Macro Economics (Eco-221)

Final Report
Topic: Investment, its types and importance
for an economy
Made by: Haseeb Abbasi (18236)
Submitted to: Miss.Maryam Hasib

Table of Contents
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S.No.

Content

Page

1.

Introduction to Investment

2.

Kinds of Investments

3.

Importance of Investment for an Economy

10

4.

Conclusion

13

5.

References

14

Introduction to Investment
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Investment involves employment of funds with the aim of achieving additional income or
growth in values. This includes:

Lending money to another(interest)

Purchasing of Gold(value appreciation)
Purchase of insurance plan(promised future benefits)

It can also be defined as

A commitment of funds made in the expectation of some positive rate of return
OR
A sacrifice of current money or other resources for future benefits
In finance, investment is the application of funds to hold assets over a longer term in the hope of achieving
gains and/or receiving income from those assets. It generally does not include deposits with a bank or similar
institution. Investment usually involves diversification of assets in order to avoid unnecessary and
unproductive risk. In contrast, dollar (or pound etc) cost averaging and market timing are
phrases often used in marketing of collective investments and can be said to be associated with
speculation. Investments are often made indirectly through intermediaries, such as pension funds, banks,
brokers, and insurance companies. These institutions may pool money received from a large number of
individuals into funds such as investment trusts, unit trusts etc to make large scale investments. Each
individual investor then has an indirect or direct claim on the assets purchased, subject to charges levied by the
intermediary, which may be large and varied. Four most commonly used investment objectives are Capital
Preservation, Income, and Growth & Speculation
Capital Preservation: A conservative investment strategy characterized by a desire to a avoid risk of loss.2)
Income: Strategy focused on current income rather than capital preservation.3)
Growth: Investing in securities with strong earnings and/or revenue growth or potential4)
Speculation: Taking a larger risk, usually by frequent trading, with hope of higher than average gains. These
investment objectives relate to risk levels. The risks are going higher from 1 to 4 and also the
same with the investment in return.

Kinds Of Investment
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There are many kinds of investments, each with its own level of risk and return. The more
money you can make from an investment, the higher the risk that you might not get all your
money back. So its good to have a mix of different kinds of investments to spread your risk
and get the results you want. And it's important to do your homework and get investment
advice so you understand the risks before you hand over your money.

Bank savings
Term deposits
Bonds
Shares
Property

Bank savings:
Savings accounts with in major banks are one of the most common and least risky ways to
store your money for the short term. Credit unions and building societies also offer savings
accounts.
When you deposit money in an account you are lending it to the bank, which pays you some
interest in return. The interest you can earn is relatively low, so savings accounts are not the
best option if you are looking for long-term growth.
Savings accounts and term deposits with a bank, credit union or building society are one of
the best known ways to save. They are relatively safe places to keep money and earn interests
but returns arent as high as other types of investment.

Access to your money

Returns from bank deposits
Income or growth?
Risks of investing in bank deposits
Access to your money:
Whether you choose a savings account or term deposit will depend on how quickly you might
need your money. Would you need it if you lost your job? Or are the savings for short term
spending such as holidays?
Most basic savings accounts allow you to withdraw your money whenever you want it. If
youre sure you dont need the money straight away, then you could get a higher interest rate
from a term deposit.

Returns from bank deposits:

Bank deposits usually earn interest. That means for every dollar you have saved, you will
earn a few cents each year in interest. Interest may be paid daily, monthly or yearly, but is
usually quoted as an annual figure such as 2% or 4%.
Most savings accounts offer a straight-forward interest rate. Bonus saver accounts are
different because they offer a low basic rate and a bonus interest rate if you meet certain
criteria, such as not making withdrawals.
Banks offer different interest rate on deposit accounts and its worth shopping around to find
the best rate for you.

Income or growth:
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Bank deposits are good if you want regular interest payments, or need access to your money
at short notice. However tax and inflation can eat into the value of the interest you earn.
If you want the money you invest to grow further, and you can cope with a higher level of
risk, you will need to buy other investments such as shares, managed funds and property.
Find out more about the different types of investments.
If your savings account or term deposit is a PIE (Portfolio Investment Entity) you will pay a
lower rate of tax on the interest you earn. There is usually a minimum deposit and other
criteria for investing in these types of accounts.

