Introduction to

Investment
Investment is the employment of funds on assets with the aim
of earning income or capital appreciation.

In financial sense, an investment is a monetary asset

purchased with the idea that the asset will provide income
in the future or will later be sold at a higher price for a
profit.

In an economic sense, investment is the net addition to the

nations capital stock that consists of goods and services
that are used in the production process.
Or in other words an investment is the purchase of goods that
are not consumed today but are used in the future to create
wealth.
In other words, it is the allocation of money to assets that are
expected to yield some gain over a period of time.
Speculation
• Speculation is the act of conducting a financial transaction
that has substantial risk of losing all value but with the
expectation of a significant gain.
• It is about taking up the business in the hope of achieving
short-term gain.

Difference between investor & speculator

• time horizon
• Risk disposition
• Return expectation
• Basis for Decision
• Funds/leverage
Gambling
• The result of gambling is known more quickly.
• It is for fun and not a business
• It is based on risk tat is created artificially. It does not
involved a bet on economic activity

investment are classified into two groups:

i) Real assets
ii) Financial assets
Investment objectives

i) Maximizing the return

ii) Minimising the risk
iii) Maintaining liquidity
iv) Hedging against inflation
v) Increasing safety
vi) Saving tax
Reasons to Invest
• To make money
• Save for retirement
• Financial flexibility
• Tax advantages
• Portfolio diversity
Essential features of good Investment
• Safety of principal
• Liquidity and Collateral value
• Stable income
• Capital growth
• Tax implications
• Stability of Purchasing Power
• Legality
Factors influencing Investment
• Interest rates
• Investment is financed either out of current savings or by
borrowing. Therefore investment is strongly influenced by
interest rates. High interest rates make it more expensive
to borrow. High interest rates also give a better rate of
return from keeping money in the bank. With higher
interest rates, investment has a higher opportunity cost
because you lose out the interest payments.
• Economic growth
• Firms invest to meet future demand. If demand is falling,
then firms will cut back on investment. If economic
prospects improve, then firms will increase investment as
they expect future demand to rise. There is strong
empirical evidence that investment is cyclical. In a
recession, investment falls, and recover with economic
growth.
Accelerator theory : The accelerator theory states that investment
depends on the rate of change of economic growth. In other words,
if the rate of economic growth increases from 1.5% a year to 2.5%
a year, then this increase in the growth rate will cause an increase
in investment spending as the economy is on an up-turn. The
accelerator theory states that investment is dependent on economic
cycle
• Confidence
• Investment is riskier than saving. Firms will only invest if they are
confident about future costs, demand and economic prospects.
Keynes referred to the ‘animal spirits’ of businessmen as a key
determinant of investment. Keynes noted that confidence that
wasn’t always rational. Confidence will be affected by economic
growth and interest rates, but also the general economic and
political climate. If there is uncertainty (e.g. political turmoil) then
firms may cut back on investment decisions as they wait to see
how event unfold.
• Inflation
• In the long-term, inflation rates can have an influence on
investment. High and variable inflation tends to create
more uncertainty and confusion, with uncertainties over
the cost of investment. If inflation is high and volatile,
firms will be uncertain at the final cost of the investment,
they may also fear high inflation could lead to economic
uncertainty and future downturn. Countries with a
prolonged period of low and stable inflation have often
experienced higher rates of investment.
• Productivity of capital
• Long-term changes in technology can influence the
attractiveness of investment. In the late nineteenth century,
new technology such as Bessemer steel and improved
steam engines meant firms had a strong incentive to invest
in this new technology because it was much more efficient
than previous technology. .
• If there is a slowdown in the rate of technological
progress, firms will cut back investment as there are lower
returns on the investment.
• Availability of finance

• In the credit crunch of 2008, many banks were short of

liquidity so had to cut back lending. Banks were very
reluctant to lend to firms for investment. Therefore despite
record low-interest rates, firms were unable to borrow for
investment – despite firms wishing to do that.
• Another factor that can influence investment in the long-
term is the level of savings. A high level of savings enables
more resources to be used for investment. With high
deposits – banks are able to lend more out. If the level of
savings in the economy falls, then it limits the amounts of
funds that can be channeled into investment.
• Government policies
• Some government regulations can make investment more
difficult. For example, strict planning legislation can
discourage investment. On the other hand, government
subsidies/tax breaks can encourage investment.
• In China and Korea, the government has often implicitly
guaranteed – supported the cost of investment. This has led
to greater investment – though it can also affect the quality
of investment as there is less incentive to make sure the
investment has a strong rate of return.
• Political stability
• Stable political conditions are essential for the
development of the industry. Industries are an essential
corollary to the development of the economy. Only a stable
political system can take care of the long-term needs of the
industry and foster its development. No industry can
prosper when the country is passing through political
instability.
Qualities for successful investing
i) Contrary thinking:
“being a joiner is fine when it comes to fashion,
sports, trendy restaurant. When it comes to investing
however, the investor must remain aloof and suppresses
social tendencies. When it comes to making money and
keeping it, the majority is always wrong.”

• Avoid stock which have a high earning ratio.

