Category: Commerce Notes PPT

One of the terms that students often come across in their accountancy books would have to be Goodwill. Here, in these notes about Hidden Goodwill, we are going to talk a little bit more about it. With the help of these notes, students can easily score good marks in the exams. Goodwill can be a term that is used to describe the reputation that a firm has. Goodwill of the company can help it in getting some important benefits in the near future when there is a comparison of the other companies and firms. The most important thing about goodwill is to remember that it doesn’t depend on a company’s monetary value, but other factors are taken into consideration as well. Goodwill is an asset that is associated with the purchase of one company by another. In Particular, goodwill is the portion of the purchase price that is always higher than the total sum of the net fair value of all of the assets which have been purchased in the acquisition and the liabilities which are assumed in the process. The value of a company’s name, its brand value, more solid customer base, good customer relationship, good employee relationship, and proprietary technology represents some reasons as to why goodwill exists in the first place. Items that are included in goodwill are proprietary or intellectual property and brand recognition and are not easily quantifiable. Companies are only required to review the value of goodwill on their financial statements at least once a year and record any impairments. 

 

Limitations of Using Goodwill

Goodwill is very difficult to price, and negative goodwill can occur anytime when an acquirer purchases a company for less than its fair value in the market. This occurs definitely when a target company will not negotiate a fair price for its acquisition.

 

What is Hidden Goodwill?

When it comes to discussing Hidden Goodwill meaning, there are a few things we have to say. Hidden Goodwill is meant to denote the particular goodwill value that is not specified at a certain point of time when there is an admission of the new partner. In case the new partner is asked to bring in their share of the goodwill, then the calculation will be made for the goodwill of the firm. 

 

There is a certain formula that is used for that and we are going to talk about it in the further section. To put it in simple words, the difference which is made between the firm’s net worth and the capitalized value will be considered the Hidden Goodwill value. So, generally, Hidden Goodwill can be considered as Inferred Goodwill too. This is what the students need to know about when it comes to the meaning of Hidden Goodwill.

 

Accounting Goodwill v/s Economical Goodwill

Accounting goodwill is sometimes defined as the intangible asset which is created when a company purchases another company for a price that is much higher than the market value of the target company’s net assets. 

 

Economical, or business, goodwill is defined as it is an intangible asset – for example, strong brand identity or very superior customer relations – that provides a company with competition in the marketplace.

 

Formula For Calculation of Hidden Goodwill 

We have already mentioned that there is a formula of hidden goodwill and we are going to mention it right here. All the students have to do is find out the exact difference between the firm’s capitalized value and the net worth or the capital invested. Given below is the proper formula that can help students understand in a better way. 

 

The hidden goodwill is calculated by calculating the difference between the capitalized value of the firm and capital invested (net worth) by all partners. The formula is shown as follows: –

 

Goodwill = Firm’s Capitalized Value – Firm’s Net Value or Invested Capital

 

When it comes to the Hidden Goodwill in the admission of a partner, there are certain changes made which we have discussed above. With the help of these notes for Hidden Goodwill Class 12, students can score better marks and be on top of their class for sure.

 

Accounting Treatment of Goodwill- Retirement 

There is a particular need to have some valuation of the hidden goodwill in retirement. Given below are some of the important cases in which this might happen. 

• When there is a change in the ratio of the profit-sharing between the partners 

• When there is an admission of a new partner 

• When there is a case where a partner has retired 

• When there is a time when the business needs to be sold 

 

Specifically, in these scenarios, there is a prominent need to have some sort of adjustment made to the Hidden Goodwill and hence there will be some methods used to value the Goodwill of the firm. 

• Average profit method

• Capitalization method

• Super profit method

 

When a partner of the firm is retired or there is a death, then the deceased partner would be entitled to have their very own shares in the goodwill for sure. This is because the Goodwill which is earned by the company or the firm is done so after the efforts of all the partners are joined. Hence, any profits which might arise will be the result of the previous attempts at building the hidden goodwill of the company. However, the retiring partner might not get to share the profits which are made in the future. So, the partners which are continuing accounting goodwill is sometimes defined as an intangible asset that is created when a company purchases another company for a price higher than the fair market value of the target company’s net assets. But referring to the intangible asset as being “created” is misleading – an accounting journal entry is created, but the intangible asset already exists. The entry of “goodwill” in a company’s financial statements  – it appears in the listing of assets on a company’s balance sheet – is not really the creation of an asset but merely the recognition of its existence.

