Businesses engage in several different kinds of investments, those of which include economic investments and financial investments. The two kinds of investments share similar characteristics and are often mistaken for those new to business investing. Understanding the differences between the two investments is important for anyone who owns or operates a business.
The difference between these two types of investments is based on the net effect they have on the company’s portfolio as well as the kind of ownership, in terms of capital, that the businesses inject in and get in return. Economic investments are meant to increase the company’s stock of capital. They include investments in the form of acquisition of equipment and other assets that are necessary to boost the business’s operations in the market.
Economic investments are geared towards helping the business boost its ability to expand output, achieve financial growth, or even generate higher profit margins. For example, a business that invests in a piece of new equipment or machinery will be bound to achieve better production capacity, thereby increasing the volume of productivity it enjoys. Economic investments also include human capital investments where a company can expand its production and boost its operations by hiring new competent and experienced workers and managers.
Financial investments, on the other hand, are based on the idea of expanding a company’s intangible assets. This category of investments includes aspects of investments, such as the acquisition of stocks, bonds, or even real estate investments. For instance, a business that invests in endowment policies gets a chance to boost its net worth after a given duration of time. They generally involve the exchange of ownership of capital and assets from one party to another with immediate financial gains not evidenced until after a given duration of time.
Generally speaking, companies, when starting, invest in economic investments as the primary strategy of enhancing their production capacity. It is only after their financial portfolio starts improving that they think of making financial investments as a result of the existence of spare capital.
Economic investments are thus more fundamental and important for any business as compared to financial investments. Businesses rely on financial investments for long-term growth and expansion. They, however, rely on economic investments for basic operations and achieving turnovers in terms of production, sales, and profits. Maintaining the perfect balance between these two types of investments gives the business an opportunity to achieve sustainable growth.