Following definitions will help us to understand the concept of money market.

According to Crowther, "The money market is a name given to the various firms and institutions that deal in the various grades of near money." According to the RBI, "The money market is the centre for dealing mainly of short character, in monetary assets; it meets the short term requirements of borrowers and provides liquidity or cash to the lenders. It is a place where short term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers, again comprising institutions and individuals and also by the government." According to Nadler and Shipman, "A money market is a mechanical device through which short term funds are loaned and borrowed through which a large part of the financial transactions of a particular country or world are degraded. A money market is distinct from but supplementary to the commercial banking system."

To maintain monetary equilibrium. It means to keep a balance between the demand for and supply of money for short term monetary transactions. To promote economic growth. Money market can do this by making funds available to various units in the economy such as agriculture, small scale industries, etc. To provide help to Trade and Industry. Money market provides adequate finance to trade and industry. Similarly it also provides facility of discounting bills of exchange for trade and industry. To help in implementing Monetary Policy. It provides a mechanism for an effective implementation of the monetary policy. To help in Capital Formation. Money market makes available investment avenues for short term period. It helps in generating savings and investments in the economy. Money market provides non-inflationary sources of finance to government. It is possible by issuing treasury bills in order to raise short loans. However this dose not leads to increases in the prices.

Apart from those, money market is an arrangement which accommodates banks and financial institutions dealing in short term monetary activities such as the demand for and supply of money.

do not accept deposits from others. The following table shows the distinction between a bank and moneylender. Basis Banks Moneylenders 1. Entity Bank are organised institutions. Moneylenders are individuals. 2. Activity Banking activities Activities of moneylender include acceptance may not include of deposits as well as acceptance of deposits. lending of money. 3. Clients Banks meet the needs Moneylenders meet of people in general the needs and the business of agriculturists and community in particular. poor people. 4. Security Banks accept tangible Moneylenders generally and personal security accept gold, jewellery against loans. or land as security for giving loan. 5. Process of The process of The process of recovery of recovery is recovery is loans. flexible. rigid and strict. 6. Interest Rate Interest charged by Rate of Interest banks on loan is is decided by the moneylender governed by RBI. and is normally very high.

15.4 Role of Banking

Banks provide funds for business as well as personal needs of individuals. They play a significant role in the economy of a nation. Let us know about the role of banking. It encourages savings habit amongst people and thereby makes funds available for productive use. It acts as an intermediary between people having surplus money and those requiring money for various business activities. It facilitates business transactions through receipts and payments by cheques instead of currency.
Business Studies

It provides loans and advances to businessmen for short term and long-term purposes. It also facilitates import export transactions. It helps in national development by providing credit to farmers, small-scale industries and self-employed people as well as to large business houses which lead to balanced economic development in the country. It helps in raising the standard of living of people in general by providing loans for purchase of consumer durable goods, houses, automobiles, etc.

Intext Questions 15.1

Fill in the blanks with suitable word (s): (a) A bank accepts deposits from people and ________ money to those who need it for various purposes. (b) Banks act as ________ between people having surplus money and those borrowing money. (c) Banking facilitates business activities and is considered as an important auxiliary to ___________. (d) Banks facilitate payment through _________ instead of currency. (e) A ___________ advances money out of his own private wealth and generally does not accept deposits from others. ________________________________________________________________________

15.5 Types of Banks

There are various types of banks which operate in our country to meet the financial requirements of different categories of people engaged in agriculture, business, profession, etc. On the basis of functions, the banking institutions in India may be divided into the following types: Types of Banks Central Bank Development Banks Specialised Banks (RBI, in India) (EXIM Bank SIDBI, NABARD) Commercial Banks Co-operative Banks (i) Public Sector Banks (i) Primary Credit Societies (ii) Private Sector Banks (ii) Central Co-operative Banks (iii) Foreign Banks (iii) State Co-operative Banks Now let us learn about each of these banks in detail.
Banking

7 a) Central Bank
A bank which is entrusted with the functions of guiding and regulating the banking system of a country is known as its Central bank. Such a bank does not deal with the general public. It acts essentially as Governments banker, maintain deposit accounts of all other banks and advances money to other banks, when needed. The Central Bank provides guidance to other banks whenever they face any problem. It is therefore known as the bankers bank. The Reserve Bank of India is the central bank of our country. The Central Bank maintains record of Government revenue and expenditure under various heads. It also advises the Government on monetary and credit policies and decides on the interest rates for bank deposits and bank loans. In addition, foreign exchange rates are also determined by the central bank. Another important function of the Central Bank is the issuance of currency notes, regulating their

circulation in the country by different methods. No other bank than the Central Bank can issue currency.

