One of the main economic goals of people at all times has been to ensure a decent standard of living and a future, as well as basic satisfaction of their needs. Therefore, each person sought to accumulate and multiply the available savings. Subsequently, they can be used as such an active production tool as an investment.
The relevance and practical significance of such a topic as investment is due to the development of this market and the need to find new assets for investment. Along with this, the volume of such investments is important and indicates the current state and overall level of development of the country’s economy as a whole. Let’s further consider the very concept of «investment», its types and potential risks of implementation.
An investment is a long–term investment of capital, with the aim of obtaining passive income in the future . These investments are used, for example, for the development and expansion of production. Investments from the point of view of the country can be considered as an investment in order to create new and/or replace worn-out production capital. They can be financial, real, direct . Financial investments include the purchase of securities, real investments include investments in industry, agriculture, construction, education, and direct investments include the purchase, organization or expansion of a company. There are also such types as intellectual, public, private and foreign. Investments are more broadly divided into deposits, stocks, bonds, funds and real estate investments . The latter classification is the most popular. Let’s consider the components included in it in more detail.
A deposit to a bank is a certain amount that the bank holds for a certain period (term deposits) or an indefinite period (demand deposits) at a certain percentage, depending on a particular financial institution . There are also so-called savings deposits, the purpose of which is to accumulate and spend money, for example, to pay for education. When investing money in a bank, you need to pay attention not only to the interest rate, but also to the frequency of payments, as well as their direction (to the current account or to the amount of the deposit). If this is a current account, then after receiving interest, the depositor can freely dispose of them. If this is attributed to the deposit amount, then the balance on the deposit account will increase – which means that subsequent interest payments will be calculated from the increased amount.
Shares are securities that provide its owner with a share in the company’s capital . Stocks are one of the main investment tools in the stock market. They can be ordinary and privileged. The former give the right to vote at the shareholders’ meeting, but do not guarantee dividends. The owners of the second have a predetermined amount of dividends, but can participate in voting only if they have not received dividends based on the results of the previous year.
Bonds are a debt security that obliges the issuer – the one who issues them – to pay a certain amount and interest for the use of funds within a specified period . A fund is a portfolio of assets that is traded on an exchange in the form of investment units. Each share certifies the owner’s right to a share in the fund’s asset portfolio . Real estate investment is the investment of finance in the purchase of both residential and non–residential properties.
Along with this, it is important to understand that investing carries certain risks. In other words, investment risk implies the probability of losses or non-receipt of income in comparison with the predicted option. Any investment is likely to be lost.
The risks of financial investments arise in two cases. The first of them is market risk. This type of risk is associated with environmental factors that affect the overall market. It is almost impossible for an investor to control them. The second type is non–market or non-systemic risk. Non-market risk is specific to a particular area. Such risks are inherent in the activities of a single investor .
According to the degree of risk, there are three main types of investments: conservative, moderate and aggressive . Conservative investments are less risky than other types. Their main value is the preservation of capital, not market profitability. These include: bank deposits, insurance savings programs, pension capital accumulation products, government bonds and some large issuers, real estate. In aggressive investing, there is a high risk of losing part or all of the capital. This type of investment is securities – stocks, bonds of small, medium and some large companies, as well as futures, options and mutual funds (mutual funds). The yield with moderate investment is higher than the yield with conservative and can reach an aggressive level. However, the risk of such an investment is also higher than that of conservative ones. Stocks are the riskiest type of investment among the specified types, since there is no predictable fixed yield. If a company does not have a profit, it may decide not to pay dividends. Its shares will decline, hence their price too. Economic and political crises and natural disasters also affect this.
Bonds are less risky than stocks. There is a so-called credit risk. This means that the company may not fulfill its obligations – will not pay coupons or will not repay the nominal default. If the company is large, the risk of default is low. The price of old bonds will fall when the rates in the economy rise – the risk of interest rates. It also happens the other way around, the risk of reinvestment – when interest rates fall, previously issued bonds become more expensive, which prevents investing the income received. There is also a tax risk, which means that the tax on income from bonds may increase, and this will reduce the income of the portfolio.
The most common risk of investing in a bank is inflation. In this case, the funds placed in securities are depreciated. In turn, the bank may go bankrupt. Then there is a possibility of non-payment in full or in part of the expected income on the invested funds. In this case, the least risky is the investment of an amount no larger than the insurance amount, so that it can be returned, or the placement of money in a reliable bank, but at a small percentage. There is also the possibility of delays in obtaining income and problems with the renewal of ownership of the purchased securities.
To date, as a number of studies show, one of the most popular types of investments is investing in real estate. This is due to statistics that show, for example, that over the past at least 20 years, the primary housing market has only been growing, although sometimes slowing down . At the same time, institutional investors, such as commercial banks, insurance companies, also consider real estate as an asset and include it in the investment portfolio, since the yield is in a more favorable position compared to the same stocks and bonds. This indicates the need for a deeper understanding of the factors affecting the processes of organizing the market environment, conducting a comprehensive analysis of these problems.
Based on the types indicated above, investing capital in real estate involves financial investments in an object under construction or completed, in order to generate income, which can be of two types:
- passive – can be obtained from renting out real estate, is the result of capital investment in real estate;
- income from resale for a higher price – speculative investments .
Changes can increase the profitability of investments, for example, when kindergartens, playgrounds, etc. begin to appear in a place where there were no social infrastructure facilities.
Let us take a closer look at the risks of investing in this area. They may be related to the problems of the economic situation of the region, or to changes affecting the value of real estate. For example, due to the fault of developers, infrastructure for citizens has not appeared for several years, or due to environmental degradation in a place where it has always been safe. Investing in an object under construction gives the risk that the developer will not complete the construction of the building to the end.
Special attention should be paid to the pros and cons of investing in real estate. Let us start with the positive aspects:
- residential premises in large cities have high liquidity, as well as objects attractive to investors, such as suburban, commercial or foreign real estate;
- the visible prospect of the payback of the object, which is a maximum of 10-12 years. On average, real estate pays off in 6-7 years;
- long–term profitability is a plus, because renting out any real estate objects, for example, apartments, premises for trade and the like, means providing passive income for an indefinite period .
When making a decision on investing capital, a detailed assessment requires not only the existing advantages of investing money, but also its disadvantages, among which the main ones are the following:
- the high cost of real estate increases the risk of losing investments due to lack of demand;
- the demand for housing and any other real estate depends on the economic situation of the region;
- demand directly depends on where the facilities are located;
- due to the unstable economy of the country, large companies are being closed, which is why commercial premises in which private investors invested began to be vacated. Accordingly, investors lose their money;
- low demand for real estate in small towns, towns or settlements due to the lack of a good, well-paid job;
- the costs of paying taxes for real estate, for repairs, for security, if we are talking about commercial real estate, sometimes utilities are included in the costs, but, often, they are paid by tenants .
Summing up, it should be noted that investments in the modern economy occupy one of the most important places. Any type of investment is closely related to risks, which every investor should understand. Of course, as in other areas, when investing in real estate, problems may arise, due to which investors lose huge amounts of funds, tenants or leave the market altogether. However, a well-chosen and structured strategy can allow a person to ensure their income in the medium and long term. In turn, the increase in the volume of investment processes has a positive impact on the development of the country’s economy.
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