Consumer Price Index Number

The consumer price index number is used to examine the average weight of a price related to a group of products and services consisting of food, transportation as well as medical care. It measures an average change within prices that the customer is supposed to pay for the basket of products and services. Development in customer price index number is used to approach price changes correlated to the cost of living. The customer index number is an important statistic that is used to identify periods of deflation and inflation. It is also called an economic indicator.

Consumer Price Index Number for Industrial Workers

Consumer price index number for industrial workers is created to measure over time changes in prices regarding a given box of goods and services. This is absorbed by a specified population, in this case, industrial workers. The consumer index number is collected for all the industrial workers living in 70 centres within the industrial importance of the country. These specific 70 centres were given to all the states in proportion to industrial development. 

The indices of all the 70 centres are collected and released each month on the ground of weights acquired from working-class families. It is also on the ground of the expenditure survey organized between 1981 and 1982 and modern prices of the individual items which were taken away from 226 markets covered by 70 centres. Based on the 70 centres, the All-India Index is derived which is also a weighted average. 

Alongside, the Labour Bureau also collects and sends indices of other six centres for meeting the requirements of individual index users. Besides presenting serial data, the publication also has various other information like inflation rates, all-India items, linking factors for new and old series, etc.

The Different Uses of Consumer Price Index Number:

• The consumer price index number specifies the change in consumer price. Thus, it helps the government to formulate several policies concerning control of taxation, price, exports and import of all the commodities. 

• It is used to grant allowance and other propensities to the employees.

• It is also used to evaluate the purchasing power associated with money.

• It also compares changes regarding the coat of survival of various communities.

• The index number is also used to deflate data on wages, living, cost and national income.

• It also acts as an economic indicator like financial instruments and the cost of commodities.

• Acts as a policy formulator for international, state and national levels.

Consumer price index number is also known as the Cost of living index. It is a theoretical index that measures the differences in the price of services and goods to allow them as a substitution with the other items as the price varies. The consumer price index measures changes in the price level of services and consumer goods purchased by the households. The consumer price index is mostly used in measuring inflation as well as a proxy of the effectiveness of the government’s policies. 

Thus, to summarize, the consumer price index measures changes in:

1. Retail prices  

2. Producers prices

3. Wholesale prices

Consumer Price Index Number in Statistics

The formula includes CPTt, Ct, and Co

Where:

CPTt = consumer price index in the current period

Ct = cost of the market basket in the current period

C0 = cost of the market basket in the base period 

Important Index Numbers

Although there are a lot of index numbers, two of them are effectively important and used in various sections of society. They are – Wholesale Price Index (WPI) and Consumer Price Index (CPI).

Wholesale Price Index

WPI measures the temporary change in the wholesale price of commodities. The wholesale price index deals with the relative change in cost from the market’s perspective. It is an important index.

To calculate WPI, commodities should be classified into – 

1. Primary articles 

2. Fuel and power 

3. Manufactured goods

Consumer Price Index

CPI measures change in price given by definite buyers for consuming services and goods. It is also called the cost of the living index because of a change in cost levels affecting the different patterns which alter the living cost. It depicts the change in the price level. It also helps the government to develop fiscal policy and taxation policies. 

Did You Know?

• Consumer Price Index is mainly used to measure proxy and inflation efficiency of the economic policy of the government.

• The consumer index statistics cover the self-employed, professionals, retired, the poor, and unemployed population of the country. However, it omits rural or non-metro populations, armed forces, farm families and the ones serving in the prison and people in the mental hospitals.

• The CPI measures average changes in cost over time which buyers pay for baskets of services and goods.

• CPI-W measures CPI for the Clerical Workers and Urban Wage Earners and CPI-U means CPI for Urban customers.

Indian Economy 1950-1990 class 12 is a very interesting chapter that provides the students with an insight into how the economy of the country has developed over the years. Indian economy 1950-1990 spans over four-decade and leads to the establishment and working of the Five-Year Plans. There have been many milestone changes in agriculture, industry, trade, and the various sectors of the economy. India has managed to overcome the status of an agricultural economy and become an industrial mixed economy system. We will start the discussion of the Indian economy 1950-1990 class 12 chapter with the different types of economic systems.

