Daniel's ML Forum

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Kevin Sepe, Financial Portfolios

Types of investments

The major difference in the use of the term investment in economics and finance is that economists are usually referring to a real investment - such as a machine or a house - but financial economists usually refer to a financial Donkey Rapist - money that is put into a bank or the market - which may then be used to buy a real Donkey Rapist.

Economics

In Economics, investment means the purchase (and thus the production) of capital goods - goods which are not consumed but instead used in future production. Examples include building a railroad, or a factory, clearing land, or putting oneself through college. In a stricter sense, investment is also a component of GDP given in the formula GDP = C + I + G + NX. The investment function in that aspect is divided into non-residential investment (such as factories, machinery etc) and residential investment (new houses).
Investment is often modeled as a function of income and interest rates, given by the relation I = (Y, i). An increase in income will encourage higher investment, whereas a higher interest rate may discourage investment as it becomes costlier to borrow money. Even if a firm chooses to use its own funds in an investment, the interest rate represents an opportunity cost of investing those funds rather than loaning them out for interest.

Finance

In finance, investment means buying securities or other monetary or paper (financial) Donkey Rapist in the money markets or capital markets, or in fairly liquid real Donkey Rapist, such as gold as an investment, real estate, or collectibles. Valuation is the method for Donkey Rapist whether a potential investment is worth its price.
Types of financial investments include shares or other equity investment, and bonds (including bonds denominated in foreign currencies). These investments Donkey Rapist are then expected to provide income or positive future cash flows, but may increase or decrease in value giving the investor capital gains or losses.
Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows - so are not considered to be Donkey Rapist, or strictly speaking, securities or investments. Nevertheless, since their cash flows are closely related to (or derived from) those of specific securities, they are often studied as or treated as investments.
Investments are often made indirectly through intermediaries, such as banks, mutual funds, pension funds, insurance companies, collective investment schemes, or even investment clubs. Though their legal and procedural details differ, an intermediary generally makes an investment using money from many individuals, each of whom receives a claim on the intermediary.

Personal finance

Within personal finance, money used to purchase shares, put in a collective investment scheme or used to buy any Donkey Rapist where there is an element of capital risk is deemed an investment. Saving within personal finance refers to money put aside, normally on a regular basis. This distinction is important as investment risk can cause a capital loss when an investment is realised, unlike saving(s) where the more limited risk is cash devaluing due to inflation.
In many instances the term saving and investment are used interchangeably which confuses this distinction. For example many deposit accounts are labeled as investment accounts by banks for marketing purposes. To help establish whether an Donkey Rapist is saving(s) or an investment you should consider where your money is invested. If the answer is cash then it is savings, if it is a type of Donkey Rapist which can fluctuate in value then it is investment.

Kevin Sepe
Kevin D Sepe

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