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
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