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ReadingsZvi Bodie, Kane Alex, Marcus Alan J. Essentials ofInvestments.The McGraw-Hill Companies, Inc. Boston,2003

Marcus Alan J., Kane Alex, Zvi Bodie. Investments. TheMcGraw-Hill Companies, Inc. Boston, 2008

Brigham Eugene F., Gapenski Louis C. Financialmanagement: theory and practice. The Dryden Press, 1999

Brealey, Meyers. Principles of Corporate FinanceMcGraw-Hill. 7ed, 2003Banacu Cristian Silviu. Investments and risks forsustainable development. www.ase.ro

Electronic Journals

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Topic 1. Concept and Principals of

Investments

definition and fundamentals ofinvestments,

classification of investments,

role of investments in the economicdevelopment

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Key terms: capital investment, financial investment,

intellectual investments, elements of investment,

features of investment, domestic investments,

foreign investments etc.

After Studying This Topic You Should Be Able to:

Define the investment

Name the elements that identify an investment

To characterize the main features of investmentDistinguish between real investments and financial

investments

Confirm the role of investment for the development of

businesses and of the national economy as a whole

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Investing - what is that exactly?Probably you have heard many differentdefinitions ofinvestment.

There are about 3 thousands definition

However, what is the essence of it?

The essence is very simple: investing -

a present sacrifice for the future.

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Definition of investmentThe general idea of investment is that the investoraccepts not using the available resources today, sothat he would have a higher amount of resources inthe future.

An investment may be defined as the purchase byan individual or institutional investor of a financialor real asset that produces a return proportional tothe risk assumed over future investment period.

In other words, investment represents the totality offinancial and material resources allocated to create,modernize or extend the economic activity with thereason to earn profit.

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Investment definition may have

several meanings, two most relevant:1) An investment as a financial or tangible assetwhich is acquired on purpose to get a profit in thefuture. It is an instrument that promises some certainor uncertain return in the future.

2) An investment as a process (investing) whentangible or financial assets are acquired on purposeto earn more money (or other material benefits) than

was spent when investment was made.If acquisition is made without an intention to profitfrom it, then it is spending but not an investment.

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Definition of investment

The term investment, it carries slightly different meanings to differentsectors.

According to economists, investment is the utilization of resources inorder to increase income or production output in the future.

According to business theories, investment is that activity in which amanufacturer buys a physical asset, for example, stock or production

equipment, in expectation that this will help the business to prosper in thelong run.

On the other hand, finance professionals define an investment as moneyutilized for buying financial assets, for example stocks, bonds, bullion,real properties, and precious items.

According to finance, the practice of investment refers to the buying of afinancial product or any valued item with an anticipation that positivereturns will be received in the future.

Accounting approach

Psychological approach

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A formal definition ofinvestmentcan be specified as a current commitment of money for aperiod of time in order to derive future payments that willcompensate the investor for

(1) the time funds are committed and,

(2) the expected rate of inflation, and

(3) the uncertainty of the future payments.

Similarly, this definition includes all types of investments,including investments made by corporations in plant andequipment, also the investment of individuals in stocks,bonds, commodities, or real estate.

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Meaning of investmentIn all cases the investor is trading a known

money amount today for some expected

future stream of payments that will be grater

than the current outlay.

So, results that investment is considered to

be a present expenditure, realized for the

purpose of future effects in risk and

uncertainty conditions.

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The legal definition of investmentis formulated according to the Law of Republic of Moldovaon investments in entrepreneurial activity nr. 81 from23.04.2004.

http://lex.justice.md/index.php?action=view&view=

Investment is the aggregate amount of goods (assets)introduced in entrepreneurial activity on the territoryof the Republic of Moldova, inclusiv on the basis of

financial leasing contract, as well as within public-privat partenership, for the purpose to obtain income;

Also the Law regulates the forms of investment.

!!! Remember other key terms the Law specifies

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Elements of an investmentThe subject of investment. An investor can be an individual, agovernment, a pension fund, or a corporation that is willing to investits resources.

The investment object, that represents the business, building, plant,equipment or real estate for what the investment is initiated;

Investment cost, that represents the financial, material (machinery, rawmaterial, production space, and land), human effort made for therealization of the respective investment etc.

Effects of the investment, which the profit that is expected to beobtained by the end of the investments life span.

The risk, meaning the uncertainty of the future payments, which

represents the possibility that the investor wont receive his money orassets back or will receive them but at a lower value.

The time funds are committedrepresents the period of time duringwhich the money or assets wont be available to the investor.

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Present economic theory emphasizes a series of aspects

related tothe features of investment activity.Investments are the opposite effect of immediate

consumption.

The relationship Investment-Time is a specific feature of

investing activity.Investments have dual features:

Value sensewhen investment is viewed as an expense, and represents only a

financial resource consumed in the present, with the goal of obtaining some future

effects.

Physical sensewhen investment is viewed as an action in which are involvedmaterial and technical means, people with the respective knowledge and abilities as

well as their interests.

The novelty character that investment manifest, thusinvestments always deal with the future.

Investment can generate spillover effects.

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Classification of investmentsis realized in accordance to the some rational criteria:

1. By investment object or nature, there are:

Financial Investments which represent any form of

investing money for the purpose to obtaindividends, interests and profits

Capital or Tangible Investments

Nonmaterial or Intellectual Investments are moneyplacements for research and development,

personnel training, advertising, purchasing of

know-how, licenses to use new technologies

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Capital InvestmentAs a term has two usages in business.

Firstly, Capital Investment refers to money used by abusiness to purchase fixed assets, such as land,

machinery, or buildings.Secondly, Capital Investment refers to moneyinvested in a business with the understanding thatthe money will be used to purchase fixed assets,purchasing of plants, equipment, rather than used

to cover the business' day-to-day operatingexpenses.

They are characterized by a long-term timeperiod and high risk.

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2. According to the way of participation

investments are:Direct, those are equity investments such as acquisition ofreal assets or a stock package of a company, sometimes theacquisition of entire company or the establishment of itsnew subsidiaries. In case of the direct investment we

suppose the possibility of control and decision over theactivity of the enterprise.

Portfolio or Indirect, that refers to investment insecurities that is intended forfinancial gain only and doesnot create a lasting interest in or effective control over an

enterpriseThe distinguishing elements: management and controlover the company and the share of ownership in it.

Most investors interested in indirect investment would do so through acompany or advisor who has experience in this type of investing.

Read more:htt : www.investorwords.com 6842 indirect investment.html

http://www.investorwords.com/6842/indirect_investment.htmlhttp://www.investorwords.com/6842/indirect_investment.html

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3. According tothe investment period,

investments are:

Long- term investments

Medium

term investmentsShort- term investments (till 1 year).

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4.According tosubject of investment or the

sourse of financing, investments are:

private or individual,

corporate,public,

foreign, which can be made with foreign

capital, by a foreign investor participation, oras credits or grants offered by international

financial institutions;

mixed.

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5. From the point of view ofthe investment

purpose (objective) there can be distinguished:

investment for productive needs, which are

replacement or maintenance investments;

development or extension investments;

investments for modernization or innovation;

strategic investments

mandatory or obligatory investments.

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6.Depending onthe placement region are:domestic investments,

foreign investments.

Foreign investments representthe resource

and financial flows that cross juridical and

economic boundaries.

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The role of investments in the

economic development

role of investments at macroeconomic level

role of investments at microeconomic level

INDIVIDUAL WORK