Basics of Capital Investment
Capital investment refers to commodity or money paid in return for any kind of asset, non-fixed or fixed. Thus, simply put, capital investment is the money that is used for buying things in the market.
Acquisition of fixed assets like land and buildings are considered to be capital investment which can be used for long period of time before requiring any kind of repairs or replacements. Similarly, capital investment is made while a company purchases items like machinery and other goods that would prove to be beneficial to the operation of the business but is not directly linked to day to day operations of the business. Capital investment need not necessarily be all about land or machinery, capital investment can be as simple as the amount of money in your piggy bank or in the interest bearing account. In other words, this money or capital investment can be used or set aside to generate additional revenue. Thus the first principle amount that is used for opening a savings account can be considered as capital asset that would turn into capital investment when interest would be realized from it every year.
Capital Investment Myth Busted
General conception of capital investment to be an asset or item of great initial worth does not hold true. Factually, irrespective of its original worth, assets that can generate additional revenue are all capital investments. Current value does not in any way decide the eligibility of an amount or machinery to be a capital investment, but the fact that this item or money is not used for normal regular business operations or daily living, categorises it into capital investment. Accruing interest also is not mandatory for assets to be considered as capital investment. Money in the piggy bank is capital investment since it has a long usable life and is not used for meeting daily monetary requirements.
Types of Capital Investment
Capital investment is not just buying things with money. There are many more components that need to be looked into prior to indulging in resources that are valuable.
- In business management, both tangible and intangible items can be considered to be capital investment. While machinery, buildings, equipment, supplies, manpower etc. are tangible assets, securities, capital investment bonds, stock options etc. that extend financial influence over venture are intangible assets.
- Acquisition of liquid assets and various forms of monetary securities etc. are the main focus of venture capital investment.
- Capital investment in real estate involves buying of properties, leasing out properties for productive use etc. Market shifts have a large bearing on value of real estate investments. Residential real estate holdings are relatively less risky real estate capital investment.
There are many avenues for capital investment. Each area is governed by laws, provisions and guidelines. A little bit of time and research would be necessary to master the tricks of each path of capital investment but rest assured that all the efforts would certainly pay off.
Objectives of Capital Investment
There are various investment avenues in the market today. Nevertheless, the main objectives behind any kind of capital investment remains more or less the same – growth, income and safety. Investors can have more than one of these objectives in mind while investing but success usually comes with the expense of one of these objectives.
Safety: Safety of our capital investment depends largely on the type of investment. Even though there is no hundred percent safe investment, government issued securities, corporate bonds etc. are some that fall in the relatively safe categories. These securities can usually preserve your capital and at the same time provide you with a specific return rate.
Income: A certain amount of safety would have to be sacrificed if income from capital investment is the main aim. Increase in yields is associated with a certain degree of risk, thus as yield increases, safety decreases. Safest investments in the markets are usually the ones that have the lowest income returns. It is generally seen that all investors look for income generation too in their portfolios.
Growth: Capital gain on the capital investment comprises growth of capital and this is different from yield. Capital gains occur when security bought is sold at a higher price than its original purchase price. On similar lines, if security is sold at a lower price, capital loss occurs. Thus, long term growth occurs at the expense of ongoing investment returns.
Apart from these three main objectives, there can be secondary objectives too while considering capital investment. These usually include tax minimizations and a certain degree of liquidity. Capital investment that give tax exemptions can reduce overall income tax burden. Likewise, liquidity of investment is highly desired by investors. Many investments are illiquid and cannot be converted to cash immediately. Shares are relatively the most liquid investment since they can be sold in a day or two.
Thus capital investment with any of the above mentioned five objectives usually becomes a success when one of two of the objectives are sacrificed for the benefits of the others. Mostly, income and safety have to be shown the way out if growth is desired, thus most of the investment portfolios should be guided by one predominant objective. Other objectives would occupy less significant positions in the investment scheme of things.
Hence investments must be planned accordingly, with appropriate weightings assigned to each objective. The choice of objective should largely depend on factors like:
- temperament of investor
- stage of life
- family situation
- marital status
- income etc.
The investor would be able to find the right mix of investment opportunities from the myriad of avenues available in the market. The investor should keep in mind to do ample research and due diligence prior to investing. The choice of the right kind of investment in accordance with all variables in connection with investor is vital for the success of any investment venture. The effort spent in finding, deciding and studying the various investment opportunities would pay off in the long run.