 

Types of Economic System

Before learning about the Indian economy from 1950 to 1990, we have first to understand what the different types of economies are. An economy that relies primarily on agriculture is agrarian. The one that relies on industries is an industrial economy. The classification can be further broadened to include command economy. In a command economy, the government is the only producer and takes all decisions regarding the economy. The decision regarding the goods to be produced and the price is all determined by the centralized authority of the government. The market economy, on the other hand, focuses on minimal intervention in the free working of the forces of demand and supply. It is the market that determines the production and price of various goods. The only alternative to these two types of economies is a mixed economy where there are characteristics of both command and free-market economies. Thus, the economy is free from intervention but subject to certain regulations by the government. India has adopted the system of a mixed economy.

 

Five Year Planning

The first phase of Indian economic development from 1950 to 1990 began with planning, where we adopted the system of planning to build our country from the ground up. An economic plan is in which there is an allocation of various resources to attain certain goals of the country in a particular period. These plans are present for a short period and a shorter version of perspective plans which embody the long-term goals of the country. The planning commission of the country was set up in 1950 and had been making plans on a five-year basis. The basic objectives of the five-year plans were to attain growth, modernization, self-reliance, and equity. The country not only needed to grow in terms of GDP but also adopt modern technology while achieving self-reliance and reducing inequalities at the same time. The five plans were made to attain all these goals.  

 

Land Reforms

Independent India had to introduce many reforms to undo the damage caused by two centuries of colonial rule. One of the major problems at the time was the Zamindari system which needed to be abolished. The British regulations had caused the land tillers to lose ownership over their land, and the owners were intermediaries such as the jagirdars and zamindars. The objective of the land reform was to bring about a drastic change in the way the agrarian economy is structured and abolish the feudal landlordism of the country. With these reforms, the government sought to bring equity into the system and prevent the farmers from being exploited. The most important goal perhaps was to motivate the farmers to increase their agricultural produce. The reforms also helped to consolidate holdings and lead to the promotion of cooperative farming in the country. The Indian economy from 1950 to 1990 experienced a boom In agriculture for this.

 

Industrial and Trade Policies

Industrial development was very important for the country during this period. The main industries during that period were cotton and jute, and there was a need for modernization in industry and trade. The industrial policy resolution 1956 divided the industries into three categories depending on whether they were owned by the state or the private sector. There was also protection for small-scale industries in the county to help them grow. The government played an active role in the development of the country’s infrastructure. The state followed an inward-looking trade policy and adopted import substitution. 

 

Did You Know?

The green revolution began in 1965 with the introduction of the HYV or the High Yield Variety seeds which gave better yields than normal seeds. As the sources needed more water, there was a major emphasis on the development of infrastructure and irrigation, which led to an increase in crop yields in the country.

 

Solved Example

 1. Who started the Bhoodan Movement in India?

Ans: A. Vinoba Bhava started the Bhoodan movement in 1951. It was also known as the land gift movement.

 

Indian economy refers to the economy of the People’s Republic of India which is one of the emerging and developing economies. The Indian economy has shown great strides in recent years, however, it still remains a developing country with many infrastructural gaps compared to developed countries like the US or China.

 

One can study the Indian economy by getting involved in various projects run by government agencies as well as non-profit organizations working towards improving this sector. There are several international organizations that constantly work on human development issues such as poverty reduction, education, health care, etc., where you can contribute your time and efforts for helping people from economically backward sections of society improve their living standards.

Importance of Studying Indian Economy

It is important to study the Indian economy because it is the world’s second-most populous country with a population of over. There are many reasons why one should study the Indian economy. 

Some of Them are:

1. The Indian economy is the world’s second-most populous country with a population of over.

2. This makes India an important player in global economic affairs. The growth rate of the Indian economy has been impressive in recent years and it is expected to continue this trend in the future as well. India is also one of the fastest-growing economies in the world.

3. The size of the Indian economy presents opportunities for businesses from all around the globe. With a GDP (gross domestic product) of $US.

One can find tremendous scope for entrepreneurship in India as its large consumer base offers ample opportunities for businesses to grow. The growth of the middle class in India is also attracting foreign investors who wish to capitalize on this opportunity. The Indian economy is currently undergoing a transition from being a primarily agricultural-based economy to an industrial and services-oriented economy. This presents immense opportunities for students and professionals alike who want to make a career in various sectors of the Indian economy.

Here are 13 Best Ways to Study Indian Economy

1. Read up on Macroeconomics: Understanding the basics of economics and its relevance for society will provide a good base for understanding Indian economics.

