Investments - Introduction

Contents
• Meaning of Investments
• Investment Defined
• Financial and Economic meaning of Investment
• Characteristics of Investment
• Three major Objectives of Investment
• Investment versus Speculation
• Investment versus Gambling
• Types of investors
Meaning of Investments

• Income earned by people can be either spent for

current consumption or saved for future
consumption.

• But savings itself are not investments.

• When you do something to your savings to make

them increase over the time, it is known as
investment.
Meaning of Investments
• It can mean many things to many people.

• A person can advance money to another person with

an anticipation to get it back with interest.

• Another person might buy gold with a purpose of

price appreciation.

• Yet another person might buy a debenture with a

purpose to earn a steady interest income.

• All these are various forms of investments.

Investment Defined

• A commitment of funds made in the expectation of some

positive rate of return.

• An investment is current commitment of funds in order

to derive future payments that will compensate the
investor for
1. the time the funds are committed,
2. the expected rate of inflation and
3.the uncertainty of future payments i.e. the risk
undertaken
Financial and Economic meaning of
Investment
• Financial sense of investment is engaging a person’s
funds to derive future income in form of
interest/dividends and capital appreciation.

• Eg: shares, debentures, fixed deposits, etc.

• Economic sense of investment means investing in

new and productive capital in form of new
constructions, plant and machinery, inventories, etc.

• In short investing in such goods and services which

are used in production of other goods and services.
Characteristics of Investment
• Return:
▫ Returns are rewards for investment.
▫ Return is capital appreciation + dividend /interest
Return =Capital appreciation (end period value-beginning period value)
+ Dividend/interest
__________________________________________ × 1oo
Beginning period value

▫ The return depends upon the nature of investment,

time period, economic conditions and so on.
Characteristics of Investment
• Risk
▫ Generally inherent in any investment.

▫ Risk is generally the variability of return.

▫ It may also relate to loss of capital, delay in

repayment, non-payment of interest, fall in prices,
etc.

▫ Risk is more in investments where there are

higher chances of variability in returns.
Characteristics of Investment
• Safety:
▫ It should be under the legal and regulatory framework
of the country.
▫ It should ensure certainty of return.

• Liquidity:
▫ Investments are liquid if they are easily marketable or
saleable. Generally investments which have a
recognized secondary market are more liquid.

• Hedge against inflation:

▫ Investments are expected to provide a return that
ensures a cover against inflation.
Three major Objectives of Investment
• Maximizing return

• Minimizing risk

• Hedge against inflation

Investment versus Speculation
• An investment is done with a purpose of some earning
capital appreciation or regular income for a relatively
long period of time.

• Speculation is done through frequent buying and selling

activities with expectation of getting profit from price
fluctuation.

• A simple example can be buying an equity share with a

purpose of earning dividend and long term returns can
be termed as investment and buying it with a purpose of
earning large capital gains in short period of time is
speculation.
 Investor Speculator

Time Plans for longer time ranging Plans a short period ranging from
from 1 year to few years. few days to months

Risk Assumes moderate risk Willing to undertake high risk

Return Moderate and sufficient return Likes to take very high amounts
of return by taking huge risks

Decision Considers fundamental factors Considers inside information,

and evaluates performance of hearsays and market behaviour.
investment regularly.

Fund Generally uses his own funds Generally uses owned plus
borrowed funds.
Investment versus Gambling
• Typical examples of gambling are horse races, card
games, lotteries, etc.

• Gambling also aims at high returns, but it is

accompanied with thrill and excitement.

• It is surrounded by uncertainty and relies on tips,

rumors and fortune.

• It is unplanned and involves artificial and

unnecessary risks.
 Types of investors
• Individuals/ Retail Investors
▫ They are many but their investment resources are comparatively
small.
▫ Generally lack the skill or time of carrying out extensive research,
analysis and evaluation.
• Institution/ Institutional Investors
▫ They are few in number but their investment resources are
comparatively large.
▫ These are organizations with surplus funds and engage in investment
activities.
▫ Eg: mutual funds, investment companies, banking and non-banking
financial institutions, insurance corporations, venture capitalists, etc.
▫ They engage professional fund managers who do extensive analysis
carry out investment activity in a more scientific and systematic
manner.