Investment: Definition, Types, Purpose, Benefits, and Risks
Investing is similar to saving but can generate returns that beat inflation. Investment can be an option to prepare for future living needs such as education funds, wedding expenses, or even retirement funds.
So one day you don’t need to continue working and decide to retire early because you already routinely get income from the investment instruments that you have. Besides that, it can also be used as a reserve of assets if you have a sudden need
Definition of Investment
Investment is an investment activity in the form of money or other assets with the hope of bringing in profits in the future.
Investments are made by investing in the long term through the procurement of assets, shares, or securities to gain profits. While short-term investments can be in the form of deposits, mutual funds, and bonds,
In practice, investment is related to the activity of allocating some assets to be put into instruments such as gold, stocks, or property. Financial potential can be obtained from the difference between buying and selling prices or from property or land rental.
Investing is highly recommended and should be done as early as possible. because no one can be sure what will happen in the future. In addition, investment has also proven to be able to help the country’s economy and the parties involved.
It is also very important for novice investors to learn about the types of investments so they are not confused between investments and speculation. because instead of getting a profit, you can actually lose money or get stuck in debt and other bad things.
Investment activity is very different from speculation. Investment activity is one that has been carefully considered in terms of opportunities and risks, whereas speculation is an undirected activity with uncontrollable outcomes.
For example, saving gold is a definite investment activity, while allocating capital by buying shares in companies whose management is inexperienced is certainly speculation.
To be successful in investing, you should understand the various types of investment instruments.Each investment has its own potential advantages and disadvantages. You can choose the type of investment in stocks, property, gold, deposits, and other types according to your abilities or goals.
If you are going to start investing, there are several types of investments that you can choose according to your goals. The reason is that every investment has different risks, opportunities, and types of treatment, so you must be able to determine which one can lead you to achieve the investment goals you want. For example, whether for retirement funds, children’s education, buying a house, or other purposes,
Investment is divided into two types: physical investment and financial investment.
This type of physical investment is a type of investment that can be seen in physical form, for example, as property buildings, gold bullion, or other valuables. While a financial investment is a type of investment in the form of a financial product, its physical form cannot be touched.
Types of Physical Investment
Included in this type of physical investment are:
1. Land investment
Land is one of the investment instruments that most people have been using for a long time. Because, as we know, the human population will always grow and definitely need land for housing and other needs.
2. Invest in gold
This type of gold investment can also be profitable because the value of gold tends to increase every year. Apart from being able to benefit from the difference between buying and selling, it can also serve as a reserve asset. Because compared to saving assets in the form of money, they will actually decrease in value, one of the causes is the effect of inflation.
Gold also does not only apply to one country but can be used as a valid medium of exchange and payment for transactions with all countries in the world. So saving assets in the form of gold is also considered safer than storing them in the form of cash savings.
Currently, if you are interested in investing in gold bullion, you can get it cheaply and easily. especially now that you can buy gold online. Some platforms that provide gold buying and selling services even offer gold installments, so it will be easier to invest in gold.
Also Read : How to Invest Gold for Beginners
3. Building a property investment
Most people choose this type of investment because the potential benefits are both short- and long-term.Property owners can rent out their buildings to make money in the short term.Meanwhile, for long-term investment, the owner can also benefit from property sales or land price increases.
Types of Financial Investments
The following types of financial investments include:
1. Education and Investment
Education is a tool to gain knowledge and experience. Education is also an investment because, through education, humans can think and use their knowledge to work, have an income, and live a decent life. This educational need also underlies investment products such as education insurance or education savings.
2. Investment Deposits
Deposit investment is the simplest and most popular type of investment.This is because deposit investments have the lowest level of risk among other types of investments.
Deposits benefit their owners through interest rates on equity participation.The practice of depositing is almost the same as saving at a bank, but deposit funds have a deposit contract, so they cannot be withdrawn at any time before the contract expires. The deposit cooperation contract period typically ranges from three months to several years.
So if you have cash or special savings for investment, deposits can be the right choice.
3. Stock Investment
Shares are proof of ownership in a company. Investments in stock instruments are expected to bring profits in the future from increasing share prices. Stocks can also bring benefits from the distribution of dividends every year.
Stock investment, when compared to other types of investment, provides a high profit potential.However, it is still advisable to pay attention to both technical and business knowledge about the company. Stocks also have a fairly high level of risk if you don’t have the knowledge.
Nowadays, it’s very easy to learn about stocks and to analyze good companies. Because many professionals in this field share their knowledge and experience in the world of stocks, You can get this information via YouTube or the website.
In addition, shares can also be owned at a very affordable price; starting from Rp. 100,000, you can own your own shares. You can buy it on various securities platforms, such as Ajaib, Seeds, BNI Sekuritas, BRI Sekuritas, and other securities companies.
Also Read : Stocks: What Are They and How Do They Work?
4. Foreign currency investment
Investment in foreign currency is one strategy to protect assets from the effects of inflation. Another benefit of having foreign currency is that we can benefit from the strengthening of foreign currency exchange rates with local currency.