2. Understand Economic History: Studying economic history can help you understand how economies develop over time, as well as why they behave the way they do today. It’s also important to know what happened in other countries so we can better understand what might happen here in India.

3. Watch TV News Channels: Watching television news channels like NDTV, Times Now or CNBC Awaaz is a great way to get an understanding of current economic events in India.

4. Follow Indian Newspapers: Newspapers like The Hindu, Mint or Economic Times will give you insights into what is happening in the world of business and economics in India.

5. Follow Indian Economists on Twitter: A lot of economists in India are very active on Twitter. Following them can give you insights into their thinking and how they view the current state of the economy. Some notable examples are Pranab Bardhan, Raghuram Rajan, and Amartya Sen.

6. Follow Indian Business Journals: Business journals like The Economic Times, Business Standard, or The Hindu Business Line are a great way to read about the latest news and views on the business world in India.

7. Subscribe to Economic Journals: There are many Indian and international magazines dedicated to the analysis of current affairs in economics. Some good ones include The Economist, Foreign Affairs, or Finance & Development (IMF).

8. Subscribe to Newsletters: There are many economic newsletters out there that provide a daily or weekly overview of the state of Indian economics. Some examples include Business Standard’s Economic Times, Mint Money, and The Hindu’s First Post.

9. Follow Indian and International Think Tanks: Following and interacting with organizations like the World Bank, IDFC Institute or Reserve Bank of India gives you a great insight into what is happening in Indian economics.

10. Subscribe to An Email List: There are many economic lists out there where experts share their thoughts on different issues concerning the economy. Some examples include FICCI’s monthly policy roundup email series (in association with Mint), The Hindu Business Line’s Econ Eye newsletter, and several newsletters from the Centre for Civil Society.

11. Read Books: Reading books provides more detailed insights than news articles often can do! It also helps if these authors come from either within India or outside it, which makes their view less biassed by local interests

12. Attend Economic Events: There are many economic events happening in India all the time. Attending these events is a great way to learn more about what’s going on and meet people who are interested in economics too.

13. Join an Online Forum or Discussion Group: There are many online forums and groups where people discuss various aspects of the Indian economy. Joining one of these groups can be a great way to learn more and connect with other people who share your interest in this topic.

The Indian economy is one of the fastest-growing economies in the world. It has been consistently growing at a rate of 6-7% for over two decades now. Its rise has also been accompanied by many questions about its stability and sustainability, which are answered below with 11 FAQs that will help you understand more about India’s economic growth.

Monetary policy is a policy that is an action taken by the Central Bank regarding the activities related in monetary terms. They might be cash, credit, ledgers, mortgage, bonds, debentures, loans, check money markets, etc. The policy is designed by the Central Bank of that particular Nation to regulate the economic imbalances either may be inflation or deflation.

We will know about the monetary policy in this section in detail. 

What are the basic aims of monetary policy? 

The basic aim of the monetary policy are as follows:

Tools of Monetary Policy in India

The Central bank designed the tools of monetary policy. Several central banks will create a common three tools for monetary policy irrespective of the nation. So the basic tools of monetary policy in India are:

Discount Rates

The discount rate is one of the basic terms of monetary policy. The monetary policy aims to stabilize and regulate the nation’s economy, which can be fulfilled by a change in discount rates. If the discount rate is reduced, the investors can get less money and take loans from other Banks. It helps any increase in the liquidity of cash. It creates growth in the economy. If the discount rate is high, all the procedures are vice versa.

Requirement of Reserves

Every nation has to maintain some reserves of all kinds of resources, especially financial resources. To maintain these reserves, the government should understand the basic requirements of that particular country. 10 to these results are certain portions of the available funds or investments to the reserve bank. As a result, the Bank of India holds a specific part of the existing money in the form of cash. It is used to lend its customers and also for businesses. It keeps reserves from the deposits and provides them in the form of loans. It also earns some money which may help to maintain the necessities of the Central Bank and the subsidiary Banks.

Growth in Open Market Operations

We all know that a market is a place where we can buy and sell goods. Here the open market refers to the buying and selling of securities from various countries. This is another tool of monetary policy that is designed for trading activity, and it is directed and regulated by the various countries of central banks of that particular Nation with which we make a deal.

What are the Instruments of Monetary Policy?

