Introduction to Investments

Prof. S G Badrinath
Real Versus Financial Assets

Welcome to Introduction to Investments. My name is Badrinath. I have been teaching Investments

in various forums and various levels for the last couple of decades. As a investments professional, I
wear different hats. Sometimes, I am an academic writing research papers that very few people
read. Sometimes I write articles for the popular press, sometimes I'm a consultant, sometimes I'm a
teacher, sometimes I'm an investor. Occasionally, but not that much anymore, I have been a trader
as well. But, through this journey of mine in the investments world, I want to share with you some of
the things that I have learnt. Some of the lessons that I have learnt. The things that I need to educate
other people about. So, most of you've had some exposure to investments, I would guess. Some of
you might have dabbled in real-estates. Some of you might have played commodities, gold. Some of
you may even have entered the stock market.

In all of these decisions that you made, you probably thought about things like, "How long should I
hold this investment, having made it? How much is it worth? Did I pay a right price for it? What kind
of risk am I going to take?" Taking real-estate as an example since it has been of, in the last decade
or so, a scenario where lots of people have made money, and lots of people have lost money; you
might say, "Why should I even think about the stock market? Let me just buy property like real-
estate, and houses, and own them, and watch them appreciate in value. Some people have even
traded houses like other people trade stocks. Flip back in time a few hundred years, and there is this
thing called the 'Tulip Bubble' where people were actually getting rid of their real-estate and buying
tulips, because the prices of tulips in Holland appreciated 300% in the course of a few months. What
I guess I am trying to say with stories like that is that sometimes investments, as we call them, tend
to have a bubble-like or a mania-like quality, but that is not what our entire story here is today. Even
though many of you may have been informed by things like that from perusing the popular media.

So, with that said, let's think in terms of what types of assets are we talking about? So, the
first distinction that we make is between real assets and financial assets. When we talk about
real assets, you're thinking about things like assets which create value. Things like land, buildings,
equipment, art, antiques. Some of you may have ownership in those assets. Whether you thought of
them for investment purposes, or otherwise, the value of these assets tends to fluctuate in terms of
depending on demand and supply. As opposed to real assets, which many of you may have more
than passing familiarity with, my focus here today is, and in this course is, financial assets which are,
really, legal claims on benefits created by those underlying real assets we were talking about. Things
like stocks, things like bonds, things like derivatives. These assets derive value from a future claim on
benefits, financial benefits that are created down the road, uncertainly, by some real asset. Bonds,
likewise, are pieces of paper that are used by governments and corporations to raise money, and in
return for lending money to these entities, the holder of that bond or that piece of paper is entitled
to a periodic payment or a discount at the time of issue or sometimes both.

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Investments, delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations,
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