Money: essence and functions

In a fully developed capitalist economy money has different purposes. Money can serve as a numérair, that means one can buy such and such amount of goods with a certain sum of money. Secondly, money can serve as a medium of exchange. Thirdly, it serves as a store of value. Fourth, money can serve as a means of creating new values through credit mechanism. Let us concentrate on only two aspects, namely as a medium of exchange and as credit mechanism. In a fully capitalist society, almost every body is directly or indirectly employed and gets a certain amount of disposable income. With the income generated from direct or indirect labour, households buy commodities, pay rents and other bills. The rest will be saved on account. Hence money as a medium of exchange determines the circulation and velocity of commodities, and has certain influence on the prices of goods. If the income of the directly employed is very low, workers could not afford to buy other goods other than for direct consumption. This will in turn hamper production activity, its quick circulation and has effects on the prices of goods. Since, industries do not find effective demand for their products they will be compelled to slow their production activity. Deflation and unemployment will become inevitable

Investment: essence and types

Investment is amount of money that is spent to purchase new capital goods by enterprises. Types are Financial and real investment and Direct and portfolio investment.Financial investment is money of government, private companies or person which is directed to buy stocks (акции), bonds (oблигации) and other securities. Real investment is money which is used to increase real production funds Direct investment is the money of foreigners that is used in national economy. Portfolio investment is the money which is directed to buy foreign companies’ stocks, bonds and other securities.

Investment sources are: free money of people,profit of individual enterprises, profit of joint enterprises, profit of public enterprises. Thelevel of investment depends on the following factors: level of profit, interest rate, tax rate, and political, economical stabilities in the society.

 

 

The factors that influence the level of investment

Amount of Surplus Income

Your level of investment will be largely determined by how much surplus income you have each month after paying bills and setting aside a bit of cash for emergencies. The greater your surplus income, the higher your potential level of investment. If you do not have a lot of surplus income, your investment level will be restricted until your surplus income rises. Avoid investing so heavily that you have difficultly meeting your current financial obligations.

Economy

The economy affects everyone, and it can affect your level of investment. During tough economic times, household incomes may drop due to economy-related layoffs or cutbacks, resulting in a decrease in the funds available for investments. Alternatively, during an economic boom your income is more likely to increase. If your surplus income rises more than your cost of living, you can afford to increase your level of investment without sacrificing your current lifestyle. Your cost of living is at least partially dictated by inflation. Inflation occurs for multiple reasons, such as supply constraints or increasing demand for products, but regardless of the cause, it raises your cost of living. As everyday products become more expensive, if your income does not rise to compensate the amount of surplus income you have to invest will decrease.

Risk Tolerance

Not everyone has the same risk tolerance; some people are conservative, while others are more aggressive in how they invest their funds. Asset classes can also be categorized on a scale of risky to safe. Stocks and commodities are considered more risky than high-grade bonds or T-bills, for example. This is because your return is unknown when you purchase stocks or commodities, but your return is known at the outset with bonds and T-bills. Your willingness to assume potential losses in higher-risk investments such as stocks, commodities and related mutual funds determines your investment level in each asset class. If you have a low risk tolerance, most of your funds will be put into investments like certificates of deposit (CDs), T-bills, high-grade bonds and money market mutual funds. If your risk tolerance is high, more funds can directed to toward stocks and commodities. No matter what your risk tolerance, diversification is an important element of any portfolio.

Future Needs

Whether your future plans involve a new condo, new car or retirement to a lake house, addressing your future financial needs today allows you to plan for those moments. The more funds your future plans require, the higher your investment level needs to be now to reach that goal. Contributing less now is likely to result in having less money in the future. The one wildcard is the return you are able to achieve on your investments. When investing in stocks and mutual funds, you won't know in advance what your return on those investments will be. The return you achieve on those investments is a significant factor in how much your money grows and your ability to reach your financial goals.

Expected Return

A diversified portfolio contains investments that are safe and typically yield lower long-run returns, as well as higher-risk investments, which generally yield higher returns over the long run. As your risk level increases, so does the expected return of your portfolio, although expected return does not necessarily equal the return you actually achieve. Therefore, your willingness to accept uncertainty in terms of the return you will achieve directly affects how much you will invest in assets such as stocks and commodities.