Investors supply the economy with capital. Investors have money earn them more money. They allocate their money to different areas of the economy to earn higher returns. When a business, financial institution, or government needs financing, investors are an option. Investors let those groups use their money; in return, the investors demand their initial money back, as well as a share in profits or an interest payment. Investors increase the productive property of society.
Means of Income
Investors make money in the form of returns on their investment. This consists of profits, capital gains, or interest, depending on the exact type of investment. Profits that come from their investments often carry no fixed return. Capital gains happen when an investment is sold for more than it was bought. Interest is typically a fixed return on investment, though it is sometimes tied to an index.
Benefits to Society
The economy is built in large part by investors. They allow for businesses to expand, financial institutions to have money to lend, and governments to pay for public goods and services, such as roads. There are four main investment areas where investors improve the economy:
Real estate investors provide people with an affordable space to live and produce in. Real estate is used by people, businesses, and financial institutions. Investors can buy existing buildings and make no changes or choose to improve the building, and can create entirely new buildings. Real estate investors often borrow from financial institutions to be able to buy more real estate properties. This gives them a higher return.
Businesses are open to investment in the form of private equity placements and stocks. Businesses use investment capital to expand operations. Afterwards, profits are shared with the investors. Investors might buy into a chain restaurant, allowing new restaurants to be created. This causes the economy to expand.
Debt instruments, such as bonds, subordinated notes, and mortgages, is a common form of investment. Investors lend money when they purchase debt. They are repaid with interest at an agreed-upon rate. The debt may be issued by businesses for expansion, financial institutions for lending, and governments for public investment and budget deficits.
Derivatives are used to lower risk in the economy. There are many different types of derivatives. Options, futures, and forwards are all derivatives. A derivative tracks the price of an underlying asset. These protect people from market downturns.
Free enterprise benefits investors by allowing them to earn money while moving resources into expanding the economy. In capitalism, investors are largely unrestricted. This allows them to find the most productive way to employ their money. Investors provide the capital needed to increase economic output. Refer to “How the Free Enterprise System Works” to learn more about related ideas.