Investments: essence, principles, features and functions

A clear understanding of the economic essence and characteristic features of investments and investment activities is important for both micro- and macroeconomics. Knowledge of investments and activities related to them is no less important for people who are investors in various projects or intend to become such. Let us examine in more detail what the economic essence of the investment process is, what classification is generally accepted, what are the signs of investment and other issues related to the theoretical principles and fundamentals of investment activity.

Investment as an economic concept

Speaking about the concept of investment, it should be noted that there are many definitions of it. In the general understanding, investments are characterized as a fundamental element of the economy, without which the development of the latter is impossible. There are three points that characterize the essence of investment:

• the investment process means investing material or intellectual resources into a specific project for a specific purpose;
• the investment period determines the structure of this process, influences the choice of instruments and market behavior strategies;
• The form and size of income is necessarily determined, which can be in the form of both material and non-material benefits.

The right investment

It should be understood that not every investment can be called an investment. For example, buying an apartment to live in does not fall into this category.

But if you purchase real estate in order to subsequently rent it out and make a profit, then such a purchase will be considered an investment.

SMART approach to goal setting

Your path in the securities market depends on the correctness of setting and the accuracy of their formulation of the goal: the choice of strategy, instruments, attitude towards securities drawdowns. Having a clear goal allows you to better control your actions and stick to a plan to achieve it, and be less affected by market declines.

At the same time, goal setting itself is not an easy task. One option is the SMART approach. It is often used in management. The term first appeared in Paul Mayer's writings on personal development in 1965.

The SMART principle is a set of criteria for accurately formulating a goal.

Specific – the goal should be specific, understandable, without vague formulations.

Measurable - it must be measurable, it is better if a specific amount or quantity is stated.

Attainable - the goal must be realistically achievable. The more realistic the goal, the greater the likelihood of achieving it.

Relevant - the goal must be important to you, relevant, must meet your expectations and be consistent with other goals, if there are several of them.

Time-bound – the goal must have a specific time frame, which provides additional motivation.

In this vein, “getting rich” is not the goal. “Saving for children’s education” is not a goal. They have no amounts or deadlines. How much to save, when, how much is needed to consider that you have become rich...

“Accumulate 8 million rubles by January 1, 2025 to buy a three-room apartment in a new building in Nizhny Novgorod” or

“Create a “financial cushion” of 500 thousand rubles by January 1, 2021” are the right goals.

The goal must be written down on paper or in a file. No entry - no goal. No goal - no money. If you have a specific goal, then you can already make a plan and observe progress.

When choosing his goals, a person starts from his life values. This could be a family, a dignified old age, hobbies, health, etc., everyone decides for themselves what is important to them.

Goals and objectives

Investment goals and objectives

The main goals and objectives of the investment process, which allow us to reveal its essence, are the following:

• making a profit;
• capital preservation;
• expansion of activities (typical for investors producing certain goods);
• social aspects (for example, staff development);
• increasing the prestige of the enterprise in the market.

Risk of non-achievement – ​​who is responsible?

The biggest risk is failing to achieve your goal. It is to minimize this risk that you create a portfolio structure that should always contain protective and conservative assets in the form of OFZs, gold, etc.

Many people forget that the stock market is not a casino. What is important for success here is not the ability to take risks, but the ability to conduct fundamental analysis and evaluation of companies. You need to carefully select stocks to buy, and not buy because “analysts said.” No, every choice is your choice, it's your money, your goals and you are responsible for achieving them. An investor must clearly understand what he is doing, and most importantly, why!

Set yourself a goal: learn to set and achieve your goals!

Types of investments

There are several classifications, but a non-standard scheme deserves special attention, according to which two types of investments are distinguished:

• commercial;
• social.

Types of investments

Their essence and significance as a comparative characteristic are presented in the table below:

Other classifications

Modern science and practice distinguish several classifications of investments. The most popular of them should be considered in more detail. Depending on the type and scope of application, there are three types of investments:

• real represent capital investments in means of production;
• financial can be in the form of any liquid assets;
• intangibles represent various social benefits and knowledge.

Smart investment

Depending on the form of investment, they are divided into:

• cash;
• land;
• movable and immovable property, tools, production facilities;
• property rights in the form of licenses, patents, franchises, trademarks, etc.

Depending on the source and form of ownership of it, investments can be:

• state, regional and municipal;
• private;
• foreign;
• mixed (on the terms of public-private partnership).

If we talk about the investment object, then depending on this criterion we can distinguish the following types of investments:

• capital assets (property, precious metals);
• monetary assets;
• intangible assets.

Of particular importance is the nature of solving the tasks assigned to the investor. This criterion allows us to distinguish the following types of investments:

• aimed at increasing production efficiency;
• intended to expand sales markets and production itself;
• having as their goal the creation of new industries;
• aimed at meeting the requirements of government agencies.

For an investor, the degree of influence and control of the business on his part is often of fundamental importance. This criterion allows us to distinguish the following types of investments:

• providing complete control to the business owner (the investor has absolutely no tools with which he could influence the company’s policies);
• granting the right to influence the business, but not allowing for full control (this situation is possible if the investor has a blocking stake in shares exceeding 25%);
• not allowing to establish full control, but if there is significant influence on the activities of the organization (this is possible if there is a controlling stake, representatives on the board of directors who form the majority).

These are the most popular investment classifications.

Video. Types of investments

It is also worth highlighting the one that is based on the degree of investor participation. Thanks to this criterion, direct, indirect and portfolio investments are distinguished. The first appear in the form of resources that are aimed at the direct implementation of production tasks.

Indirect investments provide the right to indirectly participate in an investment project (for example, through loan financing). Portfolio investments provide for investments in financial instruments of the market (stocks, bonds, etc.).

