Factors Affecting Investment Spending
There are several factors affecting investment spending for both individuals and institutional investors. These factors influence the decision made by individuals and institutions on the amount of money to invest. They vary between investors but there are common factors that cut across all investors.
One of the factors that affect investment spending is the available resources. This is very important because an individual or institution can only invest what they have. For instance, a company that has a good amount of liquid assets will not necessarily invest all of it or a sizeable amount of it if it has other more urgent commitments such as debts and employees’ payroll to meet.
Similarly, an individual cannot spend all the money they have on investment if they have unpaid bills. Thus, monetary priorities determine the amount of money available for investing and this affects investment spending for both individuals and institutional investors.
Market prediction is another factor that also affects investment spending. No investment is sufficiently foolproof to invest all your savings in. Additionally, even some of the riskiest investments are worth investing in because they can yield good returns.
However, when you are aware of the possible returns you are likely to invest more than when you do not have a slightest idea of what to expect from your investment. For instance, an investor is likely to invest a large amount of money in a government bond that has high rating than in a start-up company that they know little or nothing about.
The level of tolerable risk in an investment also affects investment spending. A common notion is that one should never invest more than they are ready to lose. This is because although it may seem unlikely, there is a possibility of losing the entire investment. Therefore, investors usually assess risk and take it seriously when investing.
In some cases, the risk factor is beyond what an investor is willing to lose. For instance, an investment may have a potential of involving the investor in a legal tussle or it may require them to spend more on upkeep and maintenance. Such factors influence the amount of money an investor will be willing to invest.
Investment spending is also affected by the asset being invested in. For instance, some assets like financial derivatives are highly risky yet they do not have value unless when cashed in at an appropriate time. Contrary to this, some investments are more tangible. They also go past the goal of making profit.
An example of such investments is real estates. Most investors will invest in such assets. Thus, the type of asset or investment determines the amount that an investor will be willing to spend on an investment opportunity.
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