Lecture 5 .

Finance and Investment.

Prepared by:
Dr/ Nourhan Tarek.
 Lecture 5.
Valuation Concepts.
How to build and value your
investment portfolio?
 Learning Goals.
▪ In this chapter, we will learn the following
points:
1. How to build our investment portfolio?
2. How to value our investment portfolio?
3. Different investment we can put in our
portfolio.
4. Investing in stock market.
5. Pros and Cons organizations benefit from
issuing their stock
 Lecture Outline.
1. The meaning of investment Portfolio.
2. Types of Investment Portfolios.
3. Components of Investment Portfolio.
4. Stocks.
5. Types of Stocks.
6. Why Stocks Fluctuates.
7. Market Capitalization.
Lecture Outline.
8. How to choose the best stock
valuation method?
9. Bond.
10. How Bond Works?
11. Characteristics of Bond.
12. Convertible Bonds.
13. Bond Valuation In Practice.
14. Currencies.
Lecture Outline.
15. Cryptocurrency.
16. Commodities.
17. Real Estate
18. How to build an optimal Investment
Portfolio?
19. Financial Advisors.
12.Types of Financial Advisors.
 Test Your ▪ What do you know about Investment
Portfolio?
Knowledge.
 The meaning of
Investment Portfolio.

▪ An investment portfolio “is a set of financial assets

owned by an investor that may include bonds, stocks,
currencies, cash and cash equivalents, and
commodities”.
▪ Further, it refers to a group of investments that an
investor uses in order to earn a profit while making
sure that capital or assets are preserved.
 Types of Investment Portfolios.
▪ Portfolios come in various types, according to their strategies for investment:
1. Growth Portfolio. 2.
2. Income Portfolio. Income
1. Portfolio. 3. Value
3. Value Portfolio. Growth Portfolio.
Portfolio.

Investment
Portfolios:
 Types of Investment Portfolios.
▪ From the name itself, a growth portfolio’s aim is to promote
growth by taking greater risks, including investing in growing
industries. Portfolios focused on growth investments typically
1. Growth Portfolio. offer both higher potential rewards and concurrent higher
potential risk. Growth investing often involves investments in
younger companies that have more potential for growth as
compared to larger, well-established firms.
▪ Generally speaking, an income portfolio is more focused on
securing regular income from investments as opposed to
2. Income Portfolio. focusing on potential capital gains. An example is buying stocks
based on the stock’s dividends rather than on a history of share
price appreciation.
▪ For value portfolios, an investor takes advantage of buying cheap
assets by valuation. They are especially useful during difficult
economic times when many businesses and investments struggle
3. Value Portfolio. to survive and stay afloat. Investors, then, search for companies
with profit potential but that are currently priced below what
analysis deems their fair market value to be. In short, value
investing focuses on finding bargains in the market.
 Test Your Knowledge.

▪ If you want to create your own

investment portfolio, what are the
components you will choose to
frame your portfolio?
 Components of Investment Portfolio.
▪ The assets that are included in a portfolio are
called asset classes. The investor or financial
advisor needs to make sure that there is a good
mix of assets in order that balance is
maintained, which helps foster capital growth
with limited or controlled risk.
▪ One point we should take into consideration that
each investor has his own investment portfolio
depending on his own circumstances. So, it is
important to mention these circumstances to the
financial advisor which helps in creating your
own portfolio. Or even if you create your own
portfolio by yourself.
 Components of Investment Portfolio.
▪ There are several way to invest some of these
ways:
1. Stocks.
2. Bonds.
3. Currencies.
4. Cryptocurrency.
5. Commodities.
6. Real Estate.
 Components of Investment Portfolio.
▪ The important point that most of investors
fall in its trap is converting all their
investments into illiquid assets without
leaving a portion of their money in cash.
We must leave a portion of our investment
portfolio in cash. We may need a cash
money in any time. So, if all our
investments are illiquid investment, we
may be in a problem and this may lead us
to lose some of our investment in return
for immediate cash.
 1. Stocks.
▪ Investing in stocks is an excellent way to grow wealth. For long-term investors, stocks
are a good investment even during periods of market volatility.
▪ Investing in stocks can be an efficient way to build wealth over time. Learning how to
invest wisely and with patience over a lifetime can yield returns that far outpace the most
modest income. Nearly every member of the Forbes 400 wealthiest Americans made
the list in 2019 because they owned a large block of shares in a public or private
corporation.
▪ It all starts with understanding how the stock market works, what your investment
goals are, and if you can handle a lot or just a little bit of risk.
 1. Stocks.
▪ Stocks are equity investments that represent legal ownership in a company. You
become a part-owner of the company when you purchase shares.
▪ Corporations issue stock to raise money, and it comes in two variations: common or
preferred. Common stock entitles the stockholder to a proportionate share of a
company's profits or losses, while preferred stock comes with a predetermined
dividend payment.
 ▪ There are two types of
Types of stocks: Stocks are
either:

Stocks. 1. Common Stocks.

