Chapter 1: introduction to Securities

 Security analysis and portfolio management are

hard work, requiring discipline and patience, and
the work is not always rewarded by exceptional
returns.
What is Security Analysis?
 Process of estimating return and risk for
individual Securities.
What is Risk?
 This means the uncertainty in the probability
distribution of returns.
What is Portfolio?
 Securities that have returns and risk characteristics
of their own in combination.
Portfolio Analysis?
 It takes the ingredients of risk and return for
individual securities and considers the blending of
combining securities.
Portfolio Selection?
 It entails choosing the one best portfolio that suits
the risk – returns preference of the investor.
Portfolio Management
 It is the dynamic functions of evaluating and revising
the portfolio in terms of stated investor’s objectives.
 Investment versus Speculation
Investment
 It is a commitment of funds made in the
expectation of some positive rate of returns.
Capital Gains
 Profits earned by the investors.
Speculation / Speculator
 Seeks opportunities promising very large returns,
earned rather than quickly.
 Speculator is less interested in consistent
performance than the investor, and is more
interested in abnormal extremely high return than
the normal.
The Investment Process
- Traditional Investment Analysis, when applied
to securities, emphasizes the projection of
prices and dividends.
What is Intrinsic Value?
It is compared with the security’s current
market price.
If the current market price is below the
intrinsic value, a purchase is recommended.
If the current market price is above the
intrinsic value, a sell is recommended.
 Portfolio Management
- It is also characterized by an old and new way
of solving portfolio problem.
Traditional Portfolio
Selection of those securities that best fit the
personal needs and desires of the investor.
Modern Portfolio
Suggests analysis, selection and management
may well yield less than the optimum result.
 Investment Categories
- Investment generally involved real assets or financial
assets.
- Among the many properties that distinguish real
from financial assets, one of the special interest to
investors is “Liquidity”.
Liquidity
 Refers to the ease of converting an assets into
money quickly, conveniently, and at little exchange
cost.
- Financial assets can be categories in a variety of ways.
Debt Instruments
 Usually take forms of issued by the governments,
corporations and individuals.
 Provide interest in either two ways;
1. Interest is paid periodically or the securities are sold
to the investor on a discount price basis.
2. Instrument is sold at price below the eventual
redemption price.
Redemption amount
 It is referred to as the face, par or maturity value.
Nominal Rate
 It is the interest payment in dollars as a percentage of
the face, par or maturity value.
Institutional Deposits and contracts
 Money and checking and savings account all
represents fixed dollar commitment that are debt
like in character.
Government Debt Securities
 Debt securities are issued by federals, state or
local government.
 These are the safest and most liquid securities
available anywhere
Private issues
 This are offered by the corporation engaged in
mining, manufacturing merchandising and
financial activities.
Short term privately issue
• Commercial paper
It is unsecured promissory notes of from 30 to
270 days maturity.
• Bankers Acceptances
Are issued in international trade, they are high
guaranteed carried by the banks.
Long term
- There is a great variety of sub classification in
long term corporate or private bonds.
• Convertible Bonds – provides the holder with an
option to exchange his bonds for a
predetermined number of common stocks
• Call features – provided for the benefit of the
issuer.
• Sinking Funds – is often found in bond issues for
the benefit of investors.
• Debentures – these are the unsecured bonds.
What is a prospectus?
It is a document required by law that issued fro
the purpose of describing a new security issue.
Equities
 It is an ownership position, that is, in which the
investor in stocks or certain option is an owner of
the firm and is thus entitled to a residual share of
profits.
What is equity investment?
 It involves commitment of funds to an institution of
some sort that in return manages the investment for
investor.
Variable Annuities
 Under federal tax laws, certain are permitted to
have certain portions of their salaries withheld their
employers for investment.
Insurance Policies
 Purchasing a life insurance policy could well be
considered an investment.
Direct Equity Investments
- There are two main direct equity investments;
Common stocks and Preferred Stocks.
Common Stocks
 Represents ownership of position.
Stock Splits
 It occurs when the firm ends up with more shares
outstanding, which sells at a lower price and have a
lower par value than the outstanding did before the
split.
Stock Dividend
Instead of cash dividend, investors can receive
dividends in the form of stocks.
Preferred Stocks
It is also known as a Hybrid Security. Because it
has features of both common stock and bonds.