Fundamentals of investment

Reliance College
BBS 4th Year

Sangam Rai
Assistant Director
Securities Board of Nepal(SEBON)
 Course Contents
Unit 1: Investment Environment
Unit 2: Market and Transactions
Unit 3: Investment Information and Securities Transactions
Unit 4: Return and Risk
Unit 5: Modern Portfolio
Unit 6: Common Stock Fundamentals
Unit 7: Common Stock Analysis and Valuation
Unit 8: Fixed Income Securities
Unit 9: Bond Valuation
Unit 10: Mutual Fund
Unit 11: Managing Portfolios
Unit 12: Derivative Securities
Project Work

Question Pattern
Short question=2*10=20 Marks
Long question=10*5=50 Marks
Very long question=15*2=30 Marks

Total Lecture Hours: 150

 Allocation of Theory and Numerical
Chapter Theory Numerical Theory Nume*
1. Investment Environment Theory Numerical on Taxes 10 -

2. Markets and Theory Numerical on trading methods: long, 5 10

Transactions short, and margin position.

3. Investment information Theory Numerical on indexes and Market 10

and Securities Transactions Orders

4. Return and Risk Theory Numerical on risk return calculation of 5

individual assets.

5. Modern Portfolio Theory Numerical on Portfolio management, 15

required rate of return by CAPM, Beta
calculation and Security Market Line

6. Commons Stock Theory Numerical on Buying and Selling of 5 10

Fundaments Securities, Transactions costs,
dividends, earnings, book value.

7. Common Stock Analysis Theory Numerical on ration analysis, common 10

and Valuation stock valuation by various models.
Chapter Theory Numerical Theory Numerical

8. Fixed Income Theory Numerical on municipal bond and 10 5-10

Securities taxes adjustment.

9. Bond Valuation Theory Numerical on pricing of bond, yields 10

on bond, duration and its application.

10. Mutual Fund Theory Numerical on net asset value 10

calculation, HPR Calculation,
expense ratio, and portfolio turnover
rate calculation.
11. Managing Theory Numerical on Performance evaluation 5 5-10
Portfolios by Sharpe, Treynor and Jenson
Performance.
12. Derivative Theory Numerical on valuation of call and 5 5
Securities put option and calculating gain or
loss and percentage rate of return.
 Course Objectives
• The student will be familiar with the investment environment
and be able to analyze securities and make correct investment
decisions from the view point of individual investors.
Course Description
• This course deals with investment environment, principles and
process of investing in securities. It also provides students
opportunities to learn techniques of analyzing securities and
forming portfolios. The topics covered in this course are: investment
environment, securities markets and transactions, risk and return,
modern portfolio, investment in common stocks, bonds, and mutual
funds, and derivative securities.
 Teaching Pedagogy
 Lecture
 Practice in class for numerical chapter
 Interaction in class
 Implementation of subject matter knowledge in real practice
 Unit test after chapter complete
 Note copy checking
 Old Is gold practice
Materials Requirement
 Book- Ashmita Publication
 Calculator
 Note Copy
 Old Is gold
 Other require materials
 Course plan
Upto Ahoj: Chapter 1 to 6 ( 60-65%)
Upto poush: Chapter 7 to 10 ( 75-80%)
Upto phalgun: Chapter 10 to 11 (100% ). Revision and Old is
Gold practice.
 Unit 1: Investment Environment
 Meaning of Investment
Income
*Income= Consumptions + Savings
Or saving = income - consumptions

Consumptions Savings

• Investment is the outcome of savings. However, all savers are not

investors.
 Future ( after 1 year)
Bonds, stocks,
businesses
The value of
Profit (10,000) investment is
1,20,000
Present ( invest Rs .
100,000 )
Total Return= Rs. 30,000.

Rs. 4 Rs. 100

 Investment is to allocate money (in present) in the expectation of
some benefit( more than initial investment amount) in the future.
Loss and gain is always associated with an investment. From an
investment either investors will bear loss or gain
 Investment is the commitment of funds at present in some course of
action with the expectation of some positive rate of return.
 Investment in made broadly in two types of assets: Real assets and
financial assets.
 Real assets possess productive capacity or they helps to (directly)
produce goods and services. Land, building, equipment, plant and
machinery are the examples of real assets.
 Financial assets are intangible assets where it represents a legal
claim ( right to receive the payments and other claim) against the
income or wealth of business firm. Stocks, bonds, derivatives are
examples of financial assets.
  Investment versus Speculation
• Speculation is to put money in an expectation of windfall gain in a
very short period of time and takes excessive risks.
• Speculation is also significant because it adds to the market liquidity
of the securities by making frequent purchase and sale of securities.

Basis Investment Speculation

Period Long period Short period
Risk Low risk High risk
Return Low return High return
Use of funds Use own funds Use own or borrowed funds.
Analysis Consider fundamentals Consider rumor, insider
factors information, market behavior
etc.
  Types of Investment
1. Securities or Property
• Securities (Financial Assets)- common stocks, bonds, derivatives
etc.
• Property ( Real Assets)- Land, Building, plant and machinery.