5. Mutual fund investment
Mutual funds are a type of investment run or managed by investment managers to invest in other financial products so as to generate profits that can be distributed to mutual fund owners.
To learn more, see our full explanation of mutual funds.
6. Bond Investment
Bonds are debt securities issued by companies or governments to obtain additional capital for business management or financial assistance.This type of bond investment is taken by many professional investors because the risk factor for bonds is quite large for novice investors. However, bond investments can also bring substantial profit opportunities.
For an in-depth explanation, read our full explanation of bond investing.
One of the most important aspects of investing is determining investment objectives.By determining good and correct investment objectives, it is hoped that the capital that has been issued can bring benefits as expected.
Some people may believe that investing can make them wealthy.This statement is not entirely wrong, nor is it entirely true. However, if an investor is disciplined and committed to investing, he can definitely get the desired profit.
So, here are some investment goals that are usually prepared by many people, including:
1. To get extra income.
By investing, one can get sufficient passive income. For example, if you choose to invest in stocks, you will receive income from dividends, deposits from interest, and property from rents and others. This income will increase over time, either due to an increase in the number of investments or an increase in the value of each investment.
So while running the main job or business, an investor can also get other income from his investment activities. This will certainly be useful; for example, when a person’s main job is disrupted, they still have other sources of income.
2. Preparing for retirement
There will be times when someone will become bored with their work routine or will be unable to work as usual.As a result, many people have made plans for their retirement, one of which is investing.
It is hoped that by routinely investing and adding investment instruments, income that can meet life’s needs will increase, eliminating the need to work continuously.In addition to getting a steady income, it can also be useful in the future so that you can enjoy old age without having to worry about not having an income.
3. The purpose of investment is to secure wealth.
In addition to bringing in profits and steady income, investment can also be used as a tool that can secure wealth. The reason is that if we are wrong in managing assets, then these assets will easily decrease or even run out. Meanwhile, if the assets are allocated for investment, then their value will actually increase.
Because the money we save has the risk of decreasing in value due to inflation, Not all countries can guarantee the safety of assets from inflation. Therefore, investment practices can function to avoid inflation risks and can even help the economy, both for individuals and business entities on a national scale. If a country’s economy is good, it will be able to prevent an economic crisis.
4. Preparing for the wedding
Currently, many young people are preparing for marriage by investing. By investing, they can avoid wasteful attitudes and be more mature in preparing for their marriage.
The cost of wedding receptions is also getting higher every year, so it’s not enough to just rely on savings. Savings are important, but to increase acceleration, you can also set aside savings for investment.
5. For education funds
Every parent will certainly prepare for their child’s needs, one of which is in the field of education. The purpose of this investment in education funds can be useful in the future so that children’s education can be guaranteed and get a proper education.
Education funds must be set aside for investment because the cost of education rises year after year.You can allocate part of your income to education funds through various types of investment instruments, according to your investment objectives, needs, and risk profile.
For example, investing in gold, because gold is an instrument whose value is always maintained and tends to increase every year, So it is very suitable to be used as an investment goal to save for children’s education funds.
Besides being used to generate profits, investment will also affect the lifestyle of an investor, for example, by making him more economical because he will set aside his income for investment and not for buying unnecessary items.
Here are some of the benefits of investing that an investor can feel, especially if they start early:
- An excellent investment for increasing assets or assets.Every investment instrument owned, such as gold, buildings, and land, will continue to increase in price, thereby increasing wealth.
- Investment is beneficial to avoid debt. An investor will usually prefer to avoid buying goods by way of debt. Because they realize that debt will reduce opportunities for investment.
- Investment is advantageous for meeting future needs.An investor who regularly invests has the opportunity to earn additional income from his investment instruments. Until such time as this instrument generates profits in the form of fixed income,
Of the various benefits and profit opportunities that can be obtained from investment, investment, like other business risks, has risk factors such as capital loss.In order for us to feel comfortable investing, we should also know about the risks involved.
There are several investment risks that we will discuss on this occasion, including those due to macroeconomic conditions, types of illiquid investment instruments, interest rates, and unstable market conditions.
1. Interest rate risk
Interest rate risk is the risk of impairment in the value of interest-bearing debt instruments, usually occurring in bonds and preferred stock. If the value of interest rates decreases, then the value of returns will also decrease.
2. Business risk
Business risks, for example, include bankruptcy, which occurs in certain companies, for example, in the stock market. If a company goes bankrupt, its assets will be liquidated to pay shareholders, which, of course, is not worth the investment that investors have made.
So it is advisable to diversify to reduce business risk.
3. Inflation risk
When there is inflation, the value of a country’s currency will decrease, meaning that assets and income will be eroded. Inflation is closely related to the concept of time value of money (TVM).
4. Liquidity risk
Liquidity risk is the difficulty in disbursing an investment, which usually occurs in property instruments. Even though everyone needs a building to live or work, property transactions usually involve large amounts, so sometimes properties experience problems selling.