b) Commercial Banks
Commercial Banks are banking institutions that accept deposits and grant short-term loans and advances to their customers. In addition to giving short-term loans, commercial banks also give medium-term and long-term loan to business enterprises. Now-a-days some of the commercial banks are also providing housing loan on a long-term basis to individuals. There are also many other functions of commercial banks, which are discussed later in this lesson. Types of Commercial banks: Commercial banks are of three types i.e., Public sector banks, Private sector banks and Foreign banks. (i) Public Sector Banks: These are banks where majority stake is held by the Government of India or Reserve Bank of India. Examples of public sector banks are: State Bank of India, Corporation Bank, Bank of Boroda and Dena Bank, etc. (ii) Private Sectors Banks: In case of private sector banks majority of share capital of the bank is held by private individuals. These banks are registered as companies with limited liability. For example: The Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd., Development Credit Bank Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd., Global Trust Bank, Vysya Bank, etc. (iii) Foreign Banks: These banks are registered and have their headquarters in a foreign country but operate their branches in our country. Some of the foreign banks operating in our country are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, Grindlays Bank, etc. The number of foreign banks operating in our country has increased since the financial sector reforms of 1991.

c) Development Banks
Business often requires medium and long-term capital for purchase of machinery and equipment, for using latest technology, or for expansion and modernization. Such financial assistance is provided by Development Banks. They also undertake other development measures like
Public Sector Banks comprise 19 nationalised banks and State Bank of India and its 7 associate banks. Business Studies

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subscribing to the shares and debentures issued by companies, in case of under subscription of the issue by the public. Industrial Finance Corporation of India (IFCI) and State Financial Corporations (SFCs) are examples of development banks in India.

d) Co-operative Banks
People who come together to jointly serve their common interest often form a co-operative society under the Co-operative Societies Act. When a co-operative society engages itself in banking business it is called a Co-operative Bank. The society has to obtain a licence from the Reserve Bank of India before starting banking business. Any co-operative bank as a society is to function under the overall supervision of the Registrar, Co-operative Societies of the State. As regards banking business, the society must follow the guidelines set and issued by the Reserve Bank of India.

Types of Co-operative Banks

There are three types of co-operative banks operating in our country. They are primary credit societies, central co-operative banks and state co-operative banks. These banks are organized at three levels, village or town level, district level and state level. (i) Primary Credit Societies: These are formed at the village or town level with borrower and non-borrower members residing in one locality. The operations of each society are restricted to a small area so that the members know each other and are able to watch over the activities of all members to prevent frauds. (ii) Central Co-operative Banks: These banks operate at the district level having some of the primary credit societies belonging to the same district as their members. These banks provide loans to their members (i.e., primary credit societies) and function as a link between the primary credit societies and state co-operative banks. (iii) State Co-operative Banks: These are the apex (highest level) co-operative banks in all the states of the country. They mobilise funds and help in its proper channelisation among various sectors. The money reaches the individual borrowers from the state co-operative banks through the central co-operative banks and the primary credit societies.

e) Specialised Banks
There are some banks, which cater to the requirements and provide overall support for setting up business in specific areas of activity. EXIM Bank, SIDBI and NABARD are examples of such banks. They engage themselves in some specific area or activity and thus, are called specialised banks. Let us know about them. i. Export Import Bank of India (EXIM Bank): If you want to set up a business for exporting products abroad or importing products from foreign countries for sale in our country, EXIM bank can provide you the required support and assistance. The bank grants loans to exporters and importers and also provides information about the international market. It gives guidance about the opportunities for export or import, the risks involved in it and the competition to be faced, etc.
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ii. Small Industries Development Bank of India (SIDBI): If you want to establish a small-scale business unit or industry, loan on easy terms can be available through SIDBI. It also finances modernisation of small-scale industrial units, use of new technology and market activities. The aim and focus of SIDBI is to promote, finance and develop small-scale industries. iii. National Bank for Agricultural and Rural Development (NABARD): It is a central or apex institution for financing agricultural and rural sectors. If a person is engaged in agriculture or other activities like handloom weaving, fishing, etc. NABARD can provide credit, both short-term and long-term, through regional rural banks. It provides financial assistance, especially, to co-operative credit, in the field of agriculture, small-scale industries, cottage and village industries handicrafts and allied economic activities in rural areas.

