Definition and Purpose of Investment

Summary

Investment is the commitment of resources, especially money, to an asset or activity with the expectation that it will gain value or generate income over time. In financial terms, investing means committing money now to receive more money later, with the resulting inflows and outflows forming cash flows or a cash flow stream. The primary purpose of investment is to earn a return, which may come from capital gains, dividends, interest, rental income, or currency movements. Investments involve risk, including the possibility of losing some or all of the invested capital. Generally, higher-risk investments offer the potential for higher returns, while lower-risk investments usually provide lower returns. Diversification is commonly used to reduce overall portfolio risk by spreading investments across different assets.

Key Points

• 1

  Investment involves committing resources with the expectation of future value growth or income.

• 2

  Financial investments may generate returns through capital gains, dividends, interest, rental income, or currency changes.

• 3

  Investment returns are linked to risk: higher potential returns generally involve greater uncertainty and possible losses.

• 4

  Diversification can reduce overall investment risk by spreading capital across different assets.