a companys debt-toequity ratio with those of other companies in the same
industry, and examine trends in debt-to-equity ratios and
free cash ow.

Warren Buett and Benjamin Graham are notable exam7 EBITDA

ples of value investors. Graham and Dodds seminal work
Security Analysis was written in the wake of the Wall
A popular valuation metric is Earnings Before Interest,
Street Crash of 1929.
Tax, Depreciation and Amortization (EBITDA), with apThe price to earnings ratio (P/E), or earnings multiple, is plication for example to valuing unlisted companies and
a particularly signicant and recognized fundamental ra- mergers and acquisitions.[9]
tio, with a function of dividing the share price of stock, by
its earnings per share. This will provide the value repre- For an attractive investment, for example a company
senting the sum investors are prepared to expend for each competing in a high growth industry, an investor might
dollar of company earnings. This ratio is an important expect a signicant acquisition premium above book
aspect, due to its capacity as measurement for the com- value or current market value, which values the company
parison of valuations of various companies. A stock with at several times the most recent EBITDA. A private eqa lower P/E ratio will cost less per share, than one with a uity fund for example may buy a target company for a
higher P/E, taking into account the same level of nancial multiple of its historical or forecasted EBITDA, perhaps
performance; therefore, it essentially means a low P/E is as much as 6 or 8 times.
the preferred option.[8]
In certain cases, an EBITDA may be sacriced by a comAn instance, in which the price to earnings ratio has a pany, in order for the pursuance of future growth; a stratlesser signicance, is when companies in dierent indus- egy frequently used by corporate giants, such as, Amazon,
tries are compared. An example; although, it is reason- Google and Microsoft, among others. This is a busiable for a telecommunications stock to show a P/E in the ness decision that can impact negatively on buyout oflow teens; in the case of hi-tech stock, a P/E in the 40s fers, founded on EBITDA and can be the cause of many
range, is not unusual. When making comparisons the P/E negotiations, failing. It may be recognized as a valuaratio can give you a rened view of a particular stock val- tion breach, with many investors maintaining that sellers are too demanding, while buyers are regarded as failuation.
ing to realize the long-term potential of, expenditure or
For investors paying for each dollar of a companys earn- acquisitions.
ings, the P/E ratio is a signicant indicator, but the priceto-book ratio (P/B) is also a reliable indication of how
much investors are willing to spend on each dollar of
company assets. In the process of the P/B ratio, the share 8 Capital gains taxes
price of a stock is divided by its net assets; any intangibles, such as goodwill, are not taken into account. It is The amount to pay in taxes for long term investments, ina crucial factor of the price-to-book ratio, due to it in- vestments that span over a year long term, and short term

3
investments such as those that are below a year are different. The long term investments range from Zero to
twenty percent for capital gains and they are regulated
by what tax bracket you are in for income taxes. For the
zero to fteen percent income tax bracket you could qualify for the zero percent long-term capital gains rate. The
next bracket is the fteen to twenty percent income tax
bracket where you are set at fteen percent capital gains
tax for long term investments. The next bracket is between twenty and 39.6 percent and that leads to a twenty
percent capital gains tax however with these numbers you
should add 3.8 percent for the health care surtax. The
short term capital gains tax is also related to your total
taxable income and is taxed at the same rate as your income and ranges from ten to 39.6 percent.[10]

11 References
[1] Pennies and Pounds. Are you investing or speculating?
(The Real Denition of Investing)". Pennies and Pounds.
Retrieved 1 December 2015.
[2] Pennies and Pounds. Are you investing or speculating?
(The Real Denition of Investing)". Pennies and Pounds.
Retrieved 1 December 2015.
[3] Editor. Forbes 400: Warren Buett. Forbes Magazine.
Retrieved 1 March 2013.
[4] Thorp, Edward (2010). Kelly Capital Growth Investment
Criterion. World Scientic. ISBN 9789814293495. Retrieved 2010. Check date values in: |access-date= (help)
[5] The Kelly Formula: Growth Optimized Money Management. Seeking Alpha. Healthy Wealthy Wise Project.

Types of nancial investment

Types of nancial investments include:

[6] Jacques, Ryan. Kelly Calculator Investment Tool. Retrieved 7 October 2008.
[7] The Code of Hammurabi. The Avalon Project; Documents in Law, History and Diplomacy.

Alternative investments

[8] Price-Earnings Ratio - P/E Ratio. Investopedia.

Traditional investments

[9] What is EBITDA.

10

See also

[10] Guide to Short-term vs Long-term Capital Gains Taxes

(Brokerage Accounts, etc.)". Intuit Turbo Tax. Turbo
Tax. Retrieved 19 November 2015.

Asset
Capital accumulation
Capital gains tax
Diversication (nance)
Foreign direct investment
Fundamental Analysis
Fundamental Analysis Software
List of countries by gross xed investment as percentage of GDP
List of economics topics
Market sentiment
Mortgage investment corporation
Rate of return
Risk
Socially responsible investing
Specialized investment fund
Technical Analysis
Time value of money

12 External links
Investing at DMOZ

13

13
13.1

TEXT AND IMAGE SOURCES, CONTRIBUTORS, AND LICENSES

Text and image sources, contributors, and licenses

Text

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