To invest is essentially to put money into an investment with the hope of receiving a profit/return at some point in the future; capital investment can be used for many different purposes depending on your circumstances. For example, there are many common uses of capital such as buying property with the intention of renting it out or in some cases, using capital funds to create a portfolio of assets that will earn you regular cash flow, or even to make a one-time large investment. Whatever the reason for the capital you are investing in, capital investment can also be useful to help you obtain the funds you need when you need them; some examples of when capital is needed include buying machinery or equipment to run your business, getting rid of something that’s not doing well, or paying off some debts.
Many businesses make their profits by using their retained earnings in capital investments such as buying fixed assets like buildings and land, equipment, and land, and using the money they make to do the same thing but using the money instead of paying employees. Examples of fixed assets are plant and machinery, inventory, accounts receivable, and financial investments. Fixed assets are less risky than non-fixed assets because you don’t have to worry about them decreasing in value as you don’t have to worry about people selling their items; however, fixed assets require considerable capital upfront. Some types of fixed capital investments are more risky than others, and include things like raw land, residential and commercial real estate, U.S. treasury bills, and corporate bonds. Most other types of capital investments are much less risky than fixed assets.
An important consideration before deciding where to invest your money is whether or not your chosen asset will generate a return. If you invest your money into fixed assets like plant and machinery, and if that equipment and plant doesn’t generate a profit, then you are losing money. On the other hand, if your fixed assets generate a profit and you use part of your profit to buy additional fixed assets, then you have made a capital investment that yields a higher rate of return. You should make sure that your chosen asset will produce a higher return than the amount of money you would have to put up front.