• Recognise that in the world of investment many people
have the temptation to play the wrong game.
• Sell to optimist and buy it from pessimists.
• Discipline your buying and selling by specifying the
target price at which you will buy and sell.
• Never look back after a sale or purchase.
ii) patience:

iii) composure:
Rudyard kipling believed that an important virtue for
becoming a mature adults is to keep your head when all
around you are losing theirs.
• Understand your own impulses and instinct towards fear and
greed
• Surmount these emotion that can wrap your judgement
• Capitalise on the greed and fear of other investors.
• Benjamin Graham (father of securities) “Rely more on hard
numbers and less on judgement”
iii) Flexibility and openess:
Mr. Arthur Zeikel “we tend to develop a ‘defensive’
interpretation of new development, and this cripple our
capacity to make good judgement about the future”.
Mr. Barton M. Briggs” flexibility of thinking and willingness
to change is required for the successful investor. In the
stock market, in investing, there is nothing permanent
except change. The investment managers should try to
cultivate a mix of healthy skepticism, open mindedness
and willingness to listen.”

iv) Decisiveness:
Major trend in investment:
i) Globalisation
ii) Information and computer network
iii) Financial engineering
iv) securitsation
Common errors in investment management
• Inadequate comprehension of return and risk
• Vaguely formulated investment policy
• Naïve extrapolation of past
• Cursory decision making
• Unlimited entries and exit
• High cost
• Over diversification and under diversification
• Wrong attitude toward losses and profit
Investment Process:
i) Framing of investment policy
• Investible funds
• Objectives
• Knowledge
ii) Security analysis
• Market
• Industry
• Company
iii) Valuation
• Intrinsic value
• Future value
iv) Portfolio construction
• Diversification
• Selection and allocation
v) Portfolio evaluation
• Appraisal
• Revision
Portfolio management

Portfolio management is the art and science of making

decisions about investment mix and policy, matching
investments to objectives, asset allocation for individuals
and institutions, and balancing risk against performance.
I will tell you how to become rich. Close the doors. Be fearful
when others are greedy. Be greedy when others are
fearful.”  – Warren Buffett
Process:
i) Specification of investment objectives and
constrain
ii) Choice of asset mix
iii) Formulation of portfolio strategy
iv) Selection of securities
v) Portfolio execution
vi) Portfolio revision
vii)Performance evaluation
Approaches to investment decision
i) Fundamental approach:
• This is a method of evaluating securities by attempting to
measure the intrinsic value of a stock.
• Fundamental analysts study everything from the overall
economy and industry conditions to the financial
condition and management of companies. 
• At any point of time there are some securities for which
the prevailing market price differ from intrinsic value.
Sooner or later of course the market price will fall in line
with the intrinsic value.
• Earnings, expenses, assets and liabilities are all important
characteristics to fundamental analysts.
• Superior return can be earn by buying undervalued
securities (securities whose intrinsic value exceed the
market prices) and selling over valued securities.
ii) Technical approach:
• technical analysis looks at the price movement of a
security and uses this data to predict future price
movements.
• Technical approach to investigate is essentially a
reflection of the idea that prices move in trends which are
determine by the changing attitudes of investors towards
a variety of economics, monetary, political and
psychological factors.
Differences between technical and fundamental analysis
i) Technical analysts typically begin their analysis with
charts, while fundamental analysts start with a company’s
financial statements.
ii) Technical analysis mainly seeks to predict short term
price movement, whereas fundamental tries to establish
long term price movement.
iii) Technical is mainly focus on internal market data,
particularly price and volume data. The focus on
fundamental is factor relating to the economy, the
industry, and the firm.
iv) Technical analysis is mainly appeal to short term traders,
whereas fundamental analysis appeals primarily to long
term investors.
iii) Psychological approach: these is based on the premises
that stock price are guided by emotions, rather than
reasons.

iv) Academic approach:

v) Eclectic approach:
• Conduct fundamental approach to establish certain value
‘anchor’.
• Do technical analysis to assess the state of market
psychology
• Combine the above both to analyse and determine which
securities are worth buying, worth holding.
 Investing strategies
1. Passive strategies:
2. passive investing means buying a security with the
intention to own it long term. 
• Passive investing methods seek to avoid the fees and
limited performance that may occur with frequent trading.
• Passive investing’s goal is to build wealth gradually. Also
known as a buy-and-hold strategy,
• passive investors do not seek to profit from short-term
price fluctuations or market timing.
• The underlying assumption of passive investment
strategy is that the market posts positive returns over
time.
Benefits:
• Ultra-low fees – There's nobody picking stocks, so
oversight is much less expensive.  Passive funds simply
follow the index they use as their benchmark.
• Transparency – It's always clear which assets are in an
index fund.
• Tax efficiency – Their buy-and-hold strategy doesn't
typically result in a massive capital gains tax for the year.
2. Active strategies
• Active investing refers to an investment strategy that
involves ongoing buying and selling activity by the
investor.
• Active investors purchase investments and continuously
monitor their activity to exploit profitable conditions.

• Benefits of Active Investing

•
Risk management
• Short-term opportunities:
• Flexibility
Investment Avenues
A. Securities:
1. Equity shares
i) Blue chip shares
ii) Large-cap, mid-cap, small-cap
iii) Growth shares
iv) Income shares
v) Defensive shares
vi) Cyclical shares
vii) Speculative shares
2. Fixed income securities
viii)Preference shares
ix) Debentures
x) Bonds
xi) Government securities
3. Money market securities
i) T-bills
ii) Commercial papers
iii) CD’s

B. Deposits
1. Bank deposits
2. NBFC deposits

c. Postal saving
3. Nationals saving scheme
4. Kisan Vikas patra
5. Post office monthly income scheme
6. Public provident funds
4. Insurance
i) Life insurance policies
• Endowment policy
- Unit linked endowment
- Full endowment
- Low cost endowment
• Whole life policy
• Term life policy
• Money back policy
• Joint life policy
• Children insurance policy
• Group policy
ii) ULIP
5. Real estate
6. Precious metals
7. Art and antiques