Just What Is an Investment Value?
An investment is something that you purchase with an aim of making a profit, obviously, you will want to maximize the amount that you want to make and that will often involve risk. The return on your investment and the type of investment value that you make will therefore often depend on the level of risk that you are happy to accept. Its value, however, is not always easy to define as well as present value annuity formula. While you may be able to put a firm value on a secure bond that is returning a steady rate of interest, defining a value for a unique business is not as simple.
Types of Investments
There are several different ways in which you can invest your own money and each has a different level of risk involved with it as well as very different returns. The following are ways in which you could invest your own money:
Putting it into a savings account
This is essentially making a loan to the bank and often comes with a host of conditions such as how long the money must be deposited for and how quickly you can access your funds. These are relatively safe investments and can provide you with a regular return on your savings.
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Maybe your investment will give you a return of 4% if this is what the bank is offering as an annual interest rate. The bank then makes its money by in turn lending your money to others that are looking for car loans, mortgages and credit cards at a higher rate than they pay you for your savings. There are of course other types of savings accounts that you can make deposits into such as those linked to insurance policies.
Bonds
There are many types of bonds that you can buy and each has its own very specific return and of course risks. These are generally however reasonably secure and can offer a good steady return on your investment.
Stocks
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A stock is a certificate that provides you with ownership of a company; although a very small portion. The risks involved in the ownership of stocks very much depend on the type of company that you are investing into and of course the state of the market in general. Over time stocks have been shown to provide a good return with both increasing values and dividends that may be paid by the companies that you have invested in. As a company becomes more successful more people want to invest in them, as such the price of the stocks can rise significantly. On the other hand, a problem with the company such as a product recall or one of the directors being investigated can have a significant negative impact on your investment. Calculating your future return on investment here, therefore, is far harder than just calculating what your interest will provide through your savings account. However, the potential returns are often far higher.
Real estate
Real estate is another area that is considered a good and often secure investment. However, there are always things that can impact your investment such as the recent mortgage crisis and even more local changes such as large companies relocating.
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Real estate is usually bought to rent or to repair and then resell. Your own home should not, however, be seen as an investment as it is providing you with your basic need of shelter. That being said it is still likely to appreciate in value over time; as long as you keep it maintained.
Business investments
Whether starting your own business or acting as an “Angel” for a share of the company this investment has the potential for very large returns; just consider the likes of Bill Gates. However, it also has a high level of risk involved in it. Again this is another area in which it is difficult for you to calculate the actual investment value.
Investing in precious objects
Art and Gold are often seen as secure investments for your money. However, it is hard to know just how their value may appreciate. There is also the risk of damage and depreciation of the object over time so these are not always the bulletproof investments that some people think they are.
Calculating Investment Value
The value of an investment can be calculated using an investment value formula if you know the rate at which the initial investment will grow such as for a bond or a savings account. The following basic calculation can be used to calculate the growth of a sum invested:
Final Value = Initial Investment x ((1 + Rate)Years Invested ) So for $1000 invested for 5 years at a return of 10% the calculation would be
$1000 x (1 + 0.10)5 = $1,610.51
Another calculation that you might be asked to make for your assignment is to find out how much you would need to invest for a number of years to generate a particular return. This is useful for instance if you wanted to build a sizable college fund for your child or put money aside to buy that boat for your retirement.
The formula to discover this is:
Present Value of Investment = Value Required / ((1 + Rate)Years Invested )
So if you wanted to generate a sum of $100, 000 by investing at 5% for 20 years the calculation would like this:
100,000 / (1 + 0.05)20 = $37,688.95
So you would need to invest $37,688.95 with a return of 5% for 20 years to get you the $100,000 that you are looking for. This calculation does not however take into account the effect that inflation may have on the purchasing power of that $100,000 after the 20 years.
Another calculation that you may be asked to make is that of investing a regular amount into an annuity for your retirement. The following is the formula that you would use if you were paying a regular amount into a scheme with a fixed interest rate:
Final Value = Payment x [((1 + Rate)Years – 1) / rate ]
So if you were to invest $1000 per year for 5 years at a rate of 5% the calculation would look like the following:
$1000 x [((1 + 0.05)5 – 1) / 0.05 ] = $5525.63
Investment Value of Property and Other Purchases
Defining an investment value to a business or a property or other purchase is not always straightforward and there is rarely going to be a formula that is going to help you make any prediction. After all an investor will only pay what they believe it is worth to them and that may not be the same as the market value. There are often discussions regarding market value vs fair value vs investment value. The economic term investment value can be applied to both stocks and property.
But what someone will see as fair value will depend on how they can utilize the asset. Market value is usually seen as what someone has paid for something similar. So your investment value could be seen as being either higher or lower than market value depending on how you intend to use the asset. Fair value would be whatever you can agree on. None of these are simple figures that can be provided by dropping numbers into a spreadsheet.
Problems with Answering Your Investment Assignments
Your assignments must be completed to a high standard if you are going to get the results that you want. There are however often many problems that you may face when tackling your investment calculations and discussions:
- Ensure that you fully understand what is being asked of you; if you are not totally clear as to what your assignment wants from you then clarify it with your tutor before you begin.
- Make sure that you are clear what investment value formula is expected from you; preferably use the one from the text book that you are using or that was covered within the class. There are many different formulas available online and not all are correct or labeled right.
- Get your calculations right; formula with many terms can come up with incorrect answers if they are done in the wrong order. There are various calculators that you can find online that will provide you with an answer to check against.
Use a Future Value Investment Calculator
When selecting the right future value investment calculator ensure that it will provide you with the correct formula for the calculation that you want to do. The following are a selection of the calculators that you could use when checking the results of your own calculations:
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