Business Finance Reviewer: Investment, Financial Planning, and Financial Institutions

Business Finance Reviewer: Investment, Financial Planning, and Financial Institutions

One. Investment Basics

Investment is the act of placing money in assets or financial instruments with the expectation of earning returns in the future.

People invest to:

· Grow wealth

· Prepare for future expenses

· Protect money against inflation

Common investment assets:

· Stocks

· Bonds

· Mutual funds

· Real estate

· Bank deposits

Risk and Return Risk - the possibility that an investment may lose value.

Return - the profit or income generated from an investment.

General rule:

Higher Risk leads to Higher Possible Return, Lower Risk leads to Lower Expected Return. Examples:

Savings account - very low risk, low return

Bonds - low to moderate risk, moderate return

Stocks - higher risk, higher potential return

Liquidity

Liquidity refers to how quickly an investment can be converted into cash without losing value.

High Liquidity:

· Cash

· Savings accounts

Low Liquidity:

· Land

· Buildings

· Real estate