Financial investment is the commitment of funds into financial instruments, such as securities, bonds, real estate and currencies. The term “investment” is closely related to the disciplines of finance and economics and essentially refers to “savings” or “deferred consumption,” which involves purchasing an asset or making a deposit in a bank in the hope of future returns.
The term “investment” is used differently in economics and finance. By the term investment, an economist refers to real investment, such as in a machine or a house. On the other hand, a finance professional would refer to a financial asset as an investment. Such financial assets could be money that is deposited in a bank or invested in the money market.
Types of Financial Investment
Financial investments are of several types, including equities, debt instruments, derivatives, currencies and real estate. These financial assets are acquired with the expectation of future cash flows and may increase or decrease in value resulting in capital gains or losses to investors.
How is Financial Investment Made?
People invest spare money to offset the effect of inflation on idle cash as well as to benefit from an additional source of income and capital appreciation. Financial investments are typically made indirectly via intermediaries such as banks, insurance companies, mutual funds, pension funds, collective investment schemes and investment clubs. An intermediary generally makes investments using the money from many individuals.
Financial Investment and Exchanges
Exchanges are financial markets where financial products are traded. There are various kinds of exchanges, such as stock exchanges, futures exchanges and commodity exchanges. These exchanges formulate their own rules and procedures for smooth transactions and ensuring fairness for all investors.
The exchanges are guided by regulating agencies. For instance, the Securities and Exchange Commission (SEC) is the watchdog of the American stock market, while the Securities and Exchange Board of India (SEBI) regulates the Indian stock market.
The various markets for financial investment are:
Bond Market – The following products trade in this market:
* Fixed income
* Corporate bond
* Government bond
* Municipal bond
* Bond valuation
* High-yield debt
Stock (Equities) Market – The following financial instruments trade in this market:
* Stock
* Preferred stock
* Common stock
* Registered share
* Voting share
Forex Market – The following financial instruments trade in this market:
* Currency
* Currency futures
* Non-deliverable forward
* Forex swap
* Currency swap
* Foreign exchange options
Derivatives Market - The following financial products trade in this market:
* Credit derivative
* Hybrid security
* Options
* Futures
* Forwards
* Swaps
Commodity Market
Money Market
Spot Market
OTC Market
Real Estate Market
The broad range of investment opportunities represents varied levels of risks and rewards. Success in financial investment requires good knowledge of investing. Instead, one could seek the help of financial advisors, who use various technical and fundamental analysis tools to manage portfolios.
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