Investment


Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broader viewpoint, an investment can be defined as "to tailor the pattern of expenditure and receipt of resources to optimise the desirable patterns of these flows". When expenditures and receipts are defined in terms of money, then the net monetary receipt in a time period is termed cash flow, while money received in a series of several time periods is termed cash flow stream.
In finance, the purpose of investing is to generate a return on the invested asset. The return may consist of a capital gain or loss, realised if the investment is sold, unrealised capital appreciation if yet unsold. It may also consist of periodic income such as dividends, interest, or rental income. The return may also include currency gains or losses due to changes in foreign currency exchange rates.
Investors generally expect higher returns from riskier investments. When a low-risk investment is made, the return is also generally low. Similarly, high risk comes with a chance of high losses. Investors, particularly novices, are often advised to diversify their portfolio. Diversification has the statistical effect of reducing overall risk.

Types of financial investments

In modern economies, traditional investments include:
Alternative investments include:
An investor may bear a risk of loss of some or all of their capital invested. Investment differs from arbitrage, in which profit is generated without investing capital or bearing risk.
Savings bear the risk that the financial provider may default.
Foreign currency savings also bear foreign exchange risk: if the currency of a savings account differs from the account holder's home currency, then there is the risk that the exchange rate between the two currencies will move unfavourably so that the value of the savings account decreases, measured in the account holder's home currency.
Even investing in tangible assets like property has its risk. And similar to most risks, property buyers can seek to mitigate any potential risk by taking out mortgage and by borrowing at a lower loan to security ratio.
In contrast with savings, investments tend to carry more risk, in the form of both a wider variety of risk factors and a greater level of uncertainty.
Industry to industry volatility is more or less of a risk depending. In biotechnology, for example, investors look for big profits on companies that have small market capitalizations but can be worth hundreds of millions quite quickly. The risk is high because approximately 90% of biotechnology products researched do not make it to market due to regulations and the complex demands within pharmacology as the average prescription drug takes 10 years and US$2.5 billion worth of capital.

History

Early forms of credit and trade-based lending appeared in ancient Mesopotamia, supporting commercial activity across the region. More formal regulation emerges in the Code of Hammurabi, compiled around 1754 BCE, which includes several provisions governing loans, collateral, maximum interest rates, and the rights of creditors and debtors—indicating the presence of structured, investment-like arrangements in ancient Babylon.
In ancient Rome, financial intermediaries known as argentarii and nummularii provided credit, accepted deposits, facilitated commercial payments, and mediated currency exchange. Their activities demonstrate the existence of organized financial intermediation and early investment-related services within the Roman imperial economy.
During the medieval period, merchant banking families in Italian city-states such as Florence, Genoa, and Venice developed early deposit, credit, and bill-of-exchange practices that supported expanding European and Mediterranean trade networks. These institutions laid the commercial and legal foundations for later financial markets.
These early financial practices eventually contributed to the more structured investment systems that emerged in Europe during the early modern period. By the 17th century, the growth of global trade networks made investment activity increasingly recognizable in its modern form. Shipping ventures to Asia undertaken by Dutch, British, and French companies often required large pools of capital, encouraging shipowners to seek outside investors willing to finance long-distance voyages in exchange for a share of the profits when ships returned safely.
A major development in this period was the founding of the Amsterdam Stock Exchange in 1602, often considered the world’s first modern securities exchange. It was created to support trading in shares of the Dutch East India Company, the first company to issue publicly traded stock. Amsterdam’s financial infrastructure—including an Exchange Bank to stabilize currency payments and merchant banks that facilitated regulated trade—helped establish the city as a global center of commerce and capital during the 17th century.
The origins of pooled investment vehicles trace back to the late 18th century in the Netherlands, when the first known investment trust — created by Dutch businessman Adriaan van Ketwich — allowed small investors to combine capital, thereby diversifying risk across a portfolio of assets.
In the United States, the origins of the stock market trace back to May 17, 1792, when 24 brokers signed the Buttonwood Agreement, establishing rules for trading securities among trusted parties. A few years earlier, the Compromise of 1790 had allowed Alexander Hamilton to consolidate Revolutionary War debts through federally issued bonds, effectively creating the first widely traded securities market in America.
The New York Stock and Exchange Board—later renamed the New York Stock Exchange —was formally organized in 1817, meeting twice daily to trade a small list of stocks and bonds. The exchange grew rapidly over the 19th century, and by the end of the Civil War in 1865, more than 300 securities were being actively traded, marking the emergence of a mature and organized American securities market.

Investment strategies

Value investing

A value investor buys assets that they believe to be undervalued. To identify undervalued securities, a value investor uses analysis of the financial reports of the issuer to evaluate the security. Value investors employ accounting ratios, such as earnings per share and sales growth, to identify securities trading at prices below their worth.
Warren Buffett and Benjamin Graham are notable examples of value investors. Graham and Dodd's seminal work, Security Analysis, was written in the wake of the Wall Street Crash of 1929.
The price to earnings ratio, or earnings multiple, is a particularly significant and recognized fundamental ratio, with a function of dividing the share price of the stock, by its earnings per share. This will provide the value representing the sum investors are prepared to expend for each dollar of company earnings. This ratio is an important aspect, due to its capacity as measurement for the comparison of valuations of various companies. A stock with a lower P/E ratio will cost less per share than one with a higher P/E, taking into account the same level of financial performance; therefore, it essentially means a low P/E is the preferred option.
An instance in which the price to earnings ratio has a lesser significance is when companies in different industries are compared. For example, although it is reasonable for a telecommunications stock to show a P/E in the low teens, in the case of hi-tech stock, a P/E in the 40s range is not unusual. When making comparisons, the P/E ratio can give you a refined view of a particular stock valuation.
For investors paying for each dollar of a company's earnings, the P/E ratio is a significant indicator, but the price-to-book ratio is also a reliable indication of how much investors are willing to spend on each dollar of company assets. In the process of the P/B ratio, the share price of a stock is divided by its net assets; any intangibles, such as goodwill, are not taken into account. It is a crucial factor of the price-to-book ratio, due to it indicating the actual payment for tangible assets and not the more difficult valuation of intangibles. Accordingly, the P/B could be considered a comparatively conservative metric.