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{{about|investment in finance|investment in macroeconomics|Investment (macroeconomics)|other uses|Investment (disambiguation)}}
{{redirect|Invest|the term in meteorology|Invest (meteorology)}}
{{more citations needed|date=February 2017}}
In general, to '''invest''' is to distribute money in the expectation of some benefit in the future – for example, '''investment''' in [[durable good]]s, in [[real estate]] by the [[service industry]], in [[factory|factories]] for [[Secondary sector of the economy|manufacturing]], in [[product development]], and in [[research and development]]. However, this article focuses specifically on investment in [[financial asset]]s.
In [[finance]], the benefit from investment is called a [[rate of return|return]]. The return may consist of a profit from the sale of property or an investment, or investment income including [[dividend]]s, [[interest]]s, rental income etc., or a combination of the two. The projected economic return is the appropriately discounted value of the future returns.
Investors generally expect higher [[rate of return|returns]] from [[risk]]ier investments. When we make a low risk investment, the return is also generally low.
Investors, particularly novices, are often advised to adopt a particular [[investment strategy]] and [[Diversification (finance)|diversify]] their [[portfolio (finance)|portfolio]]. Diversification has the [[statistics|statistical]] effect of reducing overall [[risk]].
==Terminology==
Investment differs from [[arbitrage]], in which [[profit (accounting)|profit]] is generated without investing [[Financial capital|capital]] or bearing [[risk]].
An investor may bear a risk of loss of some or all of their [[Capital (economics)|capital]] invested, whereas in [[saving]] the risk of loss in the value that is stated on a coin or note is normally remote.
Investment in stocks, property, etc. in the hope of significant gain but with the risk of significant loss, i.e. ''speculation'', involves a level of risk which is greater than most investors would generally consider justified by the expected return. An alternative characterization of speculation is its short-term, opportunistic nature.
== History ==
{{expand section|date=October 2018}}
The [[Code of Hammurabi]] (around 1700 BC) provided a legal framework for investment, establishing a means for the pledge of collateral by codifying debtor and creditor rights in regard to pledged land. Punishments for breaking financial obligations were not as severe as those for crimes involving injury or death.<ref>{{cite web|title=The Code of Hammurabi|url=http://avalon.law.yale.edu/ancient/hamframe.asp|website=The Avalon Project; Documents in Law, History and Diplomacy}}</ref>
In the early 1900s purchasers of stocks, bonds, and other securities were described in media, academia, and commerce as [[speculation|speculators]]. By the 1950s, the term investment had come to denote the more conservative end of the securities spectrum, while speculation was applied by financial brokers and their advertising agencies to higher risk securities much in vogue at that time. Since the last half of the 20th century, the terms speculation and speculator have specifically referred to higher risk ventures.
== Types of investments==
{{main|Traditional investments|Alternative investment}}
{{empty section|date=October 2018}}
==Investment strategies==
{{main|Investment strategy}}
===Growth investing===
{{main|Growth investing}}
{{empty section|date=October 2018}}
===Value investment===
{{main|Value investing}}
A value investor buys assets that they believe to be undervalued (and sells overvalued ones). To identify undervalued securities, a value investor uses analysis of the financial 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.
[[Warren Buffett]] and [[Benjamin Graham]] are notable examples of value investors. Graham and [[David Dodd|Dodd's]] seminal work, [[Security Analysis]], was written in the wake of the [[Wall Street Crash of 1929]].<ref>{{Cite book|url=https://www.amazon.ca/Security-Analysis-Classic-Benjamin-Graham/dp/007141228X|title=Security Analysis: The Classic 1940 Edition|last=Graham|first=Benjamin|last2=Dodd|first2=David|date=2002-10-31|publisher=McGraw-Hill Education|isbn=9780071412285|edition=2|location=New York; London|language=English}}</ref>
The [[price to earnings ratio]] (P/E), or earnings multiple, is a particularly significant and recognized fundamental ratio, with a function of dividing the share price of stock, by its [[earnings per share]]. This will provide the value representing the sum investors are prepared to expend for each dollar of company earnings. This ratio is an important aspect, due to its capacity as measurement for the comparison of valuations of various companies. A stock with a lower P/E ratio will cost less per share than one with a higher P/E, taking into account the same level of [[financial]] performance; therefore, it essentially means a low P/E is the preferred option.<ref>{{cite web|title=Price-Earnings Ratio - P/E Ratio|url=http://www.investopedia.com/terms/p/price-earningsratio.asp|website=Investopedia}}</ref>
An instance in which the price to earnings ratio has a lesser significance is when companies in different industries are compared. For example, although it is reasonable for a telecommunications stock to show a P/E in the low teens, in the case of hi-tech stock, a P/E in the 40s range is not unusual. When making comparisons, the P/E ratio can give you a refined view of a particular stock valuation.
