Investment - wikipedia Investment This article is about investment in finance. For investment in macroeconomics, see Investment ( macroeconomics ). For other uses, see Investment ( disambiguation ). `` Invest '' redirects here. For the term in meteorology, see Invest ( meteorology ). This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. ( February 2017 ) To invest is to allocate money ( or sometimes another resource, such as time ) in the expectation of some benefit in the future, for example, investment on durable good such as real estate for service industry and factory for manufacturing product development, which are two common types for micro-economic output in modern economy. Investment on Research and Development occurs mainly on the innovation of consumer products. In financial market, the benefit from investment is called a return. The return may consist of capital gain or investment income, including dividends, interest, rental income etc., or a combination of the two. The projected economic return is the appropriately discounted value of the future returns. The historic return comprises the actual capital gain ( or loss ) or income ( or both ) over a period of time. Investment generally results in acquiring an asset, also called an investment. If the asset is available at a price worth investing, it is normally expected either to generate income, or to appreciate in value, so that it can be sold at a higher price ( or both ). Investors generally expect higher returns from riskier investments. Financial assets range from low - risk, low - return investments, such as high - grade government bonds, to those with higher risk and higher expected commensurate reward, such as emerging markets stock investments. Investors, particularly novices, are often advised to adopt an investment strategy and diversify their portfolio. Diversification has the statistical effect of reducing overall risk. Contents 1 Related terms 2 Famous investors 3 Intermediaries and collective investments 4 History 5 Value investment 6 Free cash flow and capital structure 7 EBITDA 8 Capital gains taxes 9 Types of financial investment 10 See also 11 References 12 External links Related terms Investment differs from arbitrage, in which profit is generated without investing capital or bearing risk. 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. ( Note that if the currency of a savings account differs from the account holder 's home currency, then there is the risk that the exchange rate between the two currencies will move unfavorably, so that the value in the account holder 's home currency of the savings account decreases. ) 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. Famous investors Investors famous for their success include Warren Buffett. In March 2013 Forbes magazine, Warren Buffett ranked number 2 in their Forbes 400 list. 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. The investment principles of both of these investors have points in common with the Kelly criterion for money management. Numerous interactive calculators which use the Kelly criterion can be found online. Intermediaries and collective investments Investments are often made indirectly through intermediary financial institutions. These intermediaries include pension funds, banks, and insurance companies. They may pool money received from a number of individual end investors into funds such as 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 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. History 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. In the early 1900s purchasers of stocks, bonds, and other securities were described in media, academia, and commerce as 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. Value investment Main article : 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 Dodd 's seminal work Security Analysis was written in the wake of the Wall Street Crash of 1929. 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. 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. Free cash flow and capital structure 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 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. EBITDA A popular valuation metric is Earnings Before Interest, Tax, Depreciation and Amortization ( EBITDA ), with application for example to valuing unlisted companies and mergers and acquisitions. For an attractive investment, for example a company competing in a high growth industry, an investor might expect a significant acquisition premium above book value or current market value, which values the company at several times the most recent EBITDA. A private equity fund for example may buy a target company for a multiple of its historical or forecasted EBITDA, perhaps as much as 6 or 8 times. In certain cases, an EBITDA may be sacrificed by a company, in order for the pursuance of future growth ; a strategy frequently used by corporate giants, such as, Amazon, Google and Microsoft, among others. This is a business decision that can impact negatively on buyout offers, founded on EBITDA and can be the cause of many negotiations, failing. It may be recognized as a valuation breach, with many investors maintaining that sellers are too demanding, while buyers are regarded as failing to realize the long - term potential of, expenditure or acquisitions. Capital gains taxes The examples and perspective in this article may not represent a worldwide view of the subject. You may improve this article, discuss the issue on the talk page. ( January 2017 ) The amount to pay in taxes for long term investments, investments that span over a year long term, and short term 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 fifteen percent income tax bracket you could qualify for the zero percent long - term capital gains rate. The next bracket is the fifteen to twenty percent income tax bracket where you are set at fifteen 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. Types