This is the definition of ‘Investment’ as per Investopedia. (Read the full explanation here)
“An investment is an asset or item acquired with the goal of generating income or appreciation. In an economic sense, an investment is the purchase of goods that are not consumed today but are 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 will later be sold at a higher price for a profit.”
How does a business earn a profit? It sells goods and services. People buy those goods and services. The profit margin is their cost minus the price which the customer is willing to pay. This happens daily and monthly and quarterly and soon the business will report either a profit or a loss after every financial year. The INVESTORS into the company will now get dividends if there are or if the business is a listed entity, the share price will rise with the good performance.
How long would all these take? The business does NOT report daily profit numbers and investors do NOT get daily dividends…All these happen over a period of time and certainly not ONE day or ONE minute or even a FEW seconds. This is why if we are investing into the stock market, it’s investing into a business which we should understand well. If we are BUYING a stock because we think it could suddenly rise tomorrow since there are rumours of a new project, then that’s BUYING a stock. If another word is needed, it’s called SPECULATIVE buy. This is why stock traders (whether full-time or part-time) are called TRADERS. They are not called investors.
What about property INVESTMENT then? Please look at the Malaysian House Price Index (MHPI) below. It shows the price changes every quarter. It also shows the average increase from 1990 – 2017 and that’s an average of 6.4%. (Please do not expect this average to go up, it’s too high already in my opinion. It should continue to moderate. Reason is because our salary increment is not this high.)
What the price increase tells us is NOT that if I buy a property, I should expect it to up by 6.4% every year. Sorry yeah. If you bought in the wrong year, say 1997, then by 1998, your property may have dropped by double digits. Yes, sleepless nights. However, the ones who bought in 1998 (if they dare to), then in 1999, their property price may have risen by double digits too. WOW. However, stretch this INVESTMENT longer, say over a period of 10 years and we get back that average price increase which is usually a natural hedge against inflation. This is property investment, it is a hedge against inflation and we will enjoy capital appreciation if we look at property investment as an investment. “like watching grass grow…” (click here to read)
So, are we buying or are we investing. Are we speculating or are we investing? Are we trading or are we investing? There are reasons for all these different words. If we mix them up and we think everything is investment, then I wish you all the best. Luck however does not come every day even if sometimes we were lucky. Happy understanding.
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