Investment activity is of considerable interest, because, in the opinion of a large number of people, it is a sure way to become a millionaire. What legislative, theoretical and practical aspects exist here?
We deal with terminology
First, let's find out what the word "investment" means. From Latin it is translated as “attachment”. Thus, it follows that investment activity consists in channeling certain funds into the process of forming various types of property in order to obtain certain income or other results in the future. However, they must exceed the initial investment. The law "On Investment Activity" is very useful for studying. It is recommended that everyone who thinks about it seriously read and disassemble it. In short, it discusses the specifics of investing in order to make a profit or to achieve another pleasant effect. It should be noted that the case is not limited to one document mentioned above. But it is basic for this type of activity. In the general legal field, private and state investment activities are highlighted. Although, of course, these are not all existing distinguished types.
About the essence
Individuals and legal entities that invest at their own expense and from themselves are called investors. Why is this done? The fact is that everyone is interested in increasing efficiency, high rates of development and increasing competitiveness. And this largely depends on the ongoing investment activity and the range of its implementation. And believe me, do not underestimate its scale. So, a private enterprise can purchase auxiliary tools or fixed assets. Whereas the state is entrusted with more extensive functions. For example, the construction and maintenance of roads. Most often, investments are understood as investments in capital with the aim of subsequently increasing its volume. Although there is also an interpretation of the direction of funds for the reproduction of fixed assets, such as: buildings, vehicles, equipment and the like. Also, investment activities may relate to working with current assets, financial instruments, patents, licenses and other developments. At the same time, there is a wide range of possible investments. Since the objects of investment activity are very diverse, there are a large number of different classifications. Let's look at some of them.
Real and financial investments
This is the most popular classification group. Real (sometimes called capital-forming) investments are investments in the means of production. As a rule, they are sent to a specific, long-term project and are directly related to obtaining real assets. For this purpose, own or borrowed capital is used. Most often in the latter case, there is a bank loan. In this case, the financial institution becomes an investor, because it is in reality that it carries out the investment. In practice, they can be grouped by the following indicators:
- The level of centralization of funding sources. There are two options. May not be / centralized. In the first case, enterprise money or financial resources of other private organizations or persons are attracted. Centralized funding comes from the budget.
- Technological structure (composition of costs and work). Construction, installation, purchase of equipment, tools, inventory, as well as other means aimed at capital needs.
- The nature of the reproduction of fixed assets. New construction, technical re-equipment, reconstruction, expansion.
- The way to do the work. In an economic or contracting way.
- Destination. This is non / manufacturing.
And now let's talk about financial, or, as they are also called, portfolio investments. This refers to the allocation of capital to securities and other similar assets. In this case, the aim is to form and manage an optimal investment portfolio. Moreover, this is carried out, as a rule, through the purchase and subsequent sale of securities on the stock market. The portfolio brings together a certain number of different investment values.
What are they like?
Forms of investment activity can be considered from a slightly different point of view. The division into real and financial is the most popular, but besides them, we should also mention about:
- No / direct attachments. In the first case, the investment activity of an organization or a private individual provides for intermediaries. A similar option can be addressed by those who do not have sufficient qualifications to effectively select and manage an object. They ask to take care of the funds of specialists who allocate (manage) money, and distribute the received income between their clients. Direct investments require the presence of an investor at all stages and processes. But basically only well-trained people who have a supply of knowledge about the object and know all the necessary mechanisms of interaction act in this way.
- Short / long term investments. In the first case - no more than a year. In the second - over 12 months. As a rule, the following details are provided - up to 2, 2-3, 3-5, more than 5 years.
- Format of ownership. Allocate private, foreign, state and joint.
- Regional sign. Domestic and foreign. In the first case, money is invested in objects located inside the country, in the second - abroad.
These types of investment activities exist.
Factors Affecting Volume
There are four main components on which this indicator depends. In addition to them, there are a number of factors, but we will not mention them due to the fact that the size of the article is limited, and they are more suitable for a full-fledged book:
- Dependence on the distribution of income on savings and consumption. If a low per capita income is fixed, then the bulk of it is spent on consumption. The more people or structures make money, the higher the size of savings, which act as a source of investment resources. This is the classic position of economic theory. The higher the proportion of savings, the greater the volume of investment.
- The size of the expected rate of net profit. This is due to the fact that the income received is the main incentive for investments. The higher it is, the more money will be invested.
- The value of the loan interest rate. Although this is not a decisive factor, it can have a significant impact when borrowed capital is used for investments. What is common in our world quite often. So, if net profit exceeds the amount of loan interest, then this positively affects the volume of investments.
- The magnitude of the estimated rate of inflation. The larger it is, the more significant the profit will depreciate, and as a natural result - a smaller investment. This factor is especially important for long-term investments.
When preparatory work and analysis of investment activities are carried out, these indicators are given the most attention. True, they can have different meanings. So, for the state, the first point is the most important. Whereas for a private investor with own funds - the second and fourth.
