What is Net Investment? Everything You Need to Know About It.

Mombo Smart Investment

What is Net Investment?

Want to understand and gain knowledge about net investments? We at Mombo SACCO are here to explain it easily.

It is the measure of how much a company has invested in capital goods such as property, industries, equipment etc. Net investment will give you knowledge about the expenditure of the company on capital goods used for active work.

Try subtracting depreciation or the capital expenditure from the amount. You’ll get a more precise idea of the investment’s real value. The sustenance, maintenance, repair or installations of the goods are also included in the cost of capital goods.

At Mombo SACCO, we’re going to briefly explain everything you need to know about net investment.


Difference between Net Investment and Gross Investment

Confused about the difference between gross and net investment? Can’t figure out the difference? Well, let us give you a little more understandable difference.

The total investment which is spent on new capital goods is known as Gross investment whereas net investment is itself gross investment but it is altered for capital depreciation.

Depreciation is a method of moving the cost of a substantial good over its working lifespan. In other aspects, it is the decrease in the value of goods.

Gross and Net investment are concurrent

We have already given a difference but they are also concurrent to one another. Notice closely! If the gross investment is constantly higher than depreciation, net investment is positive. Verily, if the gross investment is constantly lower than depreciation, net investment is negative. The positive side indicates that productive capacity is rising. On the other hand, the negative side indicates the downfall of productive capacity. This is a possible problem and is true for all organizations, small or large.

Net investment in economic growth of a country

Let us provide the formula first for you to understand easily.

The formula for net investment is (capital expenditure depreciation = Net Investment).

When the net investment is greater than 0, it indicates an increase in capital goods in the country. Increasing the production capacity and shifting the PPC (Production Possibility Curve) upwards. As a result of an increase in GDP.

But to inform you, this is also the opposite if the net investment is lower than 0. Declining the PPC and GDP.

But, then again when the net investment is equal to 0, what do you think happens? The amount of capital goods remains the same. The production capacity and GDP does not change and the PPC does not shift.

Net Investment income tax

Tax is something you can never escape from. So here, we are going to talk about net investment income tax. Let us explain with an example, you have an income from investments. You are or may be subject to net investment income tax. Simple!

Generally, it includes, but not restricted to: interest, non-qualified profits, dividends, capital gains etc. No need to be worried because it does not include wages, alimony, unemployment compensation, social security benefits etc.

Net Investment Calculation

You must be very keen by now to know how to calculate it. Let’s start then!

Earlier, we have given you the formula and now we are going to apply it. A simple example will make it easy for you. Suppose you own a company which spends KES 20 million on a brand-new equipment. It has an anticipated life of 30 years and a residual value of KES 2,000,000. Let’s take the straight-line method of depreciation. Then the annual depreciation would be KES 600,000 (i.e. {KES 20,000,000- KES 2,000,000}/30). Quite simple, right?

Now, applying the net investment formula, we are going to get KES 19,400,000(KES 200,000,000- KES 600,000) as the amount of net investment at the end of the first year of that equipment.

There is no fixed amount for proper investment in any company as some need more than the others because of capital decline every time. The net investment totally depends on the amount necessary for a company in a sector to operate. All sectors are quite different from one another and the net investments cannot be compared. But it is applicable when the companies are working in the same sector.

We at Mombo SACCO have tried our best to easily explain to you about all you need to know about net investments and we can assure you, this knowledge will help you in the long term.

7 Rookie Investing Mistakes and How to avoid them

7 rookie investing mistakes

When it comes to businesses, there are no specific set of rules that will guarantee you success.

There are many different strategies or approaches that might work for you but might totally backfire when it comes to someone else.

However, when it comes to investing in the stock business, there are a few guidelines that you can follow. There are some clear Dos and Don’ts, which you might fail to see if you’re new in the stock world.

Here are seven rookie investing mistakes that rookie investors often make, and how you can stay a million miles far from them:

·      Day Trading

Day traders are the people who buy and sell multiple shares on the same day. While this might seem like a worthy risk to you if you know a very successful day trader, think twice before you decide to become one yourself.

First of all, day traders need really strong and speedy technology that help them understand the best deals, which you probably can’t afford if you are still new.

Secondly, unless you have a ton of experience in the field, you won’t be able to make the right calls even if you do manage to buy the equipment needed.

·      Overusing margin

When you use borrowed money to buy securities, it is called trading on margin. Many people use it to make extra money when they’re in short of cash.

However, a loss occurring on a stock you bought on margin is much bigger than one occurring in a normal scenario.

Not only do you have to endure the loss, but also have to pay back the loan you took from your own pocket, which is essentially an additional loss. Hence, it is recommended that you do not misuse the power of using margin.

·      Undermining yourself

Many people who are new in the stock market, get intimidated by the huge institutional investors and experienced brokers.

However, what you forget is they do not perform as well as they seem. If you invest some time in learning and researching the market, you might actually do much better than them!

A good amount of common sense and intelligence is what distinguishes a good investor from a bad one. If you think you have a good share of those, don’t underestimate yourself just because you have a different 8 to 5 job!

·      Believing everyone

When it comes to the stock business, most people think they are experts at it. That is a big rookie investing mistake. They will proudly discuss stocks in public and brag about shares they think are “about to do great”, which many people are bound to hear.

When you find yourself overhearing such conversations, or see a talk show in which some investment professional does a similar thing, don’t believe them right away.

Do your research, make sure you trust the company and understand why the share might do well. Most of the stocks that you hear about in such scenarios do not do that good in the long run.

·      Purchasing a stock because it’s price decreased

When a stock that used to have a high price, decreases all of a sudden, you might be tempted to buy it right away. Another rookie investing mistake.

But, beware! There might be very strong reasons to WHY the stock price fell, reasons which might indicate that the price will not go up anytime soon. In the worst case scenario, you might eventually end up with a totally failed investment.

·      Depending only on technicalities

Nowadays, people depend A LOT on technology to know which stock they should invest in and which they should stay away from. Hours of financial analysis and identifying patterns is usually what dictates a decision nowadays.

Even though these tools are really handy, don’t forget to do a qualitative analysis as well. Unless you take into account the current status of the company at the present time, or how it might change in the recent future, you might end up making a bad decision.

·      Not accepting your rookie investing mistakes

No matter which profession you are in, you should always have the courage to learn from it and correct yourself.

It is the same when it comes to stock business. If you make a bad investment, it is best to realize your rookie investing mistakes and move your precious money somewhere else.