Investment can refer to either economic investment or financial investment. Economic investment is the purchase of new productive ASSETS�buildings, equipment, computers, etc.�that are used to produce goods and SERVICES. Financial investment is the use of CAPITAL (MONEY) to generate hoped-for PROFITS. Financial investment includes the purchase of shares of stock in a company, other securities, or assets with the goal of selling them at a higher price. Economic investment is part of aggregate expenditures in an economy. In NATIONAL INCOME ACCOUNTING, aggregate expenditures are the sum of CONSUMPTION, investment, government, and net trade spending for final goods and services in an economy in a year. In the U.S. economy, investment spending represents approximately 17 percent of total spending annually, but it is the most volatile component of aggregate expenditures. Business managers determine economic investment. The decision whether or not to invest in new productive assets is primarily influenced by expected profits. Managers make their best projections of future sales of output from the new investments and compare expected sales with estimated COSTS. Like the oracles in ancient societies, managers seek out �divine wisdom� when making investment decisions. In addition to being influenced by expected profits, economic investment decisions are also affected by changes in technology, capacity utilization, and the cost of borrowing. Often managers will replace existing equipment, even though the existing equipment is fully operational. If new technology can result in a better-quality product, managers are forced to purchase the new equipment in order to remain competitive. Capacity utilization is the percentage of existing productive capacity that is currently being used. The Department of Commerce maintains an overall capacity utilization rate for U.S. manufacturers; generally 85-percent capacity utilization is considered close to full capacity. If, when operating at full capacity, managers think DEMAND for their PRODUCTs will continue to grow, they will decide to invest in new productive capacity. New investment is also influenced by INTEREST RATES, or the cost of borrowing. As interest rates decline, the cost of new productive assets decreases, stimulating additional investment spending. As stated earlier, financial investment is the use of money to generate hoped-for profits. Financial investment can lead to economic investment, but not necessarily. Often people will say, �I invested in a new car.� Almost always this is an incorrect use of the term investment. If someone bought a car for use in his or her business, say for delivery of goods to customers, then yes, it would be an economic investment. But most often when people purchase a car, it is what economists call durable consumer expenditure, the purchase of a product for personal benefits with an expected use life of more than one year. An example of a financial investment would be a person who bought an antique car with the expectation of selling it for a profit. Financial investment decisions involve a comparison of RISKs versus returns. Returns are expected profits, often expressed by a percentage return on investment (ROI). Risks can include DEFAULT, exchange, INFLATION, interestrate, liquidity, and political risks. Default risk is the likelihood that the borrower will not repay the loan. Exchange risk is the potential for losses due to an unfavorable change in EXCHANGE RATES. Inflation risk is the potential loss if the value of the asset or money loses value due to increased inflation. Interest-rate risk is the potential decreased value of a fixed-rate debt like a bond, due to rising interest rates. Liquidity risk is the potential problem of not being able to find a buyer for the investment. Owners of small businesses and obscure investments often face liquidity risks. Political risk is the potential for nationalization (takeover) of investments by a government or the potential for political instability causing a decrease in value of an investment. For example, the major unresolved issue in the long-standing U.S. EMBARGO of Cuba has been the 1960s nationalization of businesses by the Castro government. Financial investment can also take place through either direct or portfolio investments. DIRECT INVESTMENT is the purchase of a business or assets by an investor; portfolio investment is the purchase of securities representing an ownership (EQUITY) interest in an enterprise. Direct investment generally involves a long-term commitment of resources, while portfolio investment can be sold quickly in STOCK MARKETs. Stock markets are exchanges, which facilitate the transfer of financial investments. Investment can also refer to INVESTMENT CLUBS, INVESTMENT BANKING, and investment grade. Investment clubs are groups that pool their funds and analyze investment choices before allocating the club�s money. Investment bankers are FINANCIAL INTERMEDIARIES assist in merger acquisitions, offer securities brokerage services, and who help CORPORATIONs and governments raise capital through UNDERWRITING and distributing new securities. Investment grade refers to BONDS issued by corporations that are rated above a specified level by bond-rating agencies.