Generally, investment means buying shares, stocks, bonds, securities existing in stock market. According to J.M.Keynes, investment refers to real investment which adds to capital stock. It leads to increase in level of income and production by increasing the production and purchase of capital goods.

Investment is the production or acquisition of real capital assets during any period of time. Capital and investment are related to each other through net investment. As the income of the community increases, consumption also increases. But, it does not increase in the same proportion. There will be a gap between income and consumption. This gap must be filled by increasing employment and production. For this, investment is needed.

The decision to invest in a new capital asset depends on whether the expected rate of return on the new investment is equal to or greater or less than the rate of interest to be paid on the funds needed to purchase this asset. It is only when the expected rate of return is higher than the interest rate that investment will be made in acquiring new capital assets.

In reality, there are three factors that are taken into consideration while making any investment decision. 

They are as follows:

1. The cost of capital asset. 

2. The expected rate of returns during its lifetime. 

3. Market rate of interest. 

The types of investment are as follows: 

1. Private Investment and Public Investment: Private investment is that investment which is undertaken by private individuals, enterprises, industrialists etc. Public investments are those investments which are made by Government authorities. The intention of private investment is profit and public investment is social benefits. 

2. Induced Investment and Autonomous Investment: Induced investment is made by the people as a result of change in their income level. It is profit or income motivated. 

So, it is income elastic. The autonomous investment is public investment which is independent of the level of income. It is income inelastic. It is influenced by innovations, growth of population, social and legal institutions etc.

3. Ex-ante Investment and Ex-post Investment: Ex-ante investment is that investment which is actually planned according to objectives and investment is made. This investment is planned in advance. The ex-post investment is that investment which cannot be planned in advance. It is that investment which arises instantly during the course of production process.

4. Gross Investment and Net Investment: Gross investment is the total value of the asset made or created. It includes buildings, dams, roads, railways, industries, etc. The net investment is obtained by deducting depreciation from Gross Investment.

Determinants of Investments: The investment depends on two factors viz., Marginal efficiency of Capital and rate of interest. a) Marginal Efficiency of Capital (MEC): The MEC is the highest rate of returns expected from an additional unit of a capital asset over its cost. According to Kurihara “ MEC is the ratio between the prospective yield of additional capital goods and their supply price”. The prospective yield is the aggregate net returns from an asset during its lifetime, while the supply price is the cost of producing the asset.

If the supply price of a capital asset is Rs.20;000 and its annual yield is Rs.2,000, the Marginal Efficiency of this asset is 2000/20000 x 100/1 = 10%. The MEC is the percentage of profit expected from a given investment on a capital asset.

(b) Rate of Interest: The investment is also determined by the rate of interest. If the rate of interest is higher, the investment will be low as MEC becomes less. If the MEC is higher than the rate of interest, there will be a tendency to borrow funds in order to invest in new capital assets. If the MEC is lower than the rate of interest, no firm will borrow to invest in capital assets. Thus the equilibrium condition for a firm to hold the optimum capital stock is where the MEC is equal to the interest rate.