Financial and Real Investment

Financial investment simply means transfer of right from one party to another. While one party has made investment, the other has made disinvestment. It does not add to the stock of real capital of an economy. The purchase of stocks and shares, debentures, government bonds and equities is a financial investment. It is referred to as financial investment because it does not involve anything more than a mere transfer of the titles of ownership from one individual to the other and the stock of economy’s real capital is left unchanged.

Real investment, on the other hand, means creation of additional productive capacity. For example, the establishment of a factory or a workshop is a real investment. This creates additional productive capacity and hence it is an important activity for the economy as a whole. It is in this sense that Keynes has used the term investment in the national income analysis. In the Keynesian sense, when an individual purchases shares, bonds, or securities of a new company, the financial investment will represent real investment.

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