2. Direct or indirect investments

• Direct investments- Investments in common stocks or bonds.
• Indirect investments- Mutual Funds

3. Debt, Equity or Derivative securities

4. Low or High Risk Investments.
 Risk- possibility of losing an investment or differ in actual returns
and expected return.
• Low risk investments- common stocks, bonds, T-bills
• High risk investments- Derivatives, Junk bonds
5. Short or long term investments
• Short term investments- investments in securities having maturity
period of less than one year is classified as short term investments.
For e.g. T-bills, commercial paper, etc.
• Long term investments- investments in securities having maturity
period of more than one year is classified as long term investments.
For e.g. common stocks, bonds, preference stocks etc.
6. Domestic or Foreign investments
• Domestic investments- investments made within the country or in
the securities issued by companies of home country are known as
domestic investment.
• Investments made out of the country or in securities issued by
foreign based companies are known as foreign investment.
  Investment process
1. Set investment objectives
• Individual must decide why s/he is investing- to earn high return.
• Earning high return is attached to high risk also so that individual
should calculate how much risk they can bear.
• Other objectives can be investing for old age, financing children’s
education etc.
• Investment objectives helps for selection of different types of
securities.
2. Perform Security Analysis
• The purpose of this step is to identify securities that are worth for
buying or will give expected return.
• There are two methods of security analysis – Technical analysis and
Fundamental Analysis.
• Technical Analysis- examine the prices of securities to detect trend
or past price movement and use it to predict the future price.
• Fundamental Analysis – analysis of EPS, DPS, cash flow, net worth,
growth rate to predict fair value (intrinsic value) of the security. If
the market price is lower than intrinsic value we believe that the
market price will increase to intrinsic value, therefore that security
is worth for buying.
3. Construct Portfolio
• Portfolio refers to investment in more than one security to minimize
risks and gain high returns. So that, construct portfolio means
choosing of securities which have less risk and give more returns.
• Do not put all egg in one basket.
• Diversify funds in more than one security.

4. Portfolio revision
• Portfolio constructed once does not work forever. Over time, market
conditions, securities’ performance may change.
6. Evaluate performance of the portfolio
• To evaluate the expected return with actual return of the constructed
portfolio. If actual return doesn’t meet expected return then portfolio
structure will be change.

 Investment vehicles
• Investment vehicles refer to the investment alternatives or financial
instruments available to the investors to invest their funds. They
differ in cost, risk, return, maturities and tax considerations.
1. Short term vehicles
2. Common Stocks
3. Fixed-income securities
4. Mutual Funds
5. Derivative Securities
  Investment Plans
• Investment plans consist of a set of process and consideration of
several factors such as tax consideration, consideration about life
cycle in investment and different economic environment.
 Steps in investing
 Considering personal tax
• Tax is an important consideration in investment planning. Therefore,
an investor must be familiar with the prevailing tax laws and their
implications on investment return.
• Tax is imposed by the government on all income from the
investment.
• Taxable income is classified as ordinary income and capital gains.
• Income received in ordinary course of business is termed as
ordinary income. Dividend on stocks and interest on bond and on
deposits are examples of ordinary income.
• Capital gain is a rise in the value of a capital asset (investment or
real estate) that gives it a higher worth than the purchase price.
The gain is not realized until the asset is sold.
• In Nepal government has imposed the 5% tax for individual on
ordinary income and capital gain.
• Capital gain = p1-p0
• Where,
• p0= value of an asset or securities in today or present time period
• P1= value of an asset or securities in one year or future time period

Ordinary income= interest + dividend

Total tax=(ordinary income+ capital gain)*tax rate
 Investing over the life cycle
• Early phase of life - High risk taker
• Middle phase of life - low risk taker
• Retirement phase of life – risk free assets
 Investing in different economic Environment
• Economy is never stable. It passes through different phases. These
different phases are known as recovery, expansion, decline and
recession.
• Investors generally invest in common stocks during growth phase
and in bonds during decline phase.
 Meeting liquidity Needs: Investing in short term vehicles
• Investors invest in short-term vehicles to deal with uncertainties.
Short term vehicles have less than one year maturity and highly
liquid.
• For e.g. T-bills, commercial papers, bankers’ acceptance.
 Investing environment in Nepal
• Investing environment refers to the surroundings in which
investment decisions are made.
I. Securities (Financial instruments)
II. Securities Market
III. Securities Market Regulation
 Ethics in investing
• Ethics refer to moral principles that control or influence a person’s
behavior.
• Ethics investment is broadly defined as the integration of personal
values, social considerations and economic factors into investment
decision.
• Financial return remains an important outcome but it is not the sole
criterion driving investments
• There is nothing wrong with making money but its how you make
the money that counts.