For investors paying for each dollar of a company's earnings, the P/E ratio is a significant indicator, but the [[price-to-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 price of a stock is divided by its net assets; any intangibles, such as goodwill, are not taken into account. It is a crucial factor of the price-to-book ratio, due to it indicating the actual payment for tangible assets and not the more difficult valuation of intangibles. Accordingly, the P/B could be considered a comparatively conservative metric.
==Intermediaries and collective investments==
Investments are often made indirectly through [[intermediary]] financial institutions. These intermediaries include pension funds, [[bank]]s, and [[insurance]] companies. They may pool money received from a number of individual end investors into funds such as [[investment trust]]s, [[unit trust]]s, [[SICAV]]s, etc. to make large-scale investments. Each individual investor holds an indirect or direct claim on the assets purchased, subject to charges levied by the intermediary, which may be large and varied.
Approaches to investment sometimes referred to in marketing of collective investments include [[dollar cost averaging]] and [[market timing]].
==Famous investors==
Investors famous for their success include [[Warren Buffett]]. In the March 2013 edition of ''[[Forbes]]'' magazine, Warren Buffett ranked number 2 in their [[Forbes 400]] list.<ref>{{cite web|last=Editor|title=Forbes 400: Warren Buffett|url=https://www.forbes.com/profile/warren-buffett/|work=Forbes Magazine|accessdate=1 March 2013}}</ref> Buffett has advised in numerous articles and interviews that a good investment strategy is long term and choosing the right assets to invest in requires [[due diligence]].
[[Edward O. Thorp]] was a highly successful [[hedge fund]] manager in the 1970s and 1980s who spoke of a similar approach.<ref>{{cite book|last=Thorp|first=Edward|title=Kelly Capital Growth Investment Criterion|url=https://books.google.com/?id=GherKrR0X5cC|publisher=World Scientific|isbn=9789814293495|year=2010}}</ref>
The investment principles of both of these investors have points in common with the [[Kelly criterion]] for money management.<ref>{{cite web|title=The Kelly Formula: Growth Optimized Money Management|url=http://seekingalpha.com/article/250811-the-kelly-formula-growth-optimized-money-management-not-for-the-faint-of-heart|work=Seeking Alpha|publisher=Healthy Wealthy Wise Project}}</ref> Numerous interactive calculators which use the Kelly criterion can be found online.<ref>{{cite web|last=Jacques|first=Ryan|title=Kelly Calculator Investment Tool|url=http://rldinvestments.com/Kelly%20Calculator/js/Money%20Management.html|accessdate=7 October 2008|archive-url=https://web.archive.org/web/20120320083723/http://rldinvestments.com/Kelly%20Calculator/js/Money%20Management.html|archive-date=2012-03-20|dead-url=yes|df=}}</ref>
==Investment valuation==
[[Free cash flow]] measures the cash a company generates which is available to its debt and equity investors, after allowing for reinvestment in [[working capital]] and [[capital expenditure]]. High and rising free cash flow therefore tend to make a company more attractive to investors.
The [[debt-to-equity ratio]] is an indicator of [[capital structure]]. A high proportion of [[debt]], reflected in a high debt-to-equity ratio, tends to make a company's [[earnings]], free cash flow, and ultimately the returns to its investors, more risky or [[volatility (finance)|volatile]]. Investors compare a company's debt-to-equity ratio with those of other companies in the same industry, and examine trends in debt-to-equity ratios and free cash flow.
==See also==
{{div col|colwidth=30em}}
* [[Asset]]
* [[Capital accumulation]]
* [[Capital gains tax]]
* [[Diversification (finance)]]
* [[EBITDA]]
* [[Foreign direct investment]]
* [[Fundamental Analysis]]
* [[Fundamental Analysis Software]]
* [[Hedge fund]]
* [[List of countries by gross fixed 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]]
{{div col end}}
==References==
{{reflist}}
==External links==
{{wikiquote}}
{{commons category|Investments}}
{{NSRW Poster|Investments}}
* {{dmoz|Business/Investing/Stocks_and_Bonds/Equities/Research_and_Analysis/|Investing}}
<!--======================== {{No more links}} ============================
| PLEASE BE CAUTIOUS IN ADDING MORE LINKS TO THIS ARTICLE. Wikipedia |
| is not a collection of links nor should it be used for advertising. |
| |
| Excessive or inappropriate links WILL BE DELETED. |
| See [[Wikipedia:External links]] & [[Wikipedia:Spam]] for details. |
| |
| If there are already plentiful links, please propose additions or |
| replacements on this article's discussion page, or submit your link |
| to the relevant category at the Open Directory Project ...(dmoz.org) |
| and link back to that category using the {{dmoz}} template. |
======================= {{No more links}} =============================-->
{{economics}}
{{Authority control}}
[[Category:Investment| ]]
{{redirect|Invest|the term in meteorology|Invest (meteorology)}}
{{more citations needed|date=February 2017}}
In general, to '''invest''' is to distribute money in the expectation of some benefit in the future – for example, '''investment''' in [[durable good]]s, in [[real estate]] by the [[service industry]], in [[factory|factories]] for [[Secondary sector of the economy|manufacturing]], in [[product development]], and in [[research and development]]. However, this article focuses specifically on investment in [[financial asset]]s.