2. Preferred Stocks.
 Types of Stocks.
▪ Common stock represents shares of ownership in a corporation
and the type of stock in which most people invest.
▪ When people talk about stocks, they are usually referring to
common stock. In fact, the great majority of stock is issued is in
1. Common this form. Common shares represent a claim on profits
(dividends) and confer voting rights. Investors most often get one
Stocks. vote per share-owned to elect board members who oversee the
major decisions made by management.
▪ Stockholders thus have the ability to exercise control over
corporate policy and management issues compared to preferred
shareholders.
▪ Preferred stocks are very different from the shares of the common
stock most investors own. Holders of preferred stock are always
the first to receive dividends, and they'll be the first to get paid
2. Preferred in cases of bankruptcy. The stock price, so doesn't fluctuate the
way common stock does however, some gains can be missed on
Stocks. companies with hypergrowth.
• Preferred shareholders also get no voting rights in company
elections.
• These stocks are a hybrid of common stock and bonds.
 ▪ Do you know what are the
Test Your Knowledge. reasons behind
fluctuation of stocks?
the
 Why Stocks Fluctuates?
▪ The stock market works like an auction. Buyers and sellers can be individuals,
corporations, or governments. The price of a stock will go down when there are more
sellers than buyers. The price will go up when there are more buyers than sellers.
▪ A company's performance doesn't directly influence its stock price. Investors'
reactions to the performance decide how a stock price fluctuates. More people will
want to own the stock if a company is performing well, consequently driving the price up.
The opposite is true when a company under-performs.
 An Example for the stock
Fluctuations.
▪ One of the examples of stock price
overreaction is the case of Ezz steel
shares after the bad news.
▪ Shares in Ezz Steel have been under
pressure as its chairman comes under
investigation.
▪ Before April 2011, the target price of 14.8
Egyptian pounds a share. In April 2011,
shares in Ezz Steel yesterday fell 2
percent to 10.46 pounds.
 Market Capitalization (Cap).

▪ A stock's market capitalization (cap) is the sum of the total shares outstanding
multiplied by the share price. For example, a company's market cap would be $50
million if it has 1 million outstanding shares priced at $50 each.
▪ Market cap has more meaning than the share price because it allows you to evaluate a
company in the context of similar-sized companies in its industry.
▪ A small-cap company with a capitalization of $500 million shouldn't be compared to a
large-cap company worth $10 billion.
 Market Capitalization (Cap).
▪ Companies are generally grouped by market cap:
1. Small-cap: $300 million to $2 billion.
2. Mid-cap: Between $2 billion and $10 billion.
3. Large-cap: $10 billion or more.
 How to choose the best stock
Valuation Method?
▪ When deciding which valuation method to use to value a stock for the first time, it's easy
to become overwhelmed by the number of valuation techniques available to investors.
There are valuation methods that are fairly straightforward, while others are more
involved and complicated.
▪ Unfortunately, there's no one method that's best suited for every situation. Each
stock is different, and each industry or sector has unique characteristics that may
require multiple valuation methods. We'll explore the most common valuation methods
and when to use them.
▪ Valuation methods typically fall into two main categories: absolute valuation and
relative valuation.
 Categories of Stock Valuation.
▪ Absolute valuation models attempt to find the intrinsic or "true" value of an
investment based only on fundamentals. Looking at fundamentals simply
means you would only focus on such things as dividends, cash flow, and the
1. Absolute growth rate for a single company—and not worry about any other
Valuation. companies.

▪ Relative valuation models, in contrast, operate by comparing the company

in question to other similar companies. These methods involve
2. Relative calculating multiples and ratios, such as the price-to-earnings (P/E)
ratio, and comparing them to the multiples of similar companies.
Valuation.
 Stock Valuation.