Intext Questions 15.2

Identify the type of bank being talked about in each of the following statements: (a) The bank that undertakes to subscribe to shares and debentures of a company in case of under subscription. (b) The bank that provides assistance and guidance for export of products abroad. (c) The bank formed by a group of people to serve their common interest. (d) The bank that issues currency notes.

(e) The commercial bank where the government holds majority stake. ________________________________________________________________________

15.6 Functions of Commercial Banks

The functions of commercial banks are of two types. (A) Primary functions; and (B) Secondary functions. Let us discuss details about these functions.

(i) Primary functions

The primary functions of a commercial bank include: a) Accepting deposits; and b) Granting loans and advances. a) Accepting deposits The most important activity of a commercial bank is to mobilise deposits from the public. People who have surplus income and savings find it convenient to deposit the amounts with banks. Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus,
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deposits with the bank grow along with the interest earned. If the rate of interest is higher, public are motivated to deposit more funds with the bank. There is also safety of funds deposited with the bank. b) Grant of loans and advances The second important function of a commercial bank is to grant loans and advances. Such loans and advances are given to members of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts. The rate of interest charged on loans and advances varies according to the purpose and period of loan and also the mode of repayment. i) Loans A loan is granted for a specific time period. Generally commercial banks provide short-term loans. But term loans, i.e., loans for more than a year may also be granted. The borrower may be given the entire amount in lump sum or in instalments. Loans are generally granted against the security of certain assets. A loan is normally repaid in instalments. However, it may also be repaid in lump sum. ii) Advances An advance is a credit facility provided by the bank to its customers. It differs from loan in the sense that loans may be granted for longer period, but advances are normally granted for a short period of time. Further the purpose of granting advances is to meet the day-to-day requirements of business. The rate of interest charged on advances varies from bank to bank. Interest is charged only on the amount withdrawn and not on the sanctioned amount.

Types of Advances
Banks grant short-term financial assistance by way of cash credit, overdraft and bill discounting. Let us learn about these. a) Cash Credit Cash credit is an arrangement whereby the bank allows the borrower to draw amount upto a specified limit. The amount is credited to the account of the customer. The customer can withdraw this amount as and when he requires. Interest is charged on the amount actually withdrawn. Cash Credit is granted as per terms and conditions agreed with the customers.

b) Overdraft Overdraft is also a credit facility granted by bank. A customer who has a current account with the bank is allowed to withdraw more than the amount of credit balance in his account. It is a temporary arrangement. Overdraft facility with a specified limit may be allowed either on the security of assets, or on personal security, or both. c) Discounting of Bills Banks provide short-term finance by discounting bills, that is, making payment of the amount before the due date of the bills after deducting a certain rate of discount. The party gets the funds without waiting for the date of maturity of the bills. In case any bill is dishonoured on the due date, the bank can recover the amount from the customer.
Banking

11 ii) Secondary functions

In addition to the primary functions of accepting deposits and lending money, banks perform a number of other functions, which are called secondary functions. These are as followsa. Issuing letters of credit, travellers cheque, etc. b. Undertaking safe custody of valuables, important document and securities by providing safe deposit vaults or lockers. c. Providing customers with facilities of foreign exchange dealings. d. Transferring money from one account to another; and from one branch to another branch of the bank through cheque, pay order, demand draft. e. Standing guarantee on behalf of its customers, for making payment for purchase of goods, machinery, vehicles etc. f. Collecting and supplying business information. g. Providing reports on the credit worthiness of customers. i. Providing consumer finance for individuals by way of loans on easy terms for purchase of consumer durables like televisions, refrigerators, etc. j. Educational loans to students at reasonable rate of interest for higher studies, especially for professional courses.

