The road to wealthy lifestyle is open to everyone but only few can follow through. This brings about the concept of saving and Investment, two variables that must be exploited in order to become a millionaire or at least live comfortably. It is settled in Saving and Investment Theory that saving and investment are always equal. This implies that without saving, there cannot be investment as saving is the foundation of investment.
Many activities can pass for investment, based on their strategy and tactics. A man who sets aside certain percentage of his monthly salary in anticipation of using the money to generate additional income or to purchase something has invested. Saving money in the bank is an investment. A man who purchases financial assets such as shares, fixed income securities, land and building among others to make profit has been involved in investment.
In broad term, investment may be defined as “ a commitment of funds made in the expectation of some positive rate of return .”
Kevin (2006) narrowed the concept of investment in financial sense to “Commitment of a person’s funds to derive income in the form of interest, dividend, premiums, pension benefits or appreciation in the value of their capital. “ However, from the perspective of economic sense, investment denotes formation of new capital through activities such as new constructions, plant and machinery and inventories among others. The fact remains that all investments result in the acquisition of some assets which could be financial or physical.
Our main focus is investment in the financial sense. We can distinguish between investment and speculation as well as investment and gambling by these three characteristics: risk, capital gain and time horizon. Every investment has elements of risk. Risk itself is defined as possibility of variation in return or likelihood of incurring a loss in a financial transaction. While an investor commits his fund to low risk investment, speculators at delight in taking high risk. There is a trade off between risk and return. In the investment parlance, it is believed that the higher the risk, the higher the return and vice versa.
A speculator is more interested in capital gain (difference between the purchase and sale price of an asset ). On Monday, a speculator can purchase shares and sell it on Friday, if he believes that the share price has risen significantly. When interest rate is high in the money market, speculators offload shares and move money to the money market to earn high interest. Speculators study trends and patterns in price movement in order to take position. They are interested in capital gain almost every second. Despite their rash decisions, speculators are desirable in every stock market because they provide liquidity. They are the highest risk takers in investment pyramid. They always look for opportunities to make large returns at the quickest time. They are ready to gain all or lose all.
An investor on the other hand is more interested in realizing his returns consistently on medium and long term. This is the main essence for investment through the capital market. He is interested in regular income in form of dividend, enjoys bonus shares, sells part of his shares occasionally to meet some obligations , uses shares as collateral for loans and ensures regular review of his portfolio through his stockbroker to maximize return and minimize risk. Investors’ transaction enables stock market to operate on regular basis. Stockbrokers by their training assist an investor to carefully plan, evaluate and allocate funds to various investment outlets. A real investor is highly interested in safety of principal. He is contended with moderate and continuous return over a long period of time. His objectives are to maximize return, minimize risk and hedge against inflation.
It is important to also distinguish between investment and gambling. Gambling refers to a process of taking high risk either for expectation of mouthwatering reward or mere thrill and excitement. Gamblers do not have structured plan. Their forecast is quite unscientific and built on uncertainty. Gambling is more of tips and mere rumours. It is just permutation whereby artificial and unnecessary risks are created in anticipation of higher returns which are more often elusive. Gambling is the opposite of investment.Examples of gambling are pool betting, horse races, card and casino games, private sports betting , various forms of lotteries etc. To be continued.
Oni, award winning financial journalist and Chartered Stockbroker, is the Chief Executive Officer, Sofunix Investment and Communications. He can be reached on email@example.com