▪ In order to value a stock, they use the Present Value (PV) method in order
to compare between the initial investment (cash outflow) (the money we
invest in buying the stocks) and the cash inflow (the profit earned from
investing in the stock).
 Important Points to consider when
choosing the company to invest.
1) The recent price of the stock.
2) The performance of the stock.
3) The revenues.
4) Liabilities.
5) Cash flow.
6) EPS.
7) Technical Indicator “BUY or sell”.
8) Market Cap.
9) Volume.
 2. Bonds.
▪ A bond is a fixed income instrument that represents a loan made by an investor to a
borrower (typically corporate or governmental). A bond could be thought of between
the lender and borrower that includes the details of the loan and its payments. Bonds
are used by companies, and governments to finance projects and operations.
▪ Owners of bonds are debtholders, or creditors, of the issuer.
▪ Bond details include the end date when the principal of the loan is due to be paid to the
bond owner and usually includes the terms for variable or fixed interest payments made
by the borrower.
 How Bonds Work?
▪ Many corporate and government bonds are publicly traded; others are traded only over-
the-counter (OTC) or privately between the borrower and lender.
▪ When companies or other entities need to raise money to finance new projects, maintain
ongoing operations, or refinance existing debts, they may issue bonds directly to
investors. The borrower (issuer) issues a bond that includes the terms of the loan, interest
payments that will be made, and the time at which the loaned funds (bond principal) must
be paid back (maturity date). The interest payment (the coupon) is part of the return that
bondholders earn for loaning their funds to the issuer. The interest rate that determines the
payment is called the coupon rate.
 Characteristics of Bonds.
▪ Most bonds share some common basic characteristics including:
1. Face value is the money amount the bond will be worth at maturity; it is also the
reference amount the bond issuer uses when calculating interest payments.
2. The coupon rate is the rate of interest the bond issuer will pay on the face value of the
bond, expressed as a percentage.
3. Coupon dates are the dates on which the bond issuer will make interest payments.
Payments can be made in any interval, but the standard is semiannual payments.
4. The maturity date is the date on which the bond will mature and the bond issuer will
pay the bondholder the face value of the bond.
 The Coupon Rate.

▪ Two features of a bond—credit quality and time to maturity—are the principal

determinants of a bond's coupon rate. If the issuer has a poor credit rating, the risk of
default is greater, and these bonds pay more interest.
▪ Bonds that have a very long maturity date also usually pay a higher interest rate. This
higher compensation is because the bondholder is more exposed to interest rate and
inflation risks for an extended period.
 Convertible Bonds.

▪ Convertible bonds are debt instruments with an embedded option that allows
bondholders to convert their debt into stock (equity) at some point, depending on
certain conditions like the share price. For example, imagine a company that needs to
borrow $1 million to fund a new project. They could borrow by issuing bonds with a 12%
coupon that matures in 10 years. However, if they knew that there were some investors
willing to buy bonds with an 8% coupon that allowed them to convert the bond into stock
if the stock’s price rose above a certain value, they might prefer to issue those.
 Bond Valuation In Practice.
▪ Since bonds are an essential part of the capital markets, investors and analysts seek to
understand how the different features of a bond interact in order to determine its intrinsic
value. Like a stock, the value of a bond determines whether it is a suitable investment for
a portfolio and hence, is an integral step in bond investing.
▪ Bond valuation, in effect, is calculating the present value of a bond’s expected future
coupon payments.
 3. Currencies.
How to Invest In foreign Currencies.

▪ Many people think that investing in foreign currency sounds like an exotic, yet risky
venture. The foreign exchange, or forex market are largely dominated by banks and
institutional investors, but online brokerages and readily-available margin trading
accounts have made forex trading accessible to everyone. Individual investors can benefit
from understanding the benefits, risks, and most effective ways to invest in foreign
currency.
 4. Cryptocurrency.
▪ A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium
of exchange wherein individual coin ownership records are stored in a digital ledger
or computerized database using strong cryptography to secure transaction record
entries, to control the creation of additional digital coin records, and to verify the
transfer of coin ownership.
▪ It typically does not exist in physical form (like paper money) and is typically not issued
by a central authority.
▪ Bitcoin, first released as open-source software in 2009, is the first decentralized
cryptocurrency. The founder of Bitcoin was Satoshi Nakamoto.
▪ Now 1 Bitcoin = 151,064.38 L.E
Bitcoin
 5. Commodities.

▪ Commodities are an important aspect of most of our daily life. A commodity is a basic
good used in commerce that is interchangeable with other goods of the same type.
Traditional examples of commodities include grains, gold, beef, oil, and natural gas.
▪ For investors, commodities can be an important way to diversify their portfolio beyond
traditional securities. Because the prices of commodities tend to move in opposition to
stocks, some investors also rely on commodities during periods of market volatility.
 Types of Commodities.
1) Metals
Metals commodities include gold, silver, platinum, and copper. During periods of market
volatility or bear markets, some investors may decide to invest in precious metals–
particularly gold–because of its status as a reliable, dependable metal with real, conveyable
value. Investors may also decide to invest in precious metals as a hedge against periods of
high inflation or currency devaluation.
 Types of Commodities.