Intext Questions 15.3

State which of the following statements are True and which are false. Write T for True and F for a False statement: (a) Loans and advances are both granted by banks to customers for a long period of time. (b) Banks keep our jewellery and important documents safe with them. (c) Banks grant loans to students for their studies at reasonable interest rate. (d) Discounting of bills is done by banks free of cost. (e) Through overdraft, a customer can withdraw more money than the amount in his/her bank account. ________________________________________________________________________

15.7 E-banking (Electronic Banking)

With advancement in information and communication technology, banking services are also made available through computer. Now, in most of the branches you see computers being used to record banking transactions. Information about the balance in your deposit account can be known through computers. In most banks now a days human or manual teller counter is being

replaced by the Automated Teller Machine (ATM). Banking activity carried on through computers and other electronic means of communication is called electronic banking or e-banking. Let us now discuss about some of these modern trends in banking in India.
Business Studies

12 Automated Teller Machine

Banks have now installed their own Automated Teller Machine (ATM) throughout the country at convenient locations. By using this, customers can deposit or withdraw money from their own account any time. Debit Card Banks are now providing Debit Cards to their customers having saving or current account in the banks. The customers can use this card for purchasing goods and services at different places in lieu of cash. The amount paid through debit card is automatically debited (deducted) from the customers account. Credit Card Credit cards are issued by the bank to persons who may or may not have an account in the bank. Just like debit cards, credit cards are used to make payments for purchase, so that the individual does not have to carry cash. Banks allow certain credit period to the credit cardholder to make payment of the credit amount. Interest is charged if a cardholder is not able to pay back the credit extended to him within a stipulated period. This interest rate is generally quite high. Net Banking With the extensive use of computer and Internet, banks have now started transactions over Internet. The customer having an account in the bank can log into the banks website and access his bank account. He can make payments for bills, give instructions for money transfers, fixed deposits and collection of bill, etc. Phone Banking In case of phone banking, a customer of the bank having an account can get information of his account, make banking transactions like, fixed deposits, money transfers, demand draft, collection and payment of bills, etc. by using telephone . As more and more people are now using mobile phones, phone banking is possible through mobile phones. In mobile phone a customer can receive and send messages (SMS) from and to the bank in addition to all the functions possible through phone banking.

Intext Questions 15.4

Match the statement in column A with the word(s) / terms in column B: Column A Column B (a) The banking facility that helps us to make (i) ATM payments out of our bank account without actually carrying money with us. (b) The banking facility enabling us to deposit (ii) Phone Banking or withdraw cash 24 hours a day.
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(c) The facility that helps us to perform banking (iii) Credit Card

transactions over the Internet. (d) We can get information about the balance in (iv) Debit Card our bank account over the mobile phone using this facility (e) The facility that enables us to make payment for (v) Net Banking purchase of goods by taking credit from the bank _________________________________________________________________________

15.8 What You Have Learnt

A bank is an institution that accepts deposits from public and lends money to the people who need it. Banking is an important auxiliary to trade. Banks encourage savings and act as an intermediary between depositors and borrowers. They help in credit transactions, facilitate export and import, help in national development and raise peoples standard of living. Types of banks - The Central Bank, RBI in India, acts as the government banker and issues currency notes in the country. It also acts as the bankers bank. - The Commercial Banks provide short and medium term loans and charge interest on it. They are of three types Public Sector Banks, Private Sector Banks and Foreign Banks. - Development banks lend funds to business for medium to long term. - Co-operative banks are formed to serve common interest of members. In India, we have Primary Credit Societies (village level), Central co-operative Banks (district level) and State Co-operative Banks (State level). - EXIM Bank provides guidance and support to exporters and importers. - NABARD helps in financing agricultural and other rural activities. Functions of Commercial Banks: - Primary functions include accepting deposits, granting loans, advances, cash, credit, overdraft and discounting of bills. - Secondary functions include issuing letter of credit, undertaking safe custody of valuables, providing consumer finance, educational loans, etc. E-banking: With advancement in information and communication technology, banking is performed electronically

Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time.[1] In contrast putting money into something with an expectation of gain without thorough analysis, without security of principal, and without security of return is speculation or gambling. Investment is related to saving or deferring consumption. Investment is involved in many areas of the economy, such as business management and finance whether for households, firms, or governments. To avoid speculation an investment must be either directly backed by the pledge of sufficient collateral or insured by sufficient assets pledged by a third party.[original research?] A thoroughly analyzed loan of money backed by collateral with greater immediate value than the loan amount may be considered an investment. A financial instrument that is insured by the pledge of assets from a third party, such as a deposit in a financial institution insured by a government agency may be considered an investment. Examples of these agencies include, in the United States, the Securities Investor Protection Corporation, Federal Deposit Insurance Corporation, or National Credit Union Administration, or in Canada, the Canada Deposit Insurance Corporation. Promoters of and news sources that report on speculative financial transactions such as stocks, mutual funds, real estate, oil and gas leases, commodities, and futures often inaccurately or misleadingly describe speculative schemes as investment. Investment: thorough analysis and security. Speculation: analysis and some risk. Gambling: lack of analysis and lack of safety.

