We explain what a long-term investment is, its classification and investment strategies. In addition, its characteristics, advantages and risks.
What is a long term investment?
In economics , investment is a term in which the dimensions related to saving , postponed consumption and the location of capital intervene. It is widely used in microeconomics , in business management, and finance.
Investment, in the strictly business sense, refers to the act through which certain assets are used in order to obtain sustained income over time . Capital is used in economic activities in order to increase it; in this sense, consumption is postponed and future goods are obtained instead.
In long-term investments, the purpose is to increase the usefulness of the securities through interest or dividends or by taking advantage of the rise in market value. Although, in general, long-term investments are made in order to ensure a higher return on cash in the future.
Requirements for a long-term investment
When companies have cash left over that they do not have to use right away, they are said to be able to invest for the long term. Thus, long-term investment, usually oriented towards structural changes or large acquisitions, requires decision-making based on effective capacity .
Analysis of rentability
Long-term investments are undertaken in order to obtain profitability, which is the average between the investment and the benefits that are extracted from it . The return on investment is obtained through the division of the net income by the total assets of a company, in order to generate the total effectiveness of the administration and establish profits on the total assets available.
Classification of a long-term investment
Long-term investments are classified according to the intention of the owner of the investment . They can be held-to-maturity, permanent, or hedge investments.
Long-term investment strategies
To maintain the safest operations, it is necessary to opt for assets whose prices sustain a certain oscillation but within specific margins. It is looking for assets that can be managed, since with long-term maturities you have to be more cautious.
Term Investment Examples
Among the investments that require the most time are those related to the purchase of corporate bonds , the construction of buildings and those related to the assets of a company. Long-term investments tend to be associated with starting new ventures or major businesses.
Long-term investment is considered linked to the concept of fixed assets, "fixed assets" , since these investments are maintained with the purpose of earning profitability.
The assets, for their part, are also distinguished by their liquidity and security . These characteristics, combined with the desired profitability, generate investments. The most profitable investments are usually the least liquid, with the highest risk.
Elements of a long-term investment
The investments are made up of the subject that makes them -whether a company or an individual-, the object of these, the period in which the financial flows will originate, the cost of the initial investment (initial disbursement), the collections and payments of the investment while it lasts and the residual value at the end of the same.
Advantages of a long-term investment
Through trading with the most suitable assets, the chances of increasing long-term profits are greater. Those assets whose level of fluctuation is low , that are not influenced by external movements and that are controllable, should be chosen . The most obvious advantage of long-term investing is the opportunity to achieve long-term profits.
The current investment pays off over time . Although it should be noted that the benefits that are estimated at the beginning are not always achieved, as long as the losses are not important and there is a greater portion of profit, there will be no problem. Another advantage is that when analyzing in order to select the best assets, it is not necessary to be aware of their evolution in the markets .
Risks of a long-term investment
Despite the fact that most quotes generate insignificant movements , sometimes it is necessary to cancel a transaction and thus avoid losses that cannot be afforded. Hedging operations will have to be carried out from time to time to reduce losses
Difference between temporary and long-term investments
Temporary investments contain short-term documents while long-term investments consist of cash placements over longer terms. While in the former the investments are more easily sold, in the latter the shares are acquired in exchange for securities, which are usually not in cash. In fact, they are often made up of assets rather than cash.
Short-term investment transactions can be handled through checking accounts , in long-term investments the objective is to increase the utility of the securities by collecting dividends or interest or with the upward trend. In conclusion, long-term investments are planned to ensure that the return on investment improves and generate an optimal relationship with the companies.
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