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F1 NOTES 1

F1 NOTES 1

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Published by rameshmba

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Published by: rameshmba on Aug 16, 2008
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05/22/2013

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Module 1INVESTMENTSINVESTMENT IS A SACRIFISE OF CERTAIN PRESENT VALUE FOR FUTUREREWARD
Investment is employment of funds with aim of achieving additional income or growth invalue.It’s a long term commitment , where essential quality is waiting for a reward.It’s acommitment of resources which have been saved or put away from current consumptionin the hope that some benefit will occur in future.
Investment in economic sense
:Investment is a Net addition to the economy’s capital stock, which consists of goodsand services that are used in the production of other goods and services. It’s a formationof productive capital. Net additions to the capital stock of the society ( those goodswhich are used in the production of other goods)
Investment in financial sense
:
 
Investment is a Monetary assets purchased with the idea that the asset will provide anincome and capital appreciation. Its an exchange of financial claims like stock, bonds,real estate etc. Investment is parting with one’s fund to be used by another party for  productive activity. Investment is a conversion of money or cash into a monetary asseton a claim on future money for a return.
SPECULATION
Investment and speculation are somewhat different and yet similar because speculationrequires an investment and investments are at least somewhat speculative. Both areleading to claim on money, aims at maximizing return. Investment is putting money inan asset not necessarily in marketable in short run, where as speculation is selecting aninvestment with higher risk in order to profit from an anticipated price movement.If investment is done with long term objective, speculation is of short term objective.Investment is distinguished from speculation in 3 ways.•Risk •Capital gain•Time.
investment, a well grounded and cerefully planned speculationGAMBLING
Gambling is a High risk venture, where the investor plays for high stakes. Recklessventure to look for very quick profits in the short term. Gambling is based upon tips,rumors , its un planned, unscientific, and without the knowledge of the exact nature of risk.
 
Characteristics of gambling
•It is typical, chronic and repetitive experience•Gambling Absorb all other interests•Displays persistent optimism without winning•Never stops while winning•Risks more than what Can be afforded•Enjoys a strange thrill, a combination of pleasure and pain.
ARBITRAGE
Deliberate switching of funds between markets in order to maximize net gains on shortterm investments. Such dealings may be in currencies, commodities, Arbitrage is notconsidered as pure speculation
Difference between investment and speculation
INVESTMENT •SPECULATIONBasis of acquisition Outright purchase On marginLength of commitment Long termShort termSource of income Earnings of enterpriseChange in market priceQuantity of risk SmallLargeEarningsStability of income Very stableUncertainReason for purchase Scientific analysis Tips, inside information etcPsychological attitude Cautious and conservativeDaring and careless 
 
NEED FOR INVESTMENT
 a) Longer life expectancy and planning for retirement b) Increasing rates of taxationc) Inflationd) Increase in income levele) Availability of different investment channels
OBJECTIVES OF INVESTMENT
1) Increasing the returns2) Reducing the risk 3) Improving the liquidity ( trough marketability)4) Hedge against inflation5) Providing for safety of funds
CHARACTARISTICS OF INVESTMENTS
•RISK - RETURN RELATIONSHIP•MARKETABILITY – LIQUIDITY RELATIONSHIP•TAX BENIFITS
INVESTMENT PROCESS
The following steps are involved in the process of investments. These steps are not onlyapplicable for individuals but also for institutions.
1) Determining investment objectives and policy.
 Investment objectives are determined in terms required rate of return, need for regular income, risk perception and need for liquidity. Risk takers objective is to earnhigher rate of return, where as objective of risk averse investors is the safety of funds.Investment policy calls for determining categories of financial assets, amount of wealth, tax status. Acquiring the knowledge about the different opportunities available isv important. 
2) Security analysis

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