Theory of Firm Investment

Firm Investment

Theory of Firm Investment

The goal of all investors is firm investment, capital growth, and a secure retirement. With the current economic downturn, many are being forced to rethink their investments and determine their long-term goals. In order for an investor to be successful, they must have a clear understanding of their total financial picture. By knowing and understanding one’s own assets, liabilities, net worth, cash flow, and their firm size, you will be better prepared to make sound investment decisions that will lead to overall success. To achieve this goal you will need to understand certain concepts that apply to all forms of investing including:

Firm Investment – A firm investment is simply any investment in a business or industry. It is a way to create long-term wealth. This concept is intimately linked to long-term planning. Without sound firm investment decisions, investors run the risk of creating wealth by purchasing assets that eventually will not produce the expected returns. This concept is very important to anyone who is serious about achieving both domestic and international economic freedom and capital freedom.

Flourishing internal funds – When investors invest in a company they usually purchase shares in the company’s stock. However, they do not usually purchase all of the shares, and if they do purchase all of the shares, they usually do so in large numbers. This can create liquidity in the market when the company’s share price begins to rise because more people want to buy into the business and the company’s stock price begins to rise. Over time, with the proper amount of leverage, investors can realize significant profits from their investment decisions. However, this also means that a large number of investors will be contributing to liquidity when the company’s share price starts to fall because there are now fewer buyers.

External Finance – Financial markets that exist outside of a firm’s borders are called external finance. These include: foreign exchange markets, commodities, bond markets, and mutual funds among many others. They are usually thought to be less risky than firm investment, but just like firm investment, external finance can create fluctuations that can impact a firm’s share price. A perfect example of external finance is the current interest rate environment. Changes in external finance rates can cause a large amount of loss in value for financial firms because they are based on speculations rather than fundamental analysis.

Firm-specific and Other Economic Theory Models – There are many different theoretical frameworks and models that attempt to explain economic behavior. Two of the most popular are behavioral investment theory and institutional economics. The former explains why certain investments yield higher returns than others; it then explains why these investments are more common in certain environments, and why it is easier for some firms to be profitable while others are not. The institutional economic framework tries to provide a general description of the basic model described above and tries to provide answers to the questions why various models of investment behavior are relevant and useful. One example is why some businesses are able to grow at a faster pace than others.

Flawlessly Simple Investment Behavior – The last theory is the most simple and least debatable amongst all of them. This model is known as the Cash Flow Model or simply CIF for short. The CIF is a closed looping system that evaluates investment decisions using nothing but cash flow data. As the name implies, CIF tries to describe investment behavior as if occurring in real time. By keeping all of the variables equal and allowing the economy to respond in a deterministic manner, investors would be able to better understand what causes economic cycles. However, as stated before, this model cannot explain phenomena such as firm profit and loss.