Contents

1 In economics or macroeconomics 2 Investment related to business of a firm - business management 3 In finance 4 History 5 Linguistic significance 6 Real estate as the instrument of investment o 6.1 Residential real estate o 6.2 Commercial real estate 7 See also 8 Notes 9 External links

[edit] In economics or macroeconomics

In economic theory or in macroeconomics, investment is the amount purchased per unit time of goods which are not consumed but are to be used for future production. Examples include railroad or factory construction. Investment in human capital includes costs of additional schooling or on-the-job training. Inventory investment refers to the accumulation of goods inventories; it can be positive or negative, and it can be intended or unintended. In measures of national income and output, "gross investment" (represented by the variable I) is also a component of Gross domestic product (GDP), given in the formula GDP = C + I + G + NX, where C is consumption, G is government spending, and NX is net exports. Thus investment is everything that remains of total expenditure after consumption, government spending, and net exports are subtracted (i.e. I = GDP - C - G - NX). Non-residential fixed investment (such as new factories) and residential investment (new houses) combine with inventory investment to make up I. "Net investment" deducts depreciation from gross investment. Net fixed investment is the value of the net increase in the capital stock per year. Fixed investment, as expenditure over a period of time ("per year"), is not capital. The time dimension of investment makes it a flow. By contrast, capital is a stock that is, accumulated net investment to a point in time (such as December 31). Investment is often modeled as a function of Income and Interest rates, given by the relation I = f(Y, r). An increase in income encourages higher investment, whereas a higher interest rate may discourage investment as it becomes more costly to borrow money. Even if a firm chooses to use its own funds in an investment, the interest rate represents an opportunity cost of investing those funds rather than lending out that amount of money for interest.[2]

[edit] Investment related to business of a firm - business management

The investment decision (also known as capital budgeting) is one of the fundamental decisions of business management: Managers determine the investment value of the assets that a business enterprise has within its control or possession. These assets may be physical (such as buildings or machinery), intangible (such as patents, software, goodwill), or financial (see below). Assets are used to produce streams of revenue that often are associated with particular costs or outflows. All together, the manager must determine whether the net present value of the investment to the enterprise is positive using the marginal cost of capital that is associated with the particular area of business. In terms of financial assets, these are often marketable securities such as a company stock (an equity investment) or bonds (a debt investment). At times, the goal of the investment is to produce future cash flows, while at others it may be for the purpose of gaining access to more assets by establishing control or influence over the operation of a second company (the investee).

Business firms or organisations raise funds from investors in the form of equites and debts (collectively known as the capital structure) and further reinvest it into various investment schemes by carefully analysing the returns in order to meet out their obligations relating to purchase of assets which provides them long term benefits.

[edit] In finance
In finance, investment is the commitment of funds through collateralized lending, or making a deposit into a secured institution. In contrast to investment; dollar cost averaging, market timing, and diversification are phrases associated with speculation. Investments are often made indirectly through intermediaries, such as banks, Credit Unions, Brokers, Lenders, and insurance companies. Though their legal and procedural details differ, an intermediary generally makes an investment using money from many individuals, each of whom receives a claim on the intermediary.

[edit] History
The Code of Hammurabi 1700 B.C. provided a legal framework for investment establishing a means for the pledge of collateral by codifying debtor and creditor rights in regard to pledged land. Punishments for breaking financial obligations were not as severe as those for crimes involving injury or death. In the early 1900s purchasers of stocks, bonds, and other securities were described in media, academia, and commerce as speculators. By the 1950s the term investment had been co-opted by financial brokers and their advertising agencies to promote speculation.

[edit] Linguistic significance

Common usage of "investment" to describe "speculation" has reduced investor capacity to discern investment from speculation, reduced investor awareness of risk associated with speculation, increased capital available to speculation, and decreased capital available to investment.

[edit] Real estate as the instrument of investment

In real estate, investment money is used to purchase property for the purpose of holding, reselling or leasing for income and there is an element of capital risk.

