In the realm of economics, an investment refers to the acquisition of an asset with the hope or expectation that it will generate a return, in the form of interest or dividends, or otherwise appreciate in value, so that in the future it can be sold for more than its purchase price, thus yielding the investor a profit. An investment can be in real estate, stocks, bonds, art, jewels or precious metals, etc., or it can be in the form of capital or equity that is placed into a company or other project. Most investments contain a certain amount of risk, and, of course, some investments are riskier than others.
Finance can be defined as the science of money management. Since investments can be either personal, public, or corporate, finance refers to the decisions that are made regarding how to pay for those investments. For example, one’s personal investments may be in securities. Many people have invested in retirement plans that contain stocks or mutual funds. In addition to saving money for use in future years, these investors hope that the money they put into their 401ks and IRAs will grow in value over time. Their investment accounts are financed with the salaries they earn during their working years. Public investments, say in roads or schools, are financed by tax revenues.
Corporate investments can be financed by using a company’s own money, or by raising money from external funders. There are two ways to raise money externally: by taking on debt, meaning that the company can borrow loaned money which it has to pay back with interest; or by selling equity, meaning that it gives up shares or percentages of itself in return for operating capital. The primary goal of corporate finance is to maximize or increase the value of the firm, either to its owners or its shareholders.
In order to maximize any type of investment, it is necessary to have a financial plan. Even though it is impossible to predict the potential value of an investment with 100 percent certainty, a solid financial plan will take into account such variables as income, cash flow, current and presumed future value of assets, withdrawal plans, etc. This would apply to all types of investments – personal, public, and corporate. In business, financial planning is the task of determining how a business will afford to achieve its strategic goals and objectives. The financial plan describes each of the activities, resources, equipment, and materials that are needed to achieve these objectives, as well as the time-frames involved.