UNIT – 01

Financial Meaning of Investment

 Introduction
Investment
• Science or An Art?
• Risk and Return gettogether

“Sacrificing something now for the prospect of gaining something later”

General Sense: Purchase of a new car or washing machine or good music
system

Economic Investment: Capital formation in the form of new construction,

new production, inventories and human capital.

Business Investment: Business activities

Financial Investment: Investment in safe or risky assets with a view to earn

some gain over a period of time. Interest, Dividends, Premiums, pension
benefits or appreciation in the value of the principal capital.
Investment v/s Savings
Basis for
Savings Investment
Comparison

Savings represents that part of the Investment refers to the process of

Meaning person's income which is not used investing funds in capital assets, with a
for consumption. view to generate returns.

Savings are made to fulfill short Investment is made to provide returns and
Purpose
term or urgent requirements. help in capital formation.

Risk Low or negligible Very high

Returns No or less Comparatively high

Liquidity Highly liquid Less liquid

 Features of Investment

1.Return
2.Risk
3. Safety
4. Liquidity
 Investment
Investment
vs Gambling Vs Speculation
– The act of committing money or capital to an endeavor with the expectation of
obtaining an additional income or profit
Speculation – The act of trading in an asset, or conducting a financial transaction,
that has a significant risk of losing most or all of the initial outlay, in expectation of
a substantial gain
– With speculation, the risk of loss is more than offset by the possibility of a huge
gain; otherwise, there would be very little motivation to speculate
Gambling – Gambling is defined as staking something on a contingency
– The rewards are not inline with the risks
Investment Vs Speculation
What is Gambling ?

• Gambling is fundamentally different from investment and speculation in following respects.

Quick Outcome: Normally Outcome of gambling is know very quickly. The outcome of rolling a
dice or the turn of a dice is almost known quickly.

Results don’t depend on Economic activity: Normally results of gambling are not dependent on
any economic activity. For example when you create position in futures or commodities the prices
of stocks or commodities are some where dependent upon economic activity but when you play
card and bet on that the outcome of that doesn’t depend upon any economic activity.

Lack of significant Economic benefit: Generally gambling doesn’t provide significant economic
outcome. Whereas, investment and speculation can provide significant economic outcome.

Gambling should be for fun : Normally rational people do gambling for fun and not for making
money.
Objectives of Investment
• Income: Dividend/Interest
• Capital Appreciation: Conservative Growth/ Aggressive Growth/
Speculation
• Forms of Returns: Cash Receipt/ Capital Gain
• Safety and Security of Funds
• Risk
• Liquidity
• Tax Consideration
• Purpose
Classification of Investments
•Physical Investments
•Financial Investment
•Marketable and Non-Marketable Investments
•Transferable and Non transferable
 The Investment Process
1. Set Investment Policy
2. Perform Security Analysis
3. Construction of Portfolio
4. Revise the Portfolio
5. Evaluation of the Portfolio Performance
 The Investment Process (contd…)
1. Investment Policy
Adage: If you don’t know where you are going, any
road will do.

✔ The plan that directs the efforts

✔ It is a long-term strategic plan
Determination of investors’ objectives – Risk and Return
Determination of investible wealth
Tax status of the investor
Identification of potential categories of financial assets
 The Investment Process (contd…)
2. Security Analysis – Examining several individual securities. This analysis aims
at identifying mispriced securities.
Technical Analysis
Fundamental Analysis
3. Portfolio Construction – This is done for the purpose of diversification because
it is said that all the eggs should not be kept in a single basket.
4. Portfolio Revision – Periodic repetition of previous steps.
5. Performance Evaluation of Portfolio