2) Energy
Energy commodities include crude oil, heating oil, natural gas, and gasoline. Global
economic developments and reduced oil outputs from established oil wells around the
world have historically led to rising oil prices, as demand for energy-related products has
gone up at the same time that oil supplies have dwindled.
 Types of Commodities.

3) Agriculture
Agricultural commodities include corn, soybeans, wheat, rice, cocoa, coffee, cotton, and
sugar. In the agricultural sector, grains can be very volatile during the summer months or
during any period of weather-related transitions.
 6. Real Estate.

▪ When you think about real estate investing, the first thing that probably comes to mind is
your home. Of course, real estate investors have lots of other options when it comes to
choosing investments, and they're not all physical properties.
▪ Some Examples: Rental Properties and Flipping Houses.
 How to build an Optimal Investment
Portfolio?

▪ Investing is not a game, nor is it for the faint of heart. Markets go up and,
much as the laws of physics govern the arc of a golf ball, historical trends
prove that markets will also come down. There is no such thing as achieving
perfect performance through market timing or by only picking ‘winners.”
However, you can certainly build a solid portfolio that allows you to succeed
and (generally) avoid the stress and worry that can go along with market
volatility. Here are considerations to keep in mind.
 How to build an Optimal Investment
Portfolio?

1.Commit to your purpose. Why do you want to invest? Your purpose is

very personal. It could be to help your kids/ grandkids with education costs. It
might be to travel and enjoy a comfortable and worry-free retirement. Perhaps
the reason is to support a faith-based effort or some other philanthropic
interest. It could be to launch a new career, or your own business. Or maybe
you want to buy a vacation home that will allow you to surround yourself with
family and friends and enjoy the ‘good life’ that everyone around is working
so hard to achieve. Most likely, the “why” is some or all of the above. If you
know what you want to accomplish, you have a good idea of not just where
you are heading, but what it would take to get there.
 How to build an Optimal Investment
Portfolio?

2.Understand your starting place and be realistic about your appetite for
risk. Most of us know how much we have saved to date. Some of us have an
inkling of what we spend today and how much we will need for the next stage
of our lives. Very few of us have a realistic understanding of how much risk
we’re willing to take on to achieve our financial goals.
 How to build an Optimal Investment
Portfolio?

3.Invest with an “end” in mind. This is directly related to consideration #1.

You know your purpose for investing, but do you know what it will cost to
achieve that purpose? You have to have a fairly solid understanding of the
amount of money your purpose will require.
 How to build an Optimal Investment
Portfolio?
4.Invest with a plan. The most successful portfolios are not thrown together
haphazardly. They are assembled based on a solid understanding of the
fundamentals of the individual securities that comprise the portfolio. A solid
portfolio is diversified not just across investment vehicles and exchanges, but
also with an eye toward sectors and/or geographic regions that are expected to
perform well.
 How to build an Optimal Investment
Portfolio?

5.Think ‘quality’ over ‘quantity’. Structuring a portfolio that delivers solid,

long-term results means that the underlying fundamentals of your holdings are
critically important.
 How to build an Optimal Investment
Portfolio?

5.Think ‘quality’ over ‘quantity’. Structuring a portfolio that delivers solid,

long-term results means that the underlying fundamentals of your holdings are
critically important.
 How to build an Optimal Investment
Portfolio?

6.Give it time. This is critical because it requires you to link all of the ideas noted
above to build a solid portfolio. Building your portfolio by identifying your purpose,
what you need to achieve that purpose and your risk tolerance, and basing it all on
solid fundamentals, is a proven approach that doesn’t lend well to in-and-out,
market-timing types of investing approaches. While there may be some investment
choices that you hold for shorter periods of time than others, overall, maintaining
the long view should deliver consistently positive returns.
 How to build an Optimal Investment
Portfolio?

7. Stay focused on what you can control. Which is really just your
individual approach and mindset. You can’t control the markets, the
companies that you’re invested in, the political climate, the weather – really
anything – except your commitment to your strategy. Determine your strategy
on your own or with a financial advisor, and stick with it.
 Financial Advisors.
▪ In case when you are preparing your investment portfolio and you find that you need a
help. You can go and ask financial advisor who can give you a helping hand.
▪ A financial advisor is your planning partner.
▪ Together, you and your advisor will cover many topics, including the amount of money
you should save, the types of accounts you need, the kinds of insurance you should
have (including long-term care, term life, and disability) and estate and tax
planning.
▪ The financial advisor is also an educator. Part of the advisor's task is to help you
understand what is involved in meeting your future goals. The education process may
include detailed help with financial topics.
 Financial Advisors.

