Investment and Investment Advice
Investment depends on the marginal efficiency of investment and the rate of interest. What induces individuals to undertake
investments? Obviously, profit expectations seem to exercise a major influence on the investment decisions of individuals,
and these profit expectations in turn are influenced by the current and the expected level of economic activity, changes in
technique and so forth.
Suppose a man borrows money to invest. He will have to pay interest on the loan. But he expects profit from this
investment. He must compare the rate of interest he has to pay to the rate of profit that he expects to obtain. Obviously,
the rate of return or profit must at least be equal to the rate of interest; otherwise no investment will be made. So long
as the expected rate of profit exceeds the rate of interest, investments will continue to be made. The yield expected from
a new unit of capital is called the marginal efficiency of capital. This marginal efficiency of capital must never fall
below the current rate of interest, if investment is to be worthwhile.
The rate of interest does not quickly change. Hence, the inducement to invest, by and large, depends on the marginal
efficiency of capital. If the business expectations are good or if the marginal efficiency of capital is high, more
investments will be made in spite of high rates of interest. On the contrary, a depression, or bleak prospects of profits,
will discourage investment, even if the prevailing rate of interest is low. Thus, fluctuations in investment are mainly due
to the fluctuations in the marginal efficiency of capital. There are some other factors that affect investment. For
instance, if a firm has excess capacity and can easily handle increased future demand, it will not go in for further
investment to increase its capital equipment.
In order to invest properly and to increase your assets to ensure your financial security, you need to develop a long- term
investment plan. In order to do this, factors like your age, stage of life, personal priorities and risk tolerance have to
be considered in order to design an investment strategy that meets your needs.
It is a well-known fact that every investment can be risky, but some investments have a greater risk than others. Risk
tolerance is the amount of money you feel comfortable investing with the risk factor in mind. If you are basically a
conservation person, then you will probably be most comfortable taking limited risks by investing in cash, secure stock and
fixed income investments. If you consideration taking moderate risks, than you could consider putting your assets into
growth stocks, and if you are willing to take significant risks, then high-risk investments are for you.
There are different types of investments to choose from. Stocks are equity investments that give you a share in a
corporation. Bonds or fixed income securities pay interest over a fixed period of time. To understand mutual funds you need
to know that they are diverse equity funds that pool money together from many different investors for greater buying power.
Futures are obligations to buy or sell a specific commodity at a preset price on a specific day. Options give you rights to
buy or sell a specific stock, bond, etc at a preset price during a specified time period.
The term asset allocation simply means how you divide your investments between stocks, bonds, mutual funds and cash
equivalents. This depends on your financial goals, when you want to achieve them, and your willingness to risk. Next in
line comes diversification that allows for further spreading your investments between the major asset categories of stocks,
bonds and cash equivalents. Diversification helps you decrease your investment risk. As you know, no investment is risk
free. Without risk, there would be no reward.
Anything that is widely accepted in payment for goods, or in discharge of other kinds of obligations, is called money. The only essential requirement is general acceptability. Money need not itself be valuable. It must, indeed, be relatively scarce, since it would hardly do if money could be plucked off every tree. But, provided precautions are taken to keep it relatively scarce, money can consist of things as worthless as a scrap of paper or the scratch of a clerk’s pen in a bankbook.
In recent years, there has been a keen controversy on what is and what is not money. This controversy hinges on what functions money is expected to perform, i.e., whether money is to be regarded as a mere medium of exchange, or a store of value. Obviously, when money is to serve as a store of value, other assets besides currency and demand deposits must also be included in term money.
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