[edit] Residential real estate

Investment in residential real estate is the most common form of real estate investment measured by number of participants because it includes property purchased as a primary residence. In many cases the buyer does not have the full purchase price for a property and must engage
What's the difference? An investor is someone who carefully analyzes a company, decides exactly what it is worth, and will not buy the stock unless it is trading at a substantial discount to its intrinsic value. They are able to say, for example, that "Company 'X' is trading for $48 per share, but it is worth $62 per share." They make their investment decisions based on factual data and do not allow their emotions to get involved. A speculator is a person who buys a stock for any other reason. Often, they will buy shares in a company because they are "in play" (which is another way of saying a stock is experiencing higher than normal volume and its shares may be being accumulated or sold by institutions). They buy stock not on the basis of careful analysis, but on the chance it will rise from any cause other than a recognition of its underlying fundamentals. Speculation itself is not necessarily a vice, but its participants must be absolutely willing to accept the fact that they are risking their principal. While it can be profitable in the short term (especially during bull markets), it very rarely provides a lifetime of sustainable income or returns. It should be left only to those who can afford to lose everything they are putting up for stake. How do these two different types of activity affect stock price? The speculator will drive prices to extremes, while the investor (who generally sells when the speculator buys and buys when the speculator sells) evens out the market, so over the long run, stock prices reflect the underlying value of the companies. If everyone who bought common stocks were an investor, the market as a whole would behave far more rationally than it does. Stocks would be bought and sold based on the value of the business. Wild price fluctuations would occur far less frequently because as soon as a security appeared to be undervalued, investors would buy it, driving the price up to more reasonable levels. When a company became overpriced, it would promptly be sold. Speculators on the other hand, are the ones who help create the volatility the value investor loves. Since they buy securities based sometimes on little more than a whim, they are apt to sell for the same reason. This leads to stocks becoming dramatically overvalued when everyone is interested and unjustifiably undervalued when they fall out of vogue. This manic-depressive behavior creates the opportunity for us to pick up companies that are selling for far less than they are worth. This leads to a fundamental belief among value investors that although the stock market may, in the short-term, wildly depart from the fundamentals of a business, in the long-run the fundamentals are all that matter. This is the basis behind the famous Ben Graham quote "In the short-term the market is a voting machine, in the long-term, a weighing one." Sadly, some reject this basic principle of the stock market. Several months ago, I received an email from a reader who asserted that "the economic fundamentals of a company have no relation to the stock price." This is completely false. My response was a simple message that read "If fundamentals don't matter, what if Coca-Cola never sold another bottle of Coke? How long do you think the stock price would stay at its current level?" When put in this light, the folly of the "fundamentals don't matter" becomes evident. The next time someone preaches this, simply ask "what happens to the stock if the company can't make its payments and defaults on its loans?" When they answer "it goes bankrupt", simply smile and walk away. Fundamentals do matter. Unfortunately, countless investors believe the myth this gentleman does. The perfect example of this is the dot-com boom of the late 1990's. Companies that generated no profit and had very little, if any, book value were selling at astronomical levels. "Surely this would prove that fundamentals mean nothing," some