▪ Step one in the financial advisory process is understanding your financial health. You
can’t properly plan for the future without knowing where you stand today. Typically, you
will be asked to complete a detailed written questionnaire. Your answers help the
advisor understand your situation and make certain you don't overlook any important
information.
▪ The advisor works with you to get a complete picture of your assets, liabilities,
income, and expenses. On the questionnaire, you will also indicate future pensions
and income sources, project retirement needs and describe any long-term financial
obligations. In short, you’ll list all current and expected investments, pensions, gifts and
sources of income.
 Financial Advisors.

▪ The financial advisor synthesizes all of this initial information into a comprehensive
financial plan that will serve as a roadmap for your financial future. It begins with a
summary of the key findings from your initial questionnaire and summarizes your
current financial situation, including net worth, assets, liabilities, and liquid or
working capital. The financial plan also recaps the goals you and the advisor discussed.
▪ After you review the plan with the advisor and adjust it as necessary, you’re ready for
action.
 Financial Advisors.

▪ The advisor will set up an asset allocation that fits both your risk tolerance and risk
capacity. The asset allocation is simply a rubric to determine what percentage of your
total financial portfolio will be distributed across various asset classes. A more risk-averse
individual will have a greater concentration of government bonds, certificates of deposit
and money market holdings, while an individual who is more comfortable with risk will
take on more stocks and corporate bonds and perhaps investment real estate. Your asset
allocation will be adjusted for your age and for how long you have before retirement.
Each financial advisory firm will act in accordance with the law and with its company
investment policy when buying and selling financial assets.
 Types of Financial Advisors.

▪ There are three types of financial advisors: 2. Robo-

Advisors
1. Human Advisor.
2. Robo-Advisor.
3. Digital Advisor. Financial
Advisors:
1.
3. Digital
Human
Advisors
Advisor.
 Robo and Digital Advisors.
▪ A digital financial advisor, or robo-advisor, is a company that uses
computer algorithms to manage your money based on your answers to
questions about your goals and risk tolerance. Robo-advisors don’t
require you to have much money to get started and they cost less than
human financial advisors. Examples include Betterment and Wealth
front. These services can save you time and take the emotion out of
investing.
 Some examples for Financial Advisors in
Egypt.

1. Hassan Financial Advisors.

2. ABSOLUTE FINANCIAL ADVISORS.
3. EAGLE ADVISORS.
4. Strategy Financial Advisors SFA.
5. Financial and Management Advisors.
6. Nearshore Middle East Public Accountants & Advisors.
7. Smart Group.
8. Z financial advisors.
9. Oriental Advisors.
10. First Capital Financial Advisory.
11. www.expat.com
 Some Examples of Robo-
Advisors Globally
• Top player firms that operates internationally are namely:
1. Nutmeg.
2. Scalable Capital.
3. True Potential Investor.
4. Wealth Horizon, Wealth Wizards.
5. Wealthify, Wealth front.
6. Betterment, Wise Banyan.
7. Charles Schwab, Vanguard.
8. Personal Capital.
9. Fidelity Go.
10. Future Advisor.
 Some tips that we must take into
consideration when creating your own
investment portfolio.

▪ Tip 1: “Do not put all your eggs in one basket”. Never rely on a single investment.
▪ In Investment world, this means that it is wrong to invest all the money in one
investment. So, in order to build a strong portfolio for a successful investment, we
should diversify our portfolio.
 Some tips that we must take into
consideration when creating your own
investment portfolio.

▪ Tip 2: . Determine the objective of the portfolio

▪ Investors should answer the question of what the portfolio is for to get direction on what
investments are to be taken.
 Some tips that we must take into
consideration when creating your own
investment portfolio.

▪ Tip 3: Minimize investment turnover

▪ Some investors like to be continually buying and then selling stocks within a very short
period of time. They need to remember that this increases transaction costs. Also, some
investments simply take time before they finally pay off.
 Some tips that we must take into
consideration when creating your own
investment portfolio.

▪ Tip 4: Don’t spend too much on an asset

▪ The higher the price for acquiring an asset, the higher the break-even point to meet. So,
the lower the price of the asset, the higher the possible profits.
 Important site to use in analysis.

1) Investing.com.
2) Investment tracker.
3) Seeking Alpha “for American market”.