Final Report Macro Full

8/21/2019 Final Report Macro Full

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Macro Economics (Eco-221)

Final Report

Topic: Investment, its types and importance

for an economyMade by: Haseeb Abbasi (18236)

Submitted to: Miss.Maryam Hasib

Table of Contents


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Introduction to Investment

S.No. Content Page

1. Introduction to Investment 3

2. Kinds of Investments 4

3. Importance of Investment for an Economy 10

4. Conclusion 13

5. References 14


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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 similarinstitution. Investment usually involves diversification of assets in order to avoid unnecessary andunproductive 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 withspeculation. 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 ofindividuals 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 theintermediary, which may be large and varied. Four most commonly used investment objectives are CapitalPreservation, 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. Theseinvestment objectives relate to risk levels. The risks are going higher from 1 to 4 and also thesame 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 savingsaccounts.When you deposit money in an account you are lending it to the bank, which pays you someinterest 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 ofthe 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 mightneed your money. Would you need it if you lost your job? Or are the savings for short termspending such as holidays?Most basic savings accounts allow you to withdraw your money whenever you want it. Ifyoure 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 willearn a few cents each year in interest. Interest may be paid daily, monthly or yearly, but isusually quoted as an annual figure such as 2% or 4%.Most savings accounts offer a straight-forward interest rate. Bonus saver accounts aredifferent because they offer a low basic rate and a bonus interest rate if you meet certaincriteria, such as not making withdrawals.Banks offer different interest rate on deposit accounts and its worth shopping around to findthe 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 moneyat 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 ofrisk, 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 alower rate of tax on the interest you earn. There is usually a minimum deposit and othercriteria 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 orother institutions such as credit unions. Be aware that non-bank deposit takers such asfinance companies tend to be riskier than banks.The government does not guarantee bank deposits, but the Reserve Bank keeps an eye onhow each bank is doing and requires them to publish their credit rating. This will give you aguide as to the likely risk of the bank failing.

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

BondsA bond is like an IOU issued by a government, council, or company. You lend them yourmoney for a number of years, and they promise to pay a certain interest ratecalled acoupon. The level of risk involved when investing in bonds depends on the issuer. Unliketerm deposits, you can sell your bonds early. However the price you will get can go upand 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 theypromise to pay you a certaininterest ratecalled a coupon. Bonds are different fromtermdeposits in that you can sell them. You dont have to hold them till maturity the date youget your money back. However the price you will get if you sell your bonds early can go upor 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 ifyou 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.
https://www.sorted.org.nz/glossary#Interesthttps://www.sorted.org.nz/glossary#Term_deposithttps://www.sorted.org.nz/glossary#Term_deposithttps://www.sorted.org.nz/glossary#Term_deposithttps://www.sorted.org.nz/glossary#Term_deposithttps://www.sorted.org.nz/glossary#Interest


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However if you sell your bonds early the return you receive may not be exactly the same asthe coupon rate. How much you get back will depend on how desirable the bonds interestrate 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 lessfrom 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 youearn.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 oneissued by a company. The downside is that safer bonds tend to have lower interest rates thanriskier ones.Some bonds are rated which means they have acredit rating as a guide to how risky theyare.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 issubordinated you will be further down that queue.Subordinated bonds are more risky than senior bonds and will usually have a lower creditrating.As with any investment, it pays to do your homework and to get professional advice beforeinvesting 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 onlinedealing service. Prices of bonds that can be traded are published on the website and innewspapers.Fund management companies also offer bond funds. These pool your money and spread itacross 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 capitalgain 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 anyprofit the company makes. You can buy shares directly or own them through amanaged fund. Shares can rise and fall in value so are better as a long-terminvestment.

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 thanyou 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 pricefalls below the price you paid for them. You only make a loss or a gain when you sell theshares.Overall the long-term trend is for the value of shares to increase at a rate higher thaninflation.When the company makes money, you're sometimes paid a share of the profit, called adividend. You can choose to receive this dividend in cash, or reinvest it to buy more shares inthe company.

Risk of investing in shares:

Risk is the potential of losing some or all of your money. There are two main types of riskwith sharesvolatility risk and absolute risk.Sudden rises and falls in the price of a share are called volatility and some companies have ahigher risk of this than others. Changes in a company's profitability and in the economy as awhole can cause share prices to rise and fall. Although prices might fall, you haven't lost anymoney 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 becalled 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 fundmanager. Find out more about managed funds.

PropertyReturns from investing in property come from rental income and from any increase in thevalue of property over timecalled capital gain. Some people view their own home as aninvestment 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, orthrough manage funds.Owning rental property has been a popular investment for many Kiwis over the years. Thedifference 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 inthe 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 isfrom the property increasing in valuecalled 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 easyand there can be extra costs such as valuation and real-estate agentfees.People buy investment properties to make a long-term profit as prices rise. In the short termthere may be little or no profit from rent after expenses like mortgage, insurance, rates andmaintenance are taken into account.

Borrowing for investment property:It is usually harder to borrow money for a rental property than for your own home. Somelenders may have lower lending limits for investment properties. As with ordinary homeloans, 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. Yetthere 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 therisk that the bank could sell both properties if you run into difficulty with paying eithermortgage.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 investingin 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 bedone.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, anddealing 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 sellcommercial property. These funds may own properties such as office buildings, factories, andshopping 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 makesa 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 smallinvestors to own a diversified portfolio of commercial property, which has a different cycleof ups and downs to residential property.

AlternativesAlternatives is a broad term often used to describe investments that fall outside thestandard asset classes of cash, bonds, shares and property. Alternatives includecommodities, 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 theopposite direction of other asset classes (e.g. when share prices go down, gold oftenincreases in value, and vice versa), so investors sometimes buy them to try to protecttheir money.