Instruments of monetary policy in India are categorized into two types. One is qualitative, and the other one is quantitative instruments. These are designed based on the toons of monetary policy which is prescribed by The Reserve Bank of India. Instruments of monetary and credit control will act as an excellent weapon for the country to regulate the demand and supply of resources to that particular nation. So, they have designed these instruments.

Qualitative Instruments

Quantitative Instruments

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Who Controls the Monetary Policy in India?

The Reserve Bank of India controls the monetary policy in India. Because it is the central bank of our nation. The instruments of the monetary policy of the RBI, which we have discussed above, can help the RBI to control the money supply and the flow of money to various activities of the nation.

RBI is the central body of India which was established in 1935.it takes care of all the financial transactions and regulates the currency of the country. It provides a set of tools and instruments to maintain monetary policy transparently.

How does the RBI Control the Money Supply in the Economy?

The main objective of the hardware is to control the money supply in the economy to maintain its stability because the Nations should stand properly only with efficient resources. The RBI uses different tools and instruments like cash reserve ratio, statutory liquidity ratio, changes in repo rate and reverse report, moral suasion, etc. several instruments are in the tools used to maintain the monetary policy.

Objectives of Monetary Policy

One of the most important functions Of RBI is to control the bank credit expansion and supply of money. And special attention is paid to seasonal credit requirements without affecting the stability.

Bringing in Price stability also promotes the development of the country’s economy. However, the central focus must facilitate an environment favorable to architecture. This helps the development projects to run smoothly without affecting the price stability. 

The main aim here is to increase the productivity of investment without affecting non-essential fixed investment.

Monetary authorities hold rights over decisions for assigning credits to sectors and borrowers. This policy is decided over a specified percentage in order to allocate to desired people

The central bank pays attention to efficiency to incorporate structural changes. These structural changes include interest rates, operation constraints, and new money market instruments. 

Reducing rigidity helps to provide considerable autonomy and a sense of flexibility at work. This helps to bring in a competitive environment and diversification among work cultures. Moreover, control over the financial system is maintained and prudence in systems is observed. 

Overloading stocks and products getting expired often results in the sickness of organizational units. And hence to avoid these habits, the monetary authority restricts forming inventories by giving a major highlight to prevent idle money in the market. 

Monetary Policy Operations

Monetary policy is managed by the Central Bank Of the country. In the case of India, it is managed by the Reserve Bank of India. The operations that come under this policy are as follows:

• Money Supply

• Stability of price

• Interest rate

• Economic Growth

• Financial stability

• Balance of payment

• Stable exchange rate

Key Indicators of Monetary Policy

There are various factors associated with monetary policy. Though it is managed by the Reserve Bank of India it overall affects the country and its economy. According to 2020 report following are the key  indicator of the monetary policy:

Monetary Policy Committee

For any organizational work, a good committee is an important requirement. And when it comes to the committee for monetary policy the following people are selected at some specific designations

1. Governor of Reserve Bank of India as chairperson

2. The deputy governor of the Reserve Bank of India as in charge of monetary policy

3. One officer from the Reserve Bank of India

4. Actions of renowned person experts in their own field such as professor research Senior Advisors or committee members. 

The primary job of this committee is to observe and manage the daily liquidity work so that the target decides which weighted average Call money rate or WACR is observed. 

The Monetary Policy Framework

The reserve bank of India holds full rights to manage and control the monetary policy framework for the county. 

The framework aims to provide the following:

And once, this repo rate is announced, the RBI authority manages day to day appropriate actions with an aim to operate the target. 

This framework is tuned and revised accordingly by looking at the market prospectus.

 

Conclusion

Hunts it is clear that the monetary policy is a proforma or a set of rules imposed by The Reserve bank of India to maintain stability in the growth of the economy. The RBI needs to monitor all the financial transactions in all its forms and to keep up the sufficiency of currency without degrading its value.

The price of a product is the exchange value of the item under consideration, that is, the measure of how much you give to get the item. Prices do not always reflect the actual value of the product, that is, the value required to manufacture it. The price of a commodity covers not only the capital, labour, and land costs but also includes some profit for the sellers. Therefore, the prices of goods need regulation and a fair system of determination. In this article, we will go through several topics such as the importance of price determination that determines the level of prices in a market, and how to determine the price of a product.