Return earned
Transaction costs Risk Experienced
Set the bench mark
Your investment will benefit the
Economy?
• Capital Formation
• Economic Activity
• Spending Habits
• Sectoral Growth
• More Public Expenditure
• Beating Inflation
• Employment Opportunities
• GDP
• Returns or Reward
• Global
• Stability
Factors influencing Investment Decisions
 Factors influencing Investment
Decisions
The factors which affect the investment decisions:
• Risk Tolerance: Risk refers to the volatility of portfolio’s value. The amount of risk the investor is willing to take on is
an extremely important factor.
• Return Needs: This refers to whether the investor needs to emphasize growth or income.
• Investment Horizon: The time horizon starts when the investment portfolio is implemented and ends when the
investor will need to take the money out.
• Tax Exposure: Investors in higher tax brackets prefer such investments where the return is tax exempt, others will
have no such preference.
• Market Trends: You need to understand how various asset classes have performed in the past before planning your
finances.
• Investment Needs: How much money do you need at the time of maturity?
• Risk Coverage: A type of insurance coverage that can exclude only risks that have been specifically outlined in the
contract.
• Dependents: People who relies on another person, especially a family member, for financial support.
 Profile of Indian Investors
•Conservative
•Traditional Investment Avenues
•Don’t Spend Much Time On Planning
•Fear Factor
•Lack of Knowledge
•Short Term Returns
 Types of investors
A. Individual investors
Individual investors purchase securities in their individual
capacity. They have surplus money and are interested in investing
the same in the corporate sector.

1. Conservative investors: Conservative investors tend to be risk

averse.
2. Moderately Conservative: Moderately conservative investors are
willing to take on some amount of risk.
3. Moderately Aggressive: Moderately aggressive investors usually
have similar investment objectives as aggressive investors.
• Aggressive: Aggressive investors commonly do most of their investing in
the stock market which is highly risky.

• Active investors: Active investors, are those who have achieved significant
wealth, or earned well, during their own lifetime.

• Emotional investors: Emotional - easily attracted to fashionable

investments.

• Casual investors: Casual investors - a laid-back attitude to investment,

these individuals are often hardworking and involved with work or family.
 B. Institutional investors

Institutional investors are investment agencies

with surplus money to invest in securities.
Institutional investors are of two types:
• Private
• Public
• Sources of Investment information
In the investment process, we have seen that the investors should have knowledge about the investment
alternatives and the markets. He has to analyse the economy, industry and the company. For all these, he needs
adequate flow if information. The source of information varies with the type of information required.
International affairs with increasing globalization, international events affect the economy of the nation.
National affairs- the growth of the national economy and political events within the nation influence the
investment decision. The political events are provided by the news papers, magazines like India today, outlook,
fortune India, the week, etc. Economic events and their implication on the security market are analysed in the
financial express, economic times and business line. RBI bulletin and annual reports give a wide range of
information regarding the macro-economic indicators like GDP, GNP, inflation, agricultural and industrial
production, capital market, development in the banking sector and the balance of payment.
Industry information- information about the industry is required to identify the industries that perform better
that the national economy as a whole. Financial news papers regularly bring out industrial studies for the
benefit of the investors. Experts’ opinions about the industries are available in business India, business today,
and dalal street. CMIE also publishes data regarding the industries. BSE publishes the directory of information
that contains industry and company information.
Company information- A source of company information must be developed
to facilitate the company analysis. The BSE, NSE and OTCEI provide details
about the listed companies in the web sites. Almost all the financial journals
carry out the company analysis and even suggest enter, exit and stay hints for
the particular company stock. The annual reports of the companies and the
un-audited quarterly and half-yearly results also provide an insight into the
performance of the company. Software companies also sell details regarding
the financial performance of the companies in the floppies. Stock Exchange
Directory comes in 18 volumes. It gives information about all listed public
companies and major public sectors.
Stock market information- All the financial dailies and investment related
magazines publish the stock market news. Separate News bulletins are issued
by BSE, NSE and OTCEI providing information regarding the changes that
take place in the stock market. SEBI news letter gives the chance in the rules
and regulations regarding the activities of the stock market. Reserve bank of
India Bulletin also carries the information about the stock markets.