Risks of investing in bank deposits:

Bank deposits are some of the safest investments available. But no-one can guarantee that a
bank or financial institution wont fail.
If you have large sums to invest you may want to spread your money across several banks or
other institutions such as credit unions. Be aware that non-bank deposit takers such as
finance companies tend to be riskier than banks.
The government does not guarantee bank deposits, but the Reserve Bank keeps an eye on
how each bank is doing and requires them to publish their credit rating. This will give you a
guide as to the likely risk of the bank failing.

Term deposits

Like savings accounts, term deposits also pay interest. The difference is that you agree to
lend your money to the bank for a fixed period of time such as 6 or 12 months in return
for a higher rate of interest.
Sometimes you cant withdraw the money during the term of the investment. In other
cases you can, but get paid a lower rate of interest. Term deposits are sometimes called
fixed interest investments.

Bonds

A bond is like an IOU issued by a government, council, or company. You lend them your
money for a number of years, and they promise to pay a certain interest rate called a
coupon. The level of risk involved when investing in bonds depends on the issuer. Unlike
term deposits, you can sell your bonds early. However the price you will get can go up
and down. Bonds are also sometimes called fixed interest investments.
When you buy a bond, you lend money to a government, council, or company. In return they
promise to pay you a certain interest rate called a coupon. Bonds are different from term
deposits in that you can sell them. You dont have to hold them till maturity the date you
get your money back. However the price you will get if you sell your bonds early can go up
or down.

Returns from bonds

Risks of investing in bonds
How to buy bonds
Returns from bonds:
Bonds usually pay a higher interest rate than bank deposits. So they can be a good option if
you want a steady income from your savings.
If you hold your bonds till maturity and the company or government doesnt fail then you
will get back what you put in, plus the interest rate promised.

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However if you sell your bonds early the return you receive may not be exactly the same as
the coupon rate. How much you get back will depend on how desirable the bonds interest
rate is at the time you sell.

Risks of investing in bonds:

Bonds are considered safer than shares, but still have some risks.
This includes interest rate risk, where market rates rise and you find that youre earning less
from your bond than you could with another investment.
There is also inflation risk where a high rate of inflation lowers the value of the interest you
earn.
Other risks include liquidity risk, meaning you cant find a buyer when you want to sell.
Some bonds are safer than others. A government or council bond may be safer than one
issued by a company. The downside is that safer bonds tend to have lower interest rates than
riskier ones.
Some bonds are rated which means they have a credit rating as a guide to how risky they
are.
If a bond is senior it means that if the company or government fails then you will have a
higher priority in the queue of people trying to get their money back. If the bond is
subordinated you will be further down that queue.
Subordinated bonds are more risky than senior bonds and will usually have a lower credit
rating.
As with any investment, it pays to do your homework and to get professional advice before
investing in bonds. Particularly if there is a chance you will sell before maturity.

How to buy bonds:

Individual bonds are traded on bond markets.
You can buy bonds through a share broker (some banks offer this service) or an online
dealing service. Prices of bonds that can be traded are published on the website and in
newspapers.
Fund management companies also offer bond funds. These pool your money and spread it
across a number of different bonds. A bond fund lets you diversify your money rather than
putting it all into one single bond holding.

Shares:
When you buy a share, youre buying a small part of a company. If that company
makes money, you may be paid a share of the profit, called a dividend. Like house
prices, share prices are generally expected to go up over time and give you a capital
gain on your money when you sell. However, prices can fall in value as well.
When you buy a share, you're buying a small part of a company and a share in any
profit the company makes. You can buy shares directly or own them through a
managed fund. Shares can rise and fall in value so are better as a long-term
investment.

Returns from shares

Risk of investing in shares
How to spread your risk
Buying and Selling shares
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Returns from shares:

You can make money from shares through capital gains, where you sell a share for more than
you paid for it, and from earning income called dividends.
Like house prices, share prices are generally expected to go up over time and give you a
capital gain on your money when you sell. However, shares can also lose value if the price
falls below the price you paid for them. You only make a loss or a gain when you sell the
shares.
Overall the long-term trend is for the value of shares to increase at a rate higher than
inflation.
When the company makes money, you're sometimes paid a share of the profit, called a
dividend. You can choose to receive this dividend in cash, or reinvest it to buy more shares in
the company.