About economic efficiency
Before making a decision, the current situation is analyzed. As a rule, the parameter of economic efficiency is decisive. This is a relative value, which is calculated as the ratio of result to cost. As a guideline, profit growth, cost reduction, quality improvement, increase in labor productivity or production volumes and similar characteristics can serve. In addition, the payback period plays a significant role. This is the minimum time interval that is needed to return investments and make a profit. It should be borne in mind that the effect of investment will not be immediately, but only after a certain period of time. The gap between investment and income is called lag. To outline what changes need to be implemented, an investment project is created . This is a system of settlement-financial and legal documents that contain a program of actions that is aimed at the efficient use of investments. Its preparation is a long and very expensive process, which consists of a number of acts and stages. In world practice, three phases are usually distinguished:
- Pre-investment phase. It includes the search for investment concepts, better known as business ideas. After that, the preliminary preparation of the project. Then, its financial and economic acceptability is evaluated, after which it is formulated finally. And as a conclusion - the final consideration and decision.
- Investment stage. It means a wide range of design and consulting work.
- Operational phase. This is the process of planning, organizing and subsequent control over the movement and distribution of resources.
And let’s say a word about regulation
Where there is money, there are scammers. To minimize the negative consequences of their activities, the state is engaged in the regulation of investment activities. In addition, the process is subject to certain internal rules of the organization or individual. Private individuals and organizations independently determine their approach to work. Therefore, only a few general words can be said about them. So, the actual presence of existing assets, developments, the absence of claims from other entities of legal relationships is checked. More interesting is the regulation of investment by the state. Much attention is paid to this area.
As subjects of investment activity, the stock exchange and the companies trading in them will be considered. Regulation here starts from the very beginning. So, the exchange may put forward certain requirements for the capitalization of the enterprise, annual turnover and other characteristics important for investors. In addition, attention is also paid to a number of other points - for example, an independent inspection organization should conduct an audit. These are not just the vagaries of exchanges - a number of requirements are put forward by the state. As well as to companies that are involved in the purchase / sale of securities. Although this is a common occurrence when organizations independently introduce a number of requirements in order to maintain the elitism bar or to weed out unreliable clients (or doubtful ones, who probably have connections with the criminal world). All this has been done so that the development of investment activity proceeds with confidence and without shocks.
On book value and risks
During the analysis, this indicator is defined as the difference between the initial expenses and the accrued depreciation. For a positive decision, it is recommended that there is a positive balance of accumulation of money. Next, the question arises of the profitability of investing in a particular project. At the same time, there is some uncertainty that is associated with the situation on the market, expectations, the behavior of other structures, as well as decisions made by them. That is, you must understand that each action carries a certain amount of risk. What is most common? Investors are pursued by:
- The risk of economic instability and legislation.
- Political uncertainty and adverse social changes in a region or country.
- Foreign economic risk. This is the probability of closing borders or introducing restrictions on the supply of goods.
- Fluctuations in exchange rates and / or market conditions.
- Uncertainty of climatic conditions.
- Inaccuracy or incompleteness of information.
- Uncertainty of interests, behavior and goals of participants.
- Production and technological risks (accidents, equipment failures).
To account for these uncertainties, apply:
- Sustainability project method.
- A formatted description of the uncertainty.
- Correction of economic parameters, as well as project indicators.
Risk minimization
An effective investment activity of an enterprise cannot be carried out in conditions when there are many potentially negative factors. A number of tools are used to minimize their impact:
- Risk sharing. For this, a project plan is prepared, as well as contract documents. It should be remembered that the more investment activity of the enterprise is assigned to investors, the higher the risks and the more difficult it will be to find those who invest their money.
- Insurance. In essence, this is the transfer of certain risks to another company. Usually this option provides property insurance and accidents.
- Reservation of funds. This is a way of dealing with risk, which involves establishing a certain relationship between potential problems that affect the cost of the project, as well as the amount of expenses that are needed to overcome the failure in the project. It should be noted that part of the funds should be in the hands of the project manager in order to be able to quickly correct the situation.
- Private risk method. It is used in cases where there is a danger of trouble at certain stages of work, although at the same time, the entire project as a whole is not affected.
If you work correctly, then the investment activity of the enterprise will proceed very successfully and with minimal losses.
Financial risk
Perhaps, they, as well as minimization approaches should be singled out separately. Most attention needed:
- The risk of non-viability. In this case, the investor is recommended to make sure that the estimated income from the project will be able to cover the costs, the return on investment and the payment of debts will be ensured.
- Tax risk. Includes the inability to use the benefits that are provided by law for certain reasons. This may be a decision of the tax service or a change in regulatory documents. To protect themselves from such troubles, investors include certain guarantees in their contracts.
- The risk of non-payment of debts. It occurs in cases of temporary decrease in income (for example, due to a short-term drop in price or demand). To avoid such consequences, the formation of a reserve fund, the deduction of a percentage of the implementation, and additional financing for the project are envisaged.
- The risk of construction in progress. In this case, additional costs are implied, which are associated with the completion of the project base due to fluctuations in exchange rates, inflation, government regulations, environmental problems. Therefore, you need to make sure that you have the opportunity to complete what you started in a timely manner.
Once all the risks are identified, then we can say that a full analysis has been carried out.