Definition: Investment, Investor and Savings

In economics, the definition of investment is quite strict.

  • Investment means an increase in the capital stock – Gross fixed capital formation. Investment can involve
    • The purchase of a larger factory
    • The purchase of new automated machines to take part in the productive process.
    • The purchase of new computers in a bank.
    • The building of a new hospital.

What about saving money in a bank?

When we buy shares or put money in the bank. This is not seen as an investment – it is seen as a mere transfer of ownership – there is no increase in the productive capacity of the economy. Therefore ‘investing’ money in the bank is properly known as saving.

Of course, if we save money in a bank, it may encourage a firm to make a business loan. The firm may then use its business loan to fund investment in real capital investment, such as expansion of its business.

Financial Investment

  • In common terminology, we refer to ‘investing money’ in a bank. It is better to refer to this as ‘financial investment’ to avoid confusion.


  • An investor is someone who increases the capital stock or engages in ‘financial investment’

Definition of Saving

Saving is income that is not consumed. It could be money put in a bank or saved in cash.

Investment = saving


In a closed economy, the level of saving will equal the level of investment

See explanation: Saving, Capital Stock, and Levels of Investment

Related concepts

4 thoughts on “Definition: Investment, Investor and Savings”

    • Saving refers to left-over income after spending on Consumption goods,which satisfy our wants directly. Investment refers to spending on Capital goods,which are capable of aiding the productive process to augment future production of goods.Since Saving and Investment are done, by and large, by different sections of people in a modern economy, in the ex-ante or planned sense they are more likely to be unequal. However, in ex-post or realised sense they are always equal. They are brought into equality by the equilibrating mechanism of interest rate and/or income.

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