Why Companies Invest

Companies invest available cash to generate maximum productivity of cash that would otherwise be idle. They invest to advance corporate strategies and to have a reserve against fluctuations or downturns in their business.

Cash that is idle is not only earning a zero or negligible return; it may actually be losing purchasing power when compared with market prices. As a result, companies seek to use cash in measured and sensible ways while earning a strong return and retaining enough liquidity to meet emerging needs and therefore may pursue investments. An investment is a marketable asset owned by a company that may include bonds, notes, and stocks. Businesses have two main goals for investing that can overlap: 1) meet the company's cash needs, timing, and risk profile, and 2) purchase ownership interests that are in keeping with the company's objectives for the business.

For example, investments in debt securities can generate interest revenue. A debt security is a bond or notes held as investment. Such investments can be direct or indirect, but in these cases the passage of time may generate interest revenue in relation to the risk of the investment. High-risk investments can potentially generate higher interest rates and higher revenue, while lower-risk investments might generate lower interest rates and lower revenue. In general, the risk profile of the company, or its willingness to take certain risks, will dictate the appropriate level of risk to take. Further, the appropriate level of risk may not necessarily be achieved uniformly but may instead be achieved with a range of investments that have differing risk levels and interest rate returns.

Trade-off between Investment Risk and Investment Return

As investment risk decreases, the investment return usually decreases as well. The inverse can also be true. If the investor is willing to take a higher risk that the investment could be lost, the return may be greater. Periodic returns should reflect this.
In many cases, an investor in bonds or notes would expect a return of the principal investment at a future maturity date in addition to receiving periodic interest payments. A company investing in stocks might expect to benefit from the increase in market value of stocks and to potentially receive dividend payments as they are periodically paid out by the investee, the target or company whose ownership is bought by another. Companies may also use investment income for strategic reasons, such as expanding facilities and replacing old equipment, and in some cases may use ownership to influence or create alliances with other organizations.