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Investment is the use of resources intended to increase future production output or income. In other words, investment is purchasing an asset or item with the hope that it will generate income or appreciate in the future. From an economic standpoint, an investment is the purchase of goods that are to be used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.
Investment objective
An investment objective is a financial objective that an investor uses to determine which kind of investment is appropriate. For example, if the investor's objective is capital growth, he/she may opt for growth-oriented mutual funds or individual stocks. If he/she is more interested in income, he/she might purchase income-oriented mutual funds or individual bonds instead. The consideration of investment objectives combined with the risk tolerance of investors, assists an investor in narrowing his/her search towards an investment vehicle best suited for his/her needs.
What are the principal investment objectives?
Setting clear investment objectives is the key to developing a successful investment strategy. Different investment options can accommodate the following investment objectives that are suitable to your needs. For example, short-term bonds can provide the best safety, very steady but have limited growth while common stocks can bring in the most growth but can have the least security.
The basic investment objectives are:
• Safety
• Income
• Growth
Safety
An investor who requires safety will probably invest in fixed income securities or insurance investments such as segregated funds. Although these money market instruments offer safety to the investor, their returns tend to be lower than other types of securities. However, safety with higher returns can be achieved through the purchase of longer term fixed income securities.
Risk can be distributed over a variety of stocks in different industries and this can reduce your overall risk in your portfolio. Purchasing many low risk stocks or saving plans can contribute to receiving a guaranteed but low return. Alternatively, higher risk stock options produce higher returns but as classified pose a risk to the investor of no return.
Income
If the investor requires cash flow (income), perhaps as a supplement to a person`s income, fixed income instruments or fixed income funds may also be the appropriate choice. These can be set up through various financial tools such as GICs. Usually there are small investments required which can be made as a monthly contribution ($25.00 or more a month) and investors are typically eligible for RRSPs, RRIFs and RESPs. This type of investment is set up to achieve long-term planning.
Growth
Capital appreciation or growth is usually associated with equity investment or investment in equity funds. Debt securities pay a contractual interest and repay the amount lent at maturity.
By purchasing stocks with the intention of longer holding periods will allow for you to invest in riskier options. This is due to the fact that you can ride out fluctuations with hope that you will gain a bigger reward in the future.
What are secondary investment objectives?
• Liquidity
• Taxation
Liquidity
From a financial perspective, liquidity refers to the accessibility of an investment. The best way to determine the liquidity is to consider how long it would take to obtain if you happened to need it today. By illustration, the funds in a retirement account are not liquid because they require paperwork to redeem and time for the money to arrive in your bank account or your mailbox. Money Market funds, on the other hand are very liquid with access to them often provided through a linked checkbook or at the very least, easy transfer to a bank account. However, there are other aspects to liquidity that make it a slightly more complicated subject.
Taxation
Minimizing taxes paid to the Canadian Revenue Agency is a goal that all individuals internalize, especially those who engage in investment opportunities. When you make money from investing, taxing can become an issue. Investments can produce different types of investment incomes, such as interest income, capital gains and dividend income. Depending on which income source is involved, the Canadian tax system applies different tax rates. It is important to consider the different tax treatments involved with the different investment incomes in order to create a suitable investment strategy. For example, interest income assumed from a bond will be taxed higher by the Canadian Revenue Agency than a dividend income received from a Canadian corporation.
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