Why Do We Invest?

“Investment”, why investment is needed? Who needs investment? What purpose this investment serves? Who are the people benefits through investment? Why do governments support investment?  Did you thought about this?  Don’t know answers for these questions? Then read this ….

Investment is needed for companies/ institutions /corporations for developing their businesses. For example, ‘A’ starts a retail store called ‘X’ in a small town and does business for three years successfully generating good profits hence wants to expand his business  in other main cities of the country also. But, for that huge amount of moneys is needed. For example, assume money needed to expand retail store in other cities is Rs 50 crore. For getting that money, Company X may various options like, borrowing from relatives, friends, banks etc. 

Borrowing from banks will not proof beneficial, since X needs to pay interest for borrowed money, which will eat out the profit of the company or even it can results in negative cash flow(due to Interest payment), if company goes into losses in initial phases of expansion. Hence, borrowing from banks cannot be a better option.

As far the option available of borrowing from relatives & friends is concerned, it may be not possible to borrow huge sum.

In this situation, the X Company can seek help of Investment Concept (here, Share Market). Here, the company approaches Sebi, the capital market regulator of India(which regulates share markets like RBI does with banks), with track record report of successful business and future plans for expansion in order to approach public to generate required sum through(share market) Initial Public Offer. IPO involves issuing/selling shares of the company to the public for their money. Sebi, after scrutinising the company’s record, approves the company to go on with IPO. Then people invest their money in the Company X, and in return people who invest in it get shares in proportion to the amount invested. By this way, company raises precious capital that too without paying any Interest.

When a company expands through this investment, it creates more employment, which in turn increase productions and generate more wealth for its shareholders. When company generates more wealth, then government will begins to get more taxes from company. When government stands to gain, then whole country stands to gain, since government would have surplus to allocate more funds to creating better infrastructure for its people.

Other means of investment instruments available through which companies able to generate capital for doing their business or expanding their business are: Fixed Deposits, Bonds, Debentures, Corporate Deposits etc.

I hope, by reading this article, you got answer for "why do we invest?" who are the beneficiaries, why Govt supports Investment?

Note: Main purpose of this article is to make understand individuals about the importance of Investment for the country as a whole. Please note, it does not mean you have to invest in particular instrument only keeping this in your mind. After all, everybody have different level of risk taking abilities & hence needs to invest accordingly, that too analysing what are the pros & cons of particular investment avenues.