Introduction of Price Determination 

Determination of prices in an ideal or free market is an outcome of the competition. In a free market, the cost of commodities and the services provided are a result of the balance between demand and supply. In such a scenario, no third-party needs to intervene in the determination of prices. However, no real-world market is ideal, and there is always some degree of monopoly, and here, the Government has to step in. The Government provides the upper and lower limits for the price of a commodity in most cases.

Now that we have a fair idea of what is price determination and the importance of price determination, we will move onto topics like what determines the level of prices in a market, and how to determine the price of a product. 

Factors Determining the Price of a Product

What determines the level of prices in the market? To answer this question, we will look at the external factors that influence the Maximum Retail Price (MRP) of goods in the market. These factors are as follows.

• Total Product Cost: The total cost of a product incorporates all the charges required for the product to complete its journey from manufacturing, through distribution, and up to selling and marketing. These include fixed, variable, and semi-variable costs.

• Utility/Demand: The demand for a commodity can depend on the utility of the product or in many cases, on its price as well. Here comes the concept of elastic and inelastic demand. If the demand for a product is inelastic, that is, unchanging with time, the price of the commodity does not affect the demand significantly. On the other hand, for elastic commodities, a slight change in price causes a huge shift in the demand curve. People tend to lean towards cheaper substitutes.

• Market Competition: If the level of competition for a certain product is high in the market, the manufacturers have to be careful while price setting. However, in a monopolistic market, the manufacturer can set any price for their product.

• Government Regulations: In a monopolistic market, the company often misuses its advantage and sets a very high price for their products. To protect the interests of the customer, the Government intervenes and introduces price regulations. For example, a government can set a price ceiling for certain products or can declare a product as indispensable.

• Enterprising Objectives: Often, companies have certain objectives that they want to achieve, for example, becoming a leader in quality control, obtaining share market supremacy, maximizing profits, or surviving in an overly competitive market. The company sets its product prices, keeping its objectives in mind.

• Marketing Costs: Storage, Packaging, Distribution, and Marketing all together amount to a total of marketing costs which depends on the quality of these individual services. For example, the increasing sturdiness of the packaging will lead to heightened costs.

Now that we know the factors that affect the market price of a commodity, we can try to answer the question: how to determine the price of a product?

How to Determine The Price of a Product? 

“How to determine the sale price of a product” – understanding this is the main focus of this lesson. Let us start with the concept of the equilibrium price. The equilibrium price of a product is the cost at which demand and supply become equal. Statistically speaking, if we plot the demand and supply curve on a graph, the point at which they intersect is the equilibrium price.

When we achieve the equilibrium price and quantity, we create a stable equilibrium. At this stage, there are no disturbances in the demand and supply rates. When the price reduces below equilibrium, the demand shoots up, and stocks fall, which results in the price increasing to the equilibrium point again. Similarly, when the prices rise above equilibrium, demand decreases, and to clear the stocks, price is reduced. Therefore, the forces of demand and supply primarily control the price of goods. 

Solved Example

Q1. How to determine the price of a product in a real-world market?

Ans: In a real-world market with monopolistic trading, and other problems, a lot of factors determine the price of commodities, such as demand/supply, government regulations, company objectives, etc.

Did You Know?

• Fixed prices of goods include the rent, salary of workers, etc. The variable prices cover the charges which change with demand and supply levels. The semi-variable prices change with time but are unaffected by demand levels.

• The equilibrium price is such an ideological quantity that, at this level, all the demands of the customers are met completely, and at the same time, no stock is left unsold in the market. The equilibrium price is, therefore, also known as the market-clearing price.

Investment is an essential financial activity that contributes to the expansion of business operations of a company. In addition, it is also a marker of growth in a country’s economy. Investment is usually undertaken by governments and business entities to enhance transactions and boost employment. 

Investment assumes an important position in any economic and business activity. Therefore, it is necessary for students to understand the meaning of investment. 

What is Investment? 

The financial aspect of the term ‘investment’ has several features. First of all, investment involves the purchase of an asset for long-term financial advantages. Therefore, an individual has the option to invest money in a company’s resources. These resources are financial in nature and typically include bonds, stocks, and equities. 

Investment is thus the act of channelling one’s capital to any business project or government activity. In addition, the invested funds are exposed to the money market as well. Therefore, investors are eligible to receive periodic dividends from their financial investments. 

All these characteristics make investment a process to generate wealth. For instance, investors anticipate that the monetary value of an asset will increase over time. As a result, they can sell their assets after a stipulated time to gather profit. 