Risk of investing in shares:

Risk is the potential of losing some or all of your money. There are two main types of risk
with shares volatility risk and absolute risk.
Sudden rises and falls in the price of a share are called volatility and some companies have a
higher risk of this than others. Changes in a company's profitability and in the economy as a
whole can cause share prices to rise and fall. Although prices might fall, you haven't lost any
money through volatility unless you actually sell your shares.
Absolute risk is the risk of losing your money because the company fails and your shares
become worthless.

How to spread your risk:

It's generally not a good idea to put all your money into a small number of, or very similar,
investments. It's better to spread your investments across shares in different companies,
industries and countries, as well as buying other asset classes such as bank deposits, bonds,
and property. This is called diversification.

Buying and selling shares:

Shares are mostly bought and sold on stock exchanges such as the NZX. Shares can also be
called stocks, equities, or securities.
You can buy or sell shares through a share broker. Some banks offer a share broking service
check your bank's website for details.
Another way to buy shares is in a managed fund, which can be bought directly from a fund
manager. Find out more about managed funds.

Property

Returns from investing in property come from rental income and from any increase in the
value of property over time called capital gain. Some people view their own home as an
investment because it may grow in value. It doesnt have the income that letting property to
other individuals or businesses brings. You can invest in commercial property directly, or
through manage funds.
Owning rental property has been a popular investment for many Kiwis over the years. The
difference between an investment property and your own home is that you earn an income
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from it. Returns from property investment come from rental income and from any increase in
the value of property over time.

Returns from property

Borrowing for investment property
Risk of investing in property
How much work is involved?
Other ways to invest in property
Returns from property:
Property has two types of potential returns. One is from rent paid by tenants and the other is
from the property increasing in value called capital gain.
Property investments are not considered to be liquid because you cant withdraw your
investment quickly. To get money out you need to sell the property or increase the mortgage.
This may not be easy and there can be extra costs such as valuation and real-estate agent
fees.
People buy investment properties to make a long-term profit as prices rise. In the short term
there may be little or no profit from rent after expenses like mortgage, insurance, rates and
maintenance are taken into account.

Borrowing for investment property:

It is usually harder to borrow money for a rental property than for your own home. Some
lenders may have lower lending limits for investment properties. As with ordinary home
loans, lenders will look at what you can afford to repay.
Some lenders and mortgage brokers have particular expertise in lending for investment.

Risk of investing in property:

Property investment is often described as safe as houses. Yet there are risks, for example:
Your lender can ask you to repay the mortgage unexpectedly and you may not be able to sell,
or sell for enough to cover the mortgage.
If the investment property is mortgaged with the same bank as your own home, there is the
risk that the bank could sell both properties if you run into difficulty with paying either
mortgage.
You might need, for some reason, to sell the property at a time when it has dropped in value,
and be left still owing the lender money after the sale.
Interest Rate may increase, so the money you make from the property is reduced.
Paying off the mortgage as fast as you can reduce these risks.

How much work is involved:

Property investment usually involves more work than saving money in the bank or investing
in shares and managed funds. Most investors spend a lot of time looking for suitable
properties to buy, finding and managing tenants, and arranging for maintenance work to be
done.
A property manager can do some of this work in return for a percentage of the weekly rent.
The manager will take on the tasks of finding tenants, collecting the rent and bond, and
dealing with maintenance issues and tenant communications on your behalf.

Other ways to invest in property:

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As well as buying property directly, you can also invest in managed funds that buy and sell
commercial property. These funds may own properties such as office buildings, factories, and
shopping centers directly, or they may own shares in other funds that own the property
(known as property securities). As an investor you receive income if the managed fund makes
a profit on rents it receives, or sells the buildings or shares at a profit.
You can also receive a capital gain if the fund price has risen by the time you sell.
Property funds give you the advantages of property ownership without having to find the
property and do the hands-on management yourself. They also make it possible for small
investors to own a diversified portfolio of commercial property, which has a different cycle
of ups and downs to residential property.

Alternatives
Alternatives is a broad term often used to describe investments that fall outside the
standard asset classes of cash, bonds, shares and property. Alternatives include
commodities, currency and derivatives.

