Investing activities are investments and the implementation of practical actions in order to make a profit or achieve another useful effect. The most common examples are the purchase of fixed assets and investments, and proceeds from the sale of fixed assets and investments.
Explanation:
Investing activity is an investment process and a set of practical actions for the implementation of investments. Firms in the process of production activity accumulate capital. A firm’s investing activities in additional means of production and profit are called investment activities. Before making a decision on capital investments, the company needs to make calculations of their economic efficiency.
Economic efficiency is a relative value, which is calculated as the ratio of the effect to the costs incurred. The effect may be growth in profits, lower costs, higher labor productivity, higher quality, and higher production volumes.
The payback period is the minimum time interval from the start of the project, beyond which the integral effect becomes and then remains non-negative. Investments from investing activities do not immediately produce an effect, but only at certain intervals, that is, when the projected efficiency is achieved.
The complex of work carried out to justify the effectiveness of investments in an enterprise is called an investment project. An investment project for a particular enterprise is a system of legal and financial documents containing a program of actions aimed at the efficient use of investments. The preparation of an investment project is a lengthy, and sometimes expensive, process consisting of a series of acts and stages.
In international practice, it is customary to distinguish between three main stages of investing activity process such as pre-investment, investment, and operational. All investments are divided into two main groups: real and financial. Real investment is basically a long-term investment directly in the means of production.
They represent financial investments in a specific, usually long-term project, and are usually associated with the acquisition of real assets. At the same time, both own and borrowed capital, including bank credit, can be used. In this case, the bank also becomes a real investor.
A financial or portfolio investment is an investing activity in projects related to the formation of a portfolio of securities and other assets. In this case, the main task of the investor is the formation and management of the optimal investment portfolio, carried out, as a rule, through the operation of buying and selling securities in the stock market. An investment portfolio is a combination of various investment values gathered together.
Real and financial investments are allocated for investment objects. Real investments mean investing in real assets – both tangible and intangible. Financial investments mean investment in various financial instruments or assets, among which the most significant share is invested in securities.
By the nature of participation in investing, direct and indirect cash flow or investments are distinguished. Direct investment refers to the direct participation of the investor in the selection of investment objects and investments. Direct investment is carried out mainly by trained investors who have fairly accurate information about the investee and are well acquainted with the investment mechanism.
Indirect investment refers to investing mediated by others. Not all investors are qualified to effectively select investment objects and then manage them. In these cases, they acquire securities issued by investment or other financial intermediaries, which the collected investment funds place at their discretion.
According to the investment period, short-term and long-term investments are distinguished. Short-term investments usually mean investment of capital for a period of not more than one year. Long-term investments mean investment of capital for a period of more than one year. In the practice of large investment companies, they are detailed in different ways.