Difference between Economic Investment and Financial Investment
Difference between economic investment and financial investment:
When entrepreneurs, corporate executives, and common people use the word investment, they almost always mean financial investment. In fact, the common meaning of the word investment is a financial investment. However, there is another type of investment that we call economic investment. So, it seems much more important to recall the difference between economic investment and financial investment.
Economic investment refers to investing in new additions or new replacements to the capital stock of the business entity. The word capital stock refers to everything that is used in the production of other goods or inventory. Thus, investment in new factories, houses, retail stores, construction equipment, and wireless networks are good examples of economic investment.
The economic investment also includes an addition to a workforce that could help or improve the profitability of the business entity.
The ultimate purpose of economic investment is to improve the productive capacity of the business entity. Addition to capital stock or improvements in existing capital stock increases the efficiency of production. When your machinery produces more inventory, you can optimize your sales and profits.
In contrast, financial investment is a far broader concept. It includes economic investment and much more. Financial investment refers to either buying an asset or building an asset with the objective of financial gain.
The financial investments include both investments either on new assets or old assets. It does not distinguish between new assets and old assets.
Financial investment refers to investment in assets you expect to yield some sort of dividend over a period. It involves investment either in financial assets (such as stocks, bonds, and futures contracts) or real assets (such as land, factories, construction equipment, and retail stores).
Generally, the more developed economies mostly focus on a financial investment as compared to economic investment.
For more clarity, let’s understand the difference between economic investment and financial investment through this image.
A business with a long-term approach makes both types of investments. There is quite an interdependence between the two, however, there are also many differences we have stated above. Economic investments and financial investments also work in the same way for individuals as it does for companies.
A business entity makes a cost-benefit analysis to learn about the potential return on investment in both cases. Both investments fulfill the needs of the business entities on different scales.