of financial investment Types of financial investments include : Alternative investments Traditional investments ( Interested investment ) See also Asset Capital accumulation Capital gains tax Diversification ( finance ) 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 References Jump up ^ Editor. `` Forbes 400 : Warren Buffett ''. Forbes Magazine. Retrieved 1 March 2013. Jump up ^ Thorp, Edward ( 2010 ). Kelly Capital Growth Investment Criterion. World Scientific. ISBN 9789814293495. Jump up ^ `` The Kelly Formula : Growth Optimized Money Management ''. Seeking Alpha. Healthy Wealthy Wise Project. Jump up ^ Jacques, Ryan. `` Kelly Calculator Investment Tool ''. Retrieved 7 October 2008. Jump up ^ `` The Code of Hammurabi ''. The Avalon Project ; Documents in Law, History and Diplomacy. Jump up ^ Graham, Benjamin ; Dodd, David ( 2002 - 10 - 31 ). Security Analysis : The Classic 1940 Edition ( 2 edition ed. ). New York ; London : McGraw - Hill Education. ISBN 9780071412285. CS1 maint : Extra text ( link ) Jump up ^ `` Price - Earnings Ratio - P / E Ratio ''. Investopedia. Jump up ^ `` What is EBITDA ''. Jump up ^ `` Guide to Short - term vs Long - term Capital Gains Taxes ( Brokerage Accounts, etc. ) ''. Intuit Turbo Tax. Turbo Tax. Retrieved 19 November 2015. External links Wikiquote has quotations related to : Investment Wikimedia Commons has media related to Investments. Wikisource has the text of The New Student 's Reference Work article Investments. Investing at DMOZ Economics Economic theory Econometrics Applied economics Macroeconomics Adaptive expectations Aggregate demand Balance of payments Business cycle Capacity utilization Capital flight Central bank Consumer confidence Currency Demand shock Depression ( Great Depression ) DSGE Economic growth Economic indicator Economic rent Effective demand General Theory of Keynes Hyperinflation Inflation Interest Interest rate Investment IS -- LM model Microfoundations Monetary policy Money NAIRU National accounts PPP Rate of profit Rational expectations Recession Saving Shrinkflation Stagflation Supply shock Unemployment Macroeconomics publications Microeconomics Aggregation problem Budget set Consumer choice Convexity Cost -- benefit analysis Deadweight loss Distribution Duopoly Economic equilibrium Economic shortage Economic surplus Economies of scale Economies of scope Elasticity Expected utility hypothesis Externality General equilibrium theory Indifference curve Intertemporal choice Marginal cost Market failure Market structure Monopoly Monopsony Non-convexity Oligopoly Opportunity cost Preference Production set Profit Public good Returns to scale Risk aversion Scarcity Social choice theory Sunk costs Supply and demand Theory of the firm Trade Transaction cost Value Uncertainty Utility Microeconomics publications Applied fields Agricultural Business Demographic Development Economic history Education Environmental Financial Health Industrial organization International Knowledge Labour Law and economics Monetary Natural resource Public Service Urban Welfare Methodology Behavioral economics Computational economics Econometrics Economic systems Experimental economics Mathematical economics Methodological publications Economic thought Ancient economic thought Austrian school of economics Chicago school of economics Classical economics Feminist economics Heterodox economics Institutional economics Keynesian economics Mainstream economics Marxian economics Neoclassical economics Post-Keynesian economics Schools overview Notable economists and thinkers within economics Kenneth Arrow Gary Becker Francis Ysidro Edgeworth Milton Friedman Ragnar Frisch Friedrich Hayek Harold Hotelling John Maynard Keynes Tjalling Koopmans Paul Krugman Robert Lucas Jr. Jacob Marschak Alfred Marshall Karl Marx John von Neumann Vilfredo Pareto David Ricardo Paul Samuelson Joseph Schumpeter Amartya Sen Herbert A. Simon Adam Smith Robert Solow Léon Walras more International organizations Asia - Pacific Economic Cooperation Economic Cooperation Organization European Free Trade Association International Monetary Fund Organisation for Economic Co-operation and Development World Bank World Trade Organization Index Lists Outline Publications Business and economics portal GND : 4027556 - 5 NDL : 00573346 Retrieved from `` https://en.wikipedia.org/w/index.php?title=Investment&oldid=800639819 '' Categories : Investment Hidden categories : CS1 maint : Extra text Articles needing additional references from February 2017 All articles needing additional references Articles with limited geographic scope from January 2017 Articles with DMOZ links Wikipedia articles with GND identifiers Talk Contents About Wikipedia Wikiquote ܐܪܡܝܐ Azərbaycanca Bân - lâm - gú Беларуская Беларуская ( тарашкевіца ) ‎ Български Bosanski Brezhoneg Català Čeština Dansk Deutsch Eesti Ελληνικά Español Esperanto Euskara فارسی Français Galego 한국어 Հայերեն हिन्दी Hrvatski Bahasa Indonesia Italiano עברית Basa Jawa ಕನ್ನಡ ქართული Қазақша Latina Latviešu Lietuvių Magyar मराठी Bahasa Melayu Nederlands नेपाली नेपाल भाषा 日本 語 Norsk Norsk nynorsk Олык марий Oʻzbekcha / ўзбекча پښتو Polski Português Русский Scots Shqip Simple English Slovenščina Српски / srpski Srpskohrvatski / српскохрватски Suomi Svenska Tagalog தமிழ் తెలుగు ไทย Тоҷикӣ Türkçe Українська اردو Tiếng Việt 中文 Edit links This page was last edited on 14 September 2017, at 20 : 01. Text is available under the Creative Commons Attribution - ShareAlike License ; additional terms may apply. By using this site, you agree to the Terms of Use and Privacy Policy. Wikipedia ® is a registered trademark of the Wikimedia Foundation, Inc., a non-profit organization. About Wikipedia

Question: which of the following is the best example of a financial investment
Answer: investment on durable good such as real estate for service industry and factory for manufacturing product development, which are two common types for micro-economic output in modern economy