Commodities (including gold):

These investments dont pay interest or dividends, but do increase and decrease in
value which can result in a capital gain. The value of commodities often moves in the
opposite direction of other asset classes (e.g. when share prices go down, gold often
increases in value, and vice versa), so investors sometimes buy them to try to protect
their money.

Currency (foreign exchange)

As well as being used to buy goods and services, foreign currency is also used as an
investment. Currency investors are looking for higher interest rates overseas, or
hoping exchange rates will move in their favour resulting in a capital gain. Investors,
including managed funds, may also use currency to protect, or hedge, other
investments that are invested overseas.

Derivatives (including options and futures)

Derivatives are generally only used by more sophisticated investors, such as managed
funds. This can be a confusing and complex area of investing. However, derivatives
are built on a fairly simple concept allowing people to protect themselves, or hedge,
against future price movements. For example a farmer can fix the price today, for the
milk they will supply in the future. While at the same time, a supermarket owner can
fix the price now for the milk they will receive in the future.
Professional investors still use derivatives for this purpose, but can now also use them
to invest more efficiently.

Importance of Investment for an economy

Over the last quarter century, foreign investment has accelerated at a breathtaking pace and
shifts in the flow of this investment are now reshaping the global economic landscape. We
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have seen inward foreign direct investment stock roughly triple worldwide over the past
decade -- and that holds true for developing countries as well as developed economies.
Today more than 80,000 multinational corporations (MNCs) are operating worldwide with
more than 800,000 foreign affiliates compared to 37,000 multinational corporations and
170,000 foreign affiliates active in 1993. Foreign investors not only bring fresh capital,
technology, competitive spirit and ideas to new markets; they also bring jobs. They employ
nearly 80 million people worldwide, a figure that is roughly twice the size of Germanys
labor pool and one that has quadrupled over the past three decades. These foreign affiliates
also point to a deeper level of economic integration among nations. They show a purpose and
commitment beyond one-time sales or market entry into well-established trade patterns.
Investment not only drives jobs and innovation, but it also increasingly drives trade.
Investment also drives development. In March 2002, more than 50 heads of state and 200
finance ministers took part in the International Conference on Financing for Development in
Monterrey, Mexico. The Monterrey Consensus identified sound policies to attract
international investment flows and adequate levels of productive investment as key factors in
sustainable development. Since then, nations have broadly recognized that foreign investment
is critical to economic growth in developing nations. While valuable and important, official
development assistance cannot match the power, velocity and impact of private investment,
which is an essential factor for countries to compete in the knowledge economy.
We are well into an age when many of our most daunting challenges are global, and greater
levels of investment will be necessary to overcome many of them: achieving global food
security; mitigating climate change; defeating violent extremism; and, improving conditions
for the one-third of the worlds population that lives in circumstances that offer little
opportunity to create a better tomorrow for themselves or future generations.
Notwithstanding this consensus, in recent years, concerns have increasingly arisen about the
potential for investment protectionism. Even before the financial crisis struck in 2008,
researchers David Marchick and Matthew Slaughter had pointed out that a number of
governments, representing countries who account for a significant share of total investment
flows, had already considered, or were considering, measures that would restrict certain types
of FDI or expand government oversight of cross-border investment. Most of these measures
were justified on the grounds of protecting national security interests and sectors deemed to
be strategically important.
Key Investment Principles
As investment is contributing more substantially to our economic prosperity, policies
designed to foster, protect and fully benefit from it require greater focus. These include
improvements to the investment climate that will attract greater flows, stronger intellectual
property rights protection, and better investor aftercare and dispute prevention. A rapidly
changing global investment landscape brings many new opportunities as well as challenges.
Some of these changes require further examination and may prompt new policy approaches.
At the same time many basic principles remain valid. Those that have proven so successful in
the effective functioning of open markets will continue to be vital to success in fostering
greater economic growth and development. Both UNCTAD (United Nations Conference on
trade and development) and OECD (Organization for Economic Co-operation and
Development) the two key international organizations focused on investment policy, strongly
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advocate the benefits of opening economic sectors to investment, fair and equitable treatment
for investors, reforms that result in predictable regulatory and legal environments for
investors, and the value of Investor-State arbitration to resolve disputes between governments
and foreign investors. It is easier to attract foreign investment when foreign and domestic