In [[finance]], the benefit from investment is called a [[rate of return|return]]. The return may consist of a profit from the sale of property or an investment, or investment income including [[dividend]]s, [[interest]]s, rental income etc., or a combination of the two. The projected economic return is the appropriately discounted value of the future returns.
Investors generally expect higher [[rate of return|returns]] from [[risk]]ier investments. When we make a low risk investment, the return is also generally low.
Investors, particularly novices, are often advised to adopt a particular [[investment strategy]] and [[Diversification (finance)|diversify]] their [[portfolio (finance)|portfolio]]. Diversification has the [[statistics|statistical]] effect of reducing overall [[risk]].
==Terminology==
Investment differs from [[arbitrage]], in which [[profit (accounting)|profit]] is generated without investing [[Financial capital|capital]] or bearing [[risk]].
An investor may bear a risk of loss of some or all of their [[Capital (economics)|capital]] invested, whereas in [[saving]] the risk of loss in the value that is stated on a coin or note is normally remote.
Investment in stocks, property, etc. in the hope of significant gain but with the risk of significant loss, i.e. ''speculation'', involves a level of risk which is greater than most investors would generally consider justified by the expected return. An alternative characterization of speculation is its short-term, opportunistic nature.
== History ==
{{expand section|date=October 2018}}
The [[Code of Hammurabi]] (around 1700 BC) provided a legal framework for investment, establishing a means for the pledge of collateral by codifying debtor and creditor rights in regard to pledged land. Punishments for breaking financial obligations were not as severe as those for crimes involving injury or death.<ref>{{cite web|title=The Code of Hammurabi|url=http://avalon.law.yale.edu/ancient/hamframe.asp|website=The Avalon Project; Documents in Law, History and Diplomacy}}</ref>
In the early 1900s purchasers of stocks, bonds, and other securities were described in media, academia, and commerce as [[speculation|speculators]]. By the 1950s, the term investment had come to denote the more conservative end of the securities spectrum, while speculation was applied by financial brokers and their advertising agencies to higher risk securities much in vogue at that time. Since the last half of the 20th century, the terms speculation and speculator have specifically referred to higher risk ventures.
== Types of investments==
{{main|Traditional investments|Alternative investment}}
{{empty section|date=October 2018}}
==Investment strategies==
{{main|Investment strategy}}
===Growth investing===
{{main|Growth investing}}
{{empty section|date=October 2018}}
===Value investment===
{{main|Value investing}}
A value investor buys assets that they believe to be undervalued (and sells overvalued ones). To identify undervalued securities, a value investor uses analysis of the financial 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.
[[Warren Buffett]] and [[Benjamin Graham]] are notable examples of value investors. Graham and [[David Dodd|Dodd's]] seminal work, [[Security Analysis]], was written in the wake of the [[Wall Street Crash of 1929]].<ref>{{Cite book|url=https://www.amazon.ca/Security-Analysis-Classic-Benjamin-Graham/dp/007141228X|title=Security Analysis: The Classic 1940 Edition|last=Graham|first=Benjamin|last2=Dodd|first2=David|date=2002-10-31|publisher=McGraw-Hill Education|isbn=9780071412285|edition=2|location=New York; London|language=English}}</ref>
The [[price to earnings ratio]] (P/E), or earnings multiple, is a particularly significant and recognized fundamental ratio, with a function of dividing the share price of stock, by its [[earnings per share]]. This will provide the value representing the sum investors are prepared to expend for each dollar of company earnings. This ratio is an important aspect, due to its capacity as measurement for the comparison of valuations of various companies. A stock with a lower P/E ratio will cost less per share than one with a higher P/E, taking into account the same level of [[financial]] performance; therefore, it essentially means a low P/E is the preferred option.<ref>{{cite web|title=Price-Earnings Ratio - P/E Ratio|url=http://www.investopedia.com/terms/p/price-earningsratio.asp|website=Investopedia}}</ref>
An instance in which the price to earnings ratio has a lesser significance is when companies in different industries are compared. For example, although it is reasonable for a telecommunications stock to show a P/E in the low teens, in the case of hi-tech stock, a P/E in the 40s range is not unusual. When making comparisons, the P/E ratio can give you a refined view of a particular stock valuation.