Let's examine these three types of objectives, the investments that are used to achieve them and the ways in which investors can incorporate them in devising a strategy. Safety Perhaps there is truth to the axiom that there is no such thing as a completely safe and secure investment. Yet we can get close to ultimate safety for our investment funds through the purchase of government-issued securities in stable economic systems, or through the purchase of the highest quality corporate bonds issued by the economy's top companies. Such securities are arguably the best means of preserving principal while receiving a specified rate of return. The safest investments are usually found in the money market and include such securities as Treasury bills (T-bills), certificates of deposit (CD), commercial paper or bankers' acceptance slips; or in the fixed income (bond) market in the form of municipal and other government bonds, and in corporate bonds. The securities listed above are ordered according to the typical spectrum of increasing risk and, in turn, increasing potential yield. To compensate for their higher risk, corporate bonds return a greater yield than T-bills. (For more insight on treasuries, read Buy Treasuries Directly From The Fed.) It is important to realize that there's an enormous range of relative risk within the bond market. At one end are government and high-grade corporate bonds, which are considered some of the safest investments around; at the other end are junk bonds, which have a lower investment grade and may have more risk than some of the more speculative stocks. In other words, it's incorrect to think that corporate bonds are always safe, but most instruments from the money market can be considered very safe. Income The safest investments are also the ones that are likely to have the lowest rate of income return, or yield. Investors must inevitably sacrifice a degree of safety if they want to increase their yields. This is the inverse relationship between safety and yield: as yield increases, safety generally goes down, and vice versa. In order to increase their rate of investment return and take on risk above that of money market instruments or government bonds, investors may choose to purchase corporate bonds or preferred shares with lower investment ratings. Investment grade bonds rated at A or AA are slightly riskier than AAA bonds, but presumably also offer a higher income return than AAA bonds. Similarly, BBB rated bonds can be thought to carry medium risk but offer less potential income than junk bonds, which offer the highest potential bond yields available, but at the highest possible risk. Junk bonds are the most likely to default. Most investors, even the most conservative-minded ones, want some level of income generation in their portfolios, even if it's just to keep up with the economy's rate of inflation. But maximizing income return can be an overarching principle for a portfolio, especially for individuals who require a fixed sum from their portfolio every month. A retired person who requires a certain amount of money every month is well served by holding reasonably safe assets that provide funds over and above other income-generating assets, such as pension plans, for example. Growth of Capital This discussion has thus far been concerned only with safety and yield as investing objectives, and has not considered the potential of other assets to provide a rate of return from an increase in value, often referred to as a capital gain. Capital gains are entirely different from yield in that they are only realized when the security is sold for a price that is higher than the price at which it was originally purchased. Selling at a lower price is referred to as a capital loss. Therefore, investors seeking capital gains are likely not those who need a fixed, ongoing source of investment returns from their portfolio, but rather those who seek the possibility of longer-term growth. Growth of capital is most closely associated with the purchase of common stock, particularly growth securities, which offer low yields but considerable opportunity for increase in value. For this reason, common stock generally ranks among the most speculative of investments as their return depends on what will happen in an unpredictable future.

Blue-chip stocks, by contrast, can potentially offer the best of all worlds by possessing reasonable safety, modest income and potential for growth in capital generated by long-term increases in corporate revenues and earnings as the company matures. Yet rarely is any common stock able to provide the near-absolute safety and incomegeneration of government bonds. It is also important to note that capital gains offer potential tax advantages by virtue of their lower tax rate in most jurisdictions. Funds that are garnered through common stock offerings, for example, are often geared toward the growth plans of small companies, a process that is extremely important for the growth of the overall economy. In order to encourage investments in these areas, governments choose to tax capital gains at a lower rate than income. Such systems serve to encourage entrepreneurship and the founding of new businesses that help the economy grow. Secondary Objectives Tax Minimization An investor may pursue certain investments in order to adopt tax minimization as part of his or her investment strategy. A highly-paid executive, for example, may want to seek investments with favorable tax treatment in order to lessen his or her overall income tax burden. Making contributions to an IRA or other tax-sheltered retirement plan, such as a 401(k), can be an effective tax minimization strategy. (For related reading, see Which Retirement Plan Is Best?) Marketability / Liquidity Many of the investments we have discussed are reasonably illiquid, which means they cannot be immediately sold and easily converted into cash. Achieving a degree of liquidity, however, requires the sacrifice of a certain level of income or potential for capital gains. Common stock is often considered the most liquid of investments, since it can usually be sold within a day or two of the decision to sell. Bonds can also be fairly marketable, but some bonds are highly illiquid, or non-tradable, possessing a fixed term. Similarly, money market instruments may only be redeemable at the precise date at which the fixed term ends. If an investor seeks liquidity, money market assets and non-tradable bonds aren't likely to be held in his or her portfolio. Conclusion As we have seen from each of the five objectives discussed above, the advantages of one often comes at the expense of the benefits of another. If an investor desires growth, for instance, he or she must often sacrifice some income and safety. Therefore, most portfolios will be guided by one pre-eminent objective, with all other potential objectives occupying less significant weight in the overall scheme. Choosing a single strategic objective and assigning weightings to all other possible objectives is a process that depends on such factors as the investor's temperament, his or her stage of life, marital status, family situation, and so forth. Out of the multitude of possibilities out there, each investor is sure to find an appropriate mix of investment opportunities. You need only be Read more: http://www.investopedia.com/articles/basics/04/032604.asp#ixzz1aa8jjKft