Participants

The investment market is formed by specific subjects of the investment process, who are also called its direct participants. These include:

• buyers;
• sellers;
• intermediaries.

The first two listed categories are direct participants in the investment process. Intermediaries act as a link connecting the capital of buyers and the assets of sellers. At the same time, they can directly carry out trading activities and operations.

The classification of investment market intermediaries includes:

• brokers;
• dealers;
• support staff of exchanges, analytical agencies and so on.

Thus, the investment market is a complex, self-sufficient mechanism that largely determines the structure of investments made.

Basic functions of investments

Analyzing the definition of investment, we can come to the conclusion that these processes are carried out at both the public and private levels. The main purpose of investment is to improve the welfare of the state. Therefore, the importance of functions lies in satisfying the interests of all subjects. The main functions of investments include:

• Distribution. Its essence boils down to the fact that when choosing an investment object, the entity that carries it out contributes to the development of a specific industry.
• Regulating. Due to the fact that the importance of investments is global, they affect related sectors of the economy. For example, the opening of a new plant may involve the construction of new roads, the construction of recreation centers, the creation of jobs, and much more.
• Stimulating. Investments involve investing money in improving individual industries (science, technology, education and others). Thanks to this, the standard of living and welfare of the country increases.
• Indicative. This function is directly related to the processes of increasing capital and creating a harmonious balance in an open economic system.

Conjuncture

Investment market conditions are a form of determining a number of factors that shape the dynamics of the relationship between supply, demand, price levels and competition.

Studying and forecasting the investment market conditions allows us to conclude that there are four stages (stages) of its change.

1. A rise or growth in economic conditions associated with the revival of the economic system as a whole. This process always characterizes an increase in the activity of current market processes. Externally, it manifests itself through a steady increase in demand for investment objects. The natural response to this trend is to increase prices and intensify market competition.
2. Following it is the market boom. This stage is associated with a rapid increase in demand for investment goods, which supply is unable to satisfy. The price of investment objects continues to rise sharply. Against the backdrop of the above processes, the income of investment market entities is also rising.
3. The stage of weakening market conditions. It is associated with the beginning of a decline in market activity. These processes are taking place against the backdrop of a recession in the country's economy. Supply begins to dominate demand. However, everything starts from the moment of short-term equilibrium.
4. The stage of a market downturn is the worst time for an investor to plan to start investing. At this point, not only demand falls, but also supply. At this stage, investor income is minimal.

Features of the composition of investments

Composition of investments

Revealing the economic essence of investments, one cannot fail to mention the main characteristics of their composition:

• The subjects here can be individuals and legal entities, as well as government agencies and enterprises.
• Sources of investment can be internal (domestic) and external (foreign).

Forms of investment projects

Project specifics

To achieve the goals and objectives of investments, an instrument such as an investment project is used. Its creation ensures that the investor receives complete information about the investment object, thanks to which he will be able to make the necessary decisions.

Investment projects can be defined as a set of activities or a unique system of financial, legal, and accounting documentation that describes the process of achieving established goals. All investment projects can be classified according to several criteria.

Depending on the period, short-, medium- and long-term are distinguished.

Sources of financing for investment projects

In terms of scale, projects can be small, medium, large and mega. The first ones are designed to solve certain problems within one company. The last two types usually aim to solve several problems within a certain region.

A few words about resources

Resources and sources of their formation become especially important when implementing a specific investment project. They are defined as the available capital that an investor intends to invest in a project for profit or economic gain.

The following objects can act as resources:

• cash;
• securities;
• real estate;
• information and labor resources.

Moreover, such resources can be either own, borrowed or attracted. For example, to implement a certain project, an investor can invest his own money (this will be his own resources), take out a loan from a bank for this purpose (this will be a borrowed resource), or invest the funds he received from the sale of shares (this will be an attracted resource).

Forms of real investment

Conclusion

To summarize this article, emphasis should be placed on the economic essence of investment. It consists of the following points:

• the ability to make a profit;
• the presence of personal goals among investors;
• the movement of capital that arises through investment;
• promoting the development of the state’s economy as a whole.

The importance of investment cannot be overstated. Without them, the activities of enterprises, institutions and organizations would be ineffective.

Investment process. Stages of the investment process

What is the investment process? What stages does it consist of? What is each stage of the investment process needed for?

The investment process is a long-term investment of economic resources with the aim of creating and obtaining net profit and (or) social effect in the future.

The investment process begins with the decision to invest and ends with the cessation of investment activity. During this time, the project generates positive and negative cash flows.

At the same time, the cessation of investment activity can be either planned or forced (if it is impossible to continue to engage in investment activity for some reason).

Stages of the investment process:

• searching for investment opportunities , i.e. those values ​​that you are going to invest. In this case, investment resources can be either own or borrowed;

• formulation of projects and initial selection . At this stage, investment projects are generated that could potentially be included in the investment portfolio;

• primary selection of the most interesting investment projects . At this stage, projects are selected that will be tested for effectiveness. This stage is necessary in order to reduce the number of projects for investment analysis. This will save time and money on investment analysis;

• investment analysis and decision making . At this stage, the effectiveness of investment projects is assessed and the most attractive ones are selected. As part of the assessment, indicators are calculated that take into account the time factor, such as, for example, net present value (NPV), profitability index (PI), payback period (PB), etc. The analysis can also be carried out on the basis of simple (undiscounted indicators);

• implementation of an investment project;

• monitoring and audit of project implementation progress . This is an extremely important stage of the investment process, as it allows you to notice in time if something goes wrong, for example, the actual profitability of an investment project will be lower than planned, and correct the situation.