For investors paying for each dollar of a company's earnings, the P/E ratio is a significant indicator, but the [[price-to-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 price of a stock is divided by its net assets; any intangibles, such as goodwill, are not taken into account. It is a crucial factor of the price-to-book ratio, due to it indicating the actual payment for tangible assets and not the more difficult valuation of intangibles. Accordingly, the P/B could be considered a comparatively conservative metric.
==Intermediaries and collective investments==
Investments are often made indirectly through [[intermediary]] financial institutions. These intermediaries include pension funds, [[bank]]s, and [[insurance]] companies. They may pool money received from a number of individual end investors into funds such as [[investment trust]]s, [[unit trust]]s, [[SICAV]]s, etc. to make large-scale investments. Each individual investor holds an indirect or direct claim on the assets purchased, subject to charges levied by the intermediary, which may be large and varied.
Approaches to investment sometimes referred to in marketing of collective investments include [[dollar cost averaging]] and [[market timing]].
==Famous investors==
Investors famous for their success include [[Warren Buffett]]. In the March 2013 edition of ''[[Forbes]]'' magazine, Warren Buffett ranked number 2 in their [[Forbes 400]] list.<ref>{{cite web|last=Editor|title=Forbes 400: Warren Buffett|url=https://www.forbes.com/profile/warren-buffett/|work=Forbes Magazine|accessdate=1 March 2013}}</ref> Buffett has advised in numerous articles and interviews that a good investment strategy is long term and choosing the right assets to invest in requires [[due diligence]].
[[Edward O. Thorp]] was a highly successful [[hedge fund]] manager in the 1970s and 1980s who spoke of a similar approach.<ref>{{cite book|last=Thorp|first=Edward|title=Kelly Capital Growth Investment Criterion|url=https://books.google.com/?id=GherKrR0X5cC|publisher=World Scientific|isbn=9789814293495|year=2010}}</ref>
The investment principles of both of these investors have points in common with the [[Kelly criterion]] for money management.<ref>{{cite web|title=The Kelly Formula: Growth Optimized Money Management|url=http://seekingalpha.com/article/250811-the-kelly-formula-growth-optimized-money-management-not-for-the-faint-of-heart|work=Seeking Alpha|publisher=Healthy Wealthy Wise Project}}</ref> Numerous interactive calculators which use the Kelly criterion can be found online.<ref>{{cite web|last=Jacques|first=Ryan|title=Kelly Calculator Investment Tool|url=http://rldinvestments.com/Kelly%20Calculator/js/Money%20Management.html|accessdate=7 October 2008|archive-url=https://web.archive.org/web/20120320083723/http://rldinvestments.com/Kelly%20Calculator/js/Money%20Management.html|archive-date=2012-03-20|dead-url=yes|df=}}</ref>
==Investment valuation==
[[Free cash flow]] measures the cash a company generates which is available to its debt and equity investors, after allowing for reinvestment in [[working capital]] and [[capital expenditure]]. High and rising free cash flow therefore tend to make a company more attractive to investors.
The [[debt-to-equity ratio]] is an indicator of [[capital structure]]. A high proportion of [[debt]], reflected in a high debt-to-equity ratio, tends to make a company's [[earnings]], free cash flow, and ultimately the returns to its investors, more risky or [[volatility (finance)|volatile]]. Investors compare a company's debt-to-equity ratio with those of other companies in the same industry, and examine trends in debt-to-equity ratios and free cash flow.
==See also==
{{div col|colwidth=30em}}
* [[Asset]]
* [[Capital accumulation]]
* [[Capital gains tax]]
* [[Diversification (finance)]]
* [[EBITDA]]
* [[Foreign direct investment]]
* [[Fundamental Analysis]]
* [[Fundamental Analysis Software]]
* [[Hedge fund]]
* [[List of countries by gross fixed 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]]
{{div col end}}
==References==
{{reflist}}
==External links==
{{wikiquote}}
{{commons category|Investments}}
{{NSRW Poster|Investments}}
* {{dmoz|Business/Investing/Stocks_and_Bonds/Equities/Research_and_Analysis/|Investing}}
<!--======================== {{No more links}} ============================
| PLEASE BE CAUTIOUS IN ADDING MORE LINKS TO THIS ARTICLE. Wikipedia |
| is not a collection of links nor should it be used for advertising. |
| |
| Excessive or inappropriate links WILL BE DELETED. |
| See [[Wikipedia:External links]] & [[Wikipedia:Spam]] for details. |
| |
| If there are already plentiful links, please propose additions or |
| replacements on this article's discussion page, or submit your link |
| to the relevant category at the Open Directory Project ...(dmoz.org) |
| and link back to that category using the {{dmoz}} template. |
======================= {{No more links}} =============================-->
{{economics}}
{{Authority control}}
[[Category:Investment| ]]