For example, suppose that an investor channels Rs.5,000 to buy stocks at a company with a high growth performance. Therefore, after a period of time, the investor expects the value of the stocks to be Rs.6,000. Therefore, the asset that he/she has invested in experiences appreciation, making his/her investment profitable. 

Investment and Consumption

Experts define investment differently from consumption. It is mainly because consumption does not create additional value for a product. Whereas, investment is subject to time constraints and usually generates returns after a point of time. 

Investment meaning also includes infrastructural activities undertaken by the government. It is often seen that municipal authorities and government bodies invest in bridges, roadways, and railways to improve connectivity and infrastructure. Consequently, these organizations can increase the scale of their business processes, thus raking in higher profit. Therefore, their initial investment enables the appreciation of the value of an asset. 

What are the Risk Factors in Investment? 

Individuals invest only when there is an assurance of appreciation in an asset’s value. Therefore, the investment definition also includes the risk factors that investments are exposed to. 

For instance, different investment instruments have distinct risk factors. However, risk and return on investment have a directly proportional relationship. When an investment option is riskier, the return on such investment or the appreciation of the assets value is higher. 

On the other hand, when an investment avenue is considerably safer, investors receive lower returns. As a result, risk-prone investors tend to invest their money in risky assets for higher profit. Whereas, individuals who do not want exposure to market risks typically purchase low-risk assets. Thus, the definition of investment actively takes into account the risk factors that individuals have to deal with.

In addition, scale and volume of investment depends largely upon the return expectations of an individual. Therefore, some of the well known avenues for safe investment are land, real estate, and gold. It is because investors expect the appreciation in their value with the passage of time. As a result, when the market prices of these assets reach the highest, they can sell these off to generate profit. 

What are the Types of Investment? 

Investment can be classified into several categories. These types of investment options are available to individuals looking to bring about profit on their capital commitment.

However, the prevailing types of investment are as follows – 

Stocks – Stocks are one of the most prominent investment avenues available in the market. Individuals invest in a publicly traded company’s stock to own a percentage of the company. Therefore, stockholders buy stocks to directly become a part of the company’s financial consequence. 

For instance, when an organization gathers higher revenue in a particular business timeframe, these are passed on to stockholders as dividends. As a result, investors have the option to make profit from stocks. 

However, the performance of stocks in the stock market is directly influenced by its financial performance. Therefore, investors commit their capital to the stock of a company that shows financial promise in future. 

Bonds – Bonds are among the most secure investment types that have garnered an investor’s confidence. This investment option can be equated to a type of loan that investors offer to a company. In this particular case, investors are referred to as creditors. 

Creditors usually have to invest a principal amount into bonds for a maturity period. After the stipulated maturity period ends, investors receive the principal amount along with the predetermined rate of interest. Therefore, individuals can appreciate the value of their investment with a secure avenue such as bonds.

In addition, the return on investment (ROI) on bonds is lower than stocks. It is because bonds are exposed to less market risks than stocks. On top of that, companies that offer bonds to creditors are under legal obligations to return the principal and interest amount after the maturity period. 

Mutual funds – Financial institutions offer the option of mutual funds as one of the most popular types of investment. With this investment tool, these institutions create a pool of money with the funds collected from multiple investors. This pool of money is then offered as an aggregate investment to various companies.

As a result, the risk factor gets distributed among the companies, thus offering low risk to investors. 

Since mutual funds have a diversified investment meaning and portfolio, it has emerged as a dependable investment option among several categories of investors.

Induced Investment – This type of investment covers a wide range of financial instruments. Primarily, investments that are directly influenced by an alteration in national income or rate of interest fall under induced investment. 

Factors such as the cost of raw materials, changes in transaction rates and customer preferences have an impact on this kind of investment. As a result, an organization with a high profit margin becomes more likely to attract higher volume of investment from prospective investors.

Test your knowledge

• Consider that an investor Mr. Rahul purchases 50 shares of Spencers on 24th May @ Rs.1,000 per share. When the price rises to Rs.1200, Mr. Rahul decides to sell 50 shares at the market price. Calculate the profit from the sale of these shares. 

• Let’s suppose that creditor Mr. Jones buys a bond with its principal value set at Rs.5,000 for a maturity period of 5 years. The rate of interest (i.e. coupon rate) is 6% per year. Find out the value of the bond at the end of the period. 

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