firms can compete on an equal basis and when there are full intellectual property rights
protections.
Changing Investment Patterns
Yet there are many other challenges resulting from the changing investment landscape. There
is little doubt, for instance, that the growing importance of emerging economies in the global
economy has a major impact on the contours of international investment. Since World War II,
the largest flows have occurred between developed economies, with the single largest
bilateral investment relationship existing between the U.S. and Europe. Investment
relationships between developed and developing economies had largely been characterized
by outflows from developed economies to developing countries.
This pattern has changed and will continue to change. A number of the large emerging
economies particularly Brazil, Russia, India, China and South Africa but others as well
are now increasingly important overseas investors. In 2009, FDI flows from emerging and
developing economies into other markets approached one-quarter of a trillion dollars. These
countries held overseas investment stock of nearly $2.7 trillion more than three times their
total a decade earlier. This means that these countries now have a greater stake in the global
system of rules and practices that govern investment. It also means that there is likely to be a
growing convergence around similar sets of principles and practices.
Challenges to Global Investment Flows
The emergence of new players also highlights the prominent role of state-owned enterprises
and sovereign wealth funds, their public financing, and its impact on the competitive
landscape. The principle increasingly known as competitive neutrality suggests one way
that governments can address these challenges. Governments can create frameworks to
ensure competitive neutrality between large state-owned enterprises and private firms to
preserve competition and avoid crowding out of, or discrimination against, private initiative.
To ensure competitive neutrality, several techniques or policy measures can be employed:
reshaping management incentives within state-owned enterprises; effectively applying
competition law to avoid creating an uneven playing field; intensive evaluation of the
taxation, financing and regulatory provisions that exist for state-owned enterprises; and
implementing corporate governance reforms within these enterprises.
As nations attract foreign investment from a more diverse array of sources, investor
credibility is growing in importance. Longstanding guidelines for model corporate conduct
are being updated to reflect the current challenges. For example, the OECD Guidelines on
Multinational Enterprises are being updated this year. Discussions are currently underway
with respect to possible guidelines regarding conflict minerals. The OECDs Anti-Bribery
Convention and the recently adopted Recommendation for Further Combating Bribery of
Foreign Public Officials in International Business Transactions are particularly significant
tools for promoting responsible investor conduct, propriety, integrity and transparency
worldwide. We seek partnerships with many nations to implement them. Non-OECD member
countries are free to accede to this Convention; several have done so and we encourage other
major trading nations to join them.
Another challenging issue relates to competition for natural resources. Firms owned by
governments, or acting on the basis of government policies, are playing a greater role in
global natural resources investment and trade. When they invest in new and alternative
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supplies, they often expand global resource supplies for all nations. Where they concentrate
on securing existing sources of supplies, they are perceived to potentially limit access of other
nations and therefore raise concerns. Theodore Morans recent analysis of resource-oriented
investments suggests a differentiated picture: that foreign investments in small, independent
resource producers will likely lead to expansion of supplies and increasing competitiveness of
industries while investments in major producers which put foreign governments in a position
to control or constrain production are more concerning.
Then there are security-related issues. Technological innovation, new sources of capital and
other factors affecting the nature of security threats are evolving rapidly. We all share the
need to protect legitimate security interests. In the U.S. we have very clear laws and
procedures to do that. These are fully consistent with our open investment policy for the vast
majority of investment that does not adversely affect our security and our eagerness to attract
such overseas investment.

Conclusion
The ultimate goal of this project is to teach students the value of long-term investments. Upon
completion of this lesson, the students will be more familiar with terms and concepts that
help them make sound investment decisions. This Lesson complies with Standards by helping
students distinguish between types and importance of investment, determine the difference
between nominal and real data, and improve understanding of the function of the investment.
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Different type of investment includes

Bank savings
Term deposits
Bonds
Shares
Property
We have also studied returns, risk and buying shares of these investments
In importance we have learned
Key Investment Principles
Changing Investment Patterns
Challenges to Global Investment Flows

References
http://www.investopedia.com/university/beginner/beginner5.asp
https://www.sorted.org.nz/a-z-guides/kinds-investments

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http://www.slideshare.net/prahalathan26/an-introduction-to-investment

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