What Are The Types Of Investment In Finance

Without a doubt, the most important decision that anyone who manages their wealth will have to make is to determine which investment is most suitable for them.

From a macroeconomic point of view , investment is understood as “the purchase of goods that will be used to produce more goods and services” . We speak, therefore, of productive investment (or investment dedicated to production), since assets are acquired that will be incorporated into manufacturing, marketing or service provision tasks. 

Thus, if we buy fabrics to make costumes in our factory in Almería, or we acquire a mechanical workshop where we will repair trucks, or we buy premises and machinery in Guadalajara for the manufacture of aluminum and glazing, we are making productive investments.

It is very easy that the reader has ever heard of the GDP (Gross Domestic Product), also called in Anglo-Saxon terminology GDP ( Gross Domestic Product ). Productive investment is an essential constitutive element of the GDP equation , so that an increase in productive investment generates economic growth. 

Starting from the basic macroeconomic relationship that GDP poses to us, and following any macroeconomic manual [Mankiw (2007), for example], it is easy to reach a conclusion that becomes a cornerstone of the functioning of the financial system: all productive investment must be finance through savings , a concept that is understood as the “total income of the economy that remains once consumption, state purchases, and net exports have been paid ”. In this way, all productive investment is possible thanks to the savings of some public, private, national or international agent.

Depending on the use made of the income-generating asset in which it is invested (and not depending on its nature), it is possible to classify investments into three clearly differentiated groups :

Productive investment : investment in “assets that are going to be incorporated into productive tasks that will generate income through the sale of products or services produced from them”, meaning that had already been presented in the macroeconomic vision. 

We also include in this group those investments made in assets, the use or exploitation of which will be transferred to obtain income. The acquisition of a place to install a consultancy, the purchase of a van to sell bread, the construction of a factory to produce tables and chairs, the expenses necessary to develop a product that will be patented and subsequently exploited by an external company, the acquisition of a fast food franchise to exploit it commercially, the writing of a material so that it is commercialized and you obtain copyright … are considered by the authors of this material productive investments.

Non-productive investment : “ investment in assets that are not going to be incorporated into productive tasks” , and that therefore, will generate income through sources other than productive exploitation or the transfer of their use. We can distinguish between two types of non-productive investments

Financial investment : 

Therefore, it involves acquiring products that are traded on a finance market, the most common assets being stocks, bonds or obligations, products that will be analyzed in detail in the next point of this module. 

The “ finance” process, already introduced earlier in this course, (and specifically, the securitization methods, and the development of ETFs, Hedge Funds, and all types of financial derivatives), allows any asset to be acquired through a financial market. 

An investment fund whose policy is to purchase precious metals offers us the possibility, through financial participation, to operate in the real market for precious metals; An investment fund that invests in works of art provides an investor with the option to act in the collectibles market, converting an investment in real assets into an investment in financeholdings.

Non-financial investment : 

An agent that makes this type of investment participates in the real economy, acquiring tangible or intangible assets in order to obtain profitability from them, basically, based on differences between acquisition and disposal value. The purchase of real estate, paintings, works of art, commodities , etc. to resell them later (when the investor is not professionally engaged in this activity), are some examples of possible non-productive, non-financial investments.