Note: These course notes were written by Professor Virginia Maracine PhD and Professor Emil Scarlat PhD Department of Economic Cybernetics, Academy of Economic Studies Bucharest, using the announced references (see the Course's Syllabus). Chapter 1
Introduction. Basic of Investment
1.1. What Investment it is about? But Investment Management? 1. Investment - concepts and types
The word Investment originates in the Latin "vestis", meaning garment, and refers to the act of putting things (money or other claims to resources) into others' pockets. The basic meaning of the term being an asset held to have some recurring or capital gains. It is an asset that is expected to give returns without any work on the asset per se (Wikipedia). In the most general wide accepted sense, to invest means to spend an amount of money (investment fund I) in order and in such way that to get a future return R greater than the initial spent fund. According with this acceptation of the investment it then has to be very easy for every one to do so (i.e. to spend some money today and to receive more tomorrow). But, unfortunately, things aren't so at all. The main arguments for this statement rely on all the aspects that have to be tacking care of when we speak or think at an investment, and that make this process to be a very complex one:
1) What types of assets we must invest in (tangible or fixed, intangible, financial, human)?
2) How we can get the necessary information for assess the performances of a particular class of assets?
3) For how long we should keep an (financial) asset before we sell it? 4) Where we can find the investment fund (if we do not posses the necessary resources)?
Analyzing these items, we realize that actually there are very few people which have all the answers. The others must turn to somebody else (an investment professional) in order to get the right answers for these questions. And this is where the Investment Management intervenes, both as a science and as a profession.
From another perspective, investment or investing is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it.
The term "investment" is used differently in economics and in finance. Economists refer to a real investment (such as a machine or a house), while financial economists refer to a financial asset, such as money that is put into a bank or the market, which may then be used to buy a real asset.
Business Management Approach
The investment decision (also known as capital budgeting) is one of the fundamental decisions of business management: managers determine the assets that the business enterprise obtains. These assets may be physical (such as buildings or machinery), intangible (such as 2
patents, software, goodwill), or financial (see below). The manager must assess whether the Net Present Value (see Chapter 3) of the investment to the enterprise is positive or not. This is the main decisional criteria in the investment decision.
A business might invest with the goal of making profit. These are marketable securities or passive investment. It might also invest with the goal of controlling or influencing the operation of the second company, the investee. These are called intercorporate, long-term and strategic investments. Hence, a company can have none, some or total control over the investee's strategic, operating, investing and financing decisions. One can control a company by owning over 50% ownership, or have the ability to elect a majority of the Board of Directors. Economics Approach
In economics, investment is the production per unit time of goods which are not consumed but are to be used for future production. Examples include tangibles (such as building a railroad or factory) and intangibles...