Currency (foreign exchange)

As well as being used to buy goods and services, foreign currency is also used as aninvestment. Currency investors are looking for higher interest rates overseas, orhoping 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 managedfunds. This can be a confusing and complex area of investing. However, derivativesare 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 themilk they will supply in the future. While at the same time, a supermarket owner canfix 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 themto invest more efficiently.

Importance of Investment for an economy

Over the last quarter century, foreign investment has accelerated at a breathtaking pace andshifts 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 withmore than 800,000 foreign affiliatescompared 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 employnearly 80 million people worldwide, a figure that is roughly twice the size of Germanyslabor pooland one that has quadrupled over the past three decades. These foreign affiliatesalso point to a deeper level of economic integration among nations. They show a purpose andcommitment 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 200finance ministers took part in the International Conference on Financing for Development inMonterrey, Mexico. The Monterrey Consensus identified sound policies to attract

international investment flows and adequate levels of productive investment as key factors insustainable development. Since then, nations have broadly recognized that foreign investmentis critical to economic growth in developing nations. While valuable and important, officialdevelopment 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 greaterlevels of investment will be necessary to overcome many of them: achieving global foodsecurity; mitigating climate change; defeating violent extremism; and, improving conditionsfor the one-third of the worlds population that lives in circumstances that offer littleopportunity to create a better tomorrow for themselves or future generations.

Notwithstanding this consensus, in recent years, concerns have increasingly arisen about thepotential for investment protectionism. Even before the financial crisis struck in 2008,researchers David Marchick and Matthew Slaughter had pointed out that a number ofgovernments, representing countries who account for a significant share of total investmentflows, had already considered, or were considering, measures that would restrict certain typesof FDI or expand government oversight of cross-border investment. Most of these measureswere justified on the grounds of protecting national security interests and sectors deemed to

be strategically important.

Key Investment PrinciplesAs investment is contributing more substantially to our economic prosperity, policiesdesigned to foster, protect and fully benefit from it require greater focus. These includeimprovements to the investment climate that will attract greater flows, stronger intellectual

property rights protection, and better investor aftercare and dispute prevention. A rapidlychanging 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 inthe effective functioning of open markets will continue to be vital to success in fosteringgreater economic growth and development. Both UNCTAD (United Nations Conference on

trade and development) and OECD (Organization for Economic Co-operation andDevelopment) 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 treatmentfor investors, reforms that result in predictable regulatory and legal environments forinvestors, and the value of Investor-State arbitration to resolve disputes between governmentsand foreign investors. It is easier to attract foreign investment when foreign and domesticfirms can compete on an equal basis and when there are full intellectual property rights

protections.

Changing Investment PatternsYet there are many other challenges resulting from the changing investment landscape. Thereis little doubt, for instance, that the growing importance of emerging economies in the globaleconomy 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. Investmentrelationships 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

economiesparticularly Brazil, Russia, India, China and South Africa but others as wellare now increasingly important overseas investors. In 2009, FDI flows from emerging anddeveloping economies into other markets approached one-quarter of a trillion dollars. Thesecountries held overseas investment stock of nearly $2.7 trillionmore than three times theirtotal a decade earlier. This means that these countries now have a greater stake in the globalsystem of rules and practices that govern investment. It also means that there is likely to be agrowing 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 enterprisesand sovereign wealth funds, their public financing, and its impact on the competitivelandscape. The principle increasingly known as competitive neutrality suggests one waythat governments can address these challenges. Governments can create frameworks toensure 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 applyingcompetition law to avoid creating an uneven playing field; intensive evaluation of thetaxation, financing and regulatory provisions that exist for state-owned enterprises; andimplementing 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 conductare being updated to reflect the current challenges. For example, the OECD Guidelines onMultinational Enterprises are being updated this year. Discussions are currently underwaywith respect to possible guidelines regarding conflict minerals. The OECDs Anti-BriberyConvention and the recently adopted Recommendation for Further Combating Bribery ofForeign Public Officials in International Business Transactions are particularly significanttools for promoting responsible investor conduct, propriety, integrity and transparencyworldwide. We seek partnerships with many nations to implement them. Non-OECD membercountries are free to accede to this Convention; several have done so and we encourage othermajor 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 inglobal natural resources investment and trade. When they invest in new and alternative


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supplies, they often expandglobal resource supplies for all nations. Where they concentrateon securing existingsources of supplies, they are perceived to potentially limit access of othernations and therefore raise concerns. Theodore Morans recent analysis of resource -orientedinvestments suggests a differentiated picture: that foreign investments in small, independentresource producers will likely lead to expansion of supplies and increasing competitiveness of

industries while investments in major producers which put foreign governments in a positionto control or constrain production are more concerning.

Then there are security-related issues. Technological innovation, new sources of capital andother factors affecting the nature of security threats are evolving rapidly. We all share theneed 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 vastmajority of investment that does not adversely affect our security and our eagerness to attractsuch overseas investment.

ConclusionThe ultimate goal of this project is to teach students the value of long-term investments. Uponcompletion of this lesson, the students will be more familiar with terms and concepts thathelp them make sound investment decisions. This Lesson complies with Standards by helping

students distinguish between types and importance of investment, determine the differencebetween nominal and real data, and improve understanding of the function of the investment.


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Different type of investment includesBank savingsTerm depositsBonds

SharesProperty

We have also studied returns, risk and buying shares of these investmentsIn importance we have learnedKey Investment PrinciplesChanging Investment PatternsChallenges to Global Investment Flows

References

http://www.investopedia.com/university/beginner/beginner5.asp

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


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

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Final Report Macro Full