Savings vs.

Investing
Savings
Savings is the portion of current income
not spent on consumption.

Investments
Investing is the purchase of assets with the
goal of increasing future income.
Risk, Return, and Liquidity
 Risk
• The chance that the value of an
investment will decrease.
 Return
• The profit or yield from an investment.
 Liquidity
• The ability of an investment to be
converted into cash quickly without
loss of value.
Risk, Return, and Liquidity

 Savings  Investments
• Low risk • High risk
• Low return • High return
• High liquidity • Low liquidity
Inflation, Savings and
Investments
Today, a large soft drink at
your favorite fast-food place
costs Rs100. You buy the soft
drink but also decide to save
some money for the future as
well. So you put in your
savings account, where it earns
5%.

NEFE
Inflation, Savings and
Investments
One year later, the amount in
your saving account is worth
Rs105. You take the money out
and visit your favorite
convenience store, hoping to
buy another delicious
beverage. Unfortunately,
drinks now cost Rs110.
NEFE
Inflation, Savings and
Investments
The point? Inflation can work
against your money. You need
to learn to invest wisely, follow
the rate of inflation, and make
sure your investment rates are
higher than those of inflation.
• Securities – financial assets
• Property - real, tangible assets
• Short term vs. Long term

(1) Gamble
(2) Speculation
(3) Investment
 B. The Personal Investment
Process (In Theory)
• 1. Consumption and Utility

U(Co)

Co
(Consumption)
a. Assumptions
 Current Consumption
vs. Future Consumption

C1

C11 A

B I3
C I2
C12
I1
C0
C01 C02
Points A, B, and C on I2 all provide the individual with the same total utility of consumption.
Therefore: U(C11 + C01) = U(C12 + C02) 11
 The GOAL of an Investor...
 The goal of an Investor is to MAXIMIZE the
total of all present and future UTILITY
derived from current and future consumption.
This means investing for maximum
return.
The Investment Environment
The investment environment
encompasses the kinds of marketable
securities that exist and where and how
they are bought and sold.
 Lenders and borrowers
 Financial Securities
 Money Market Instruments
 Capital Markets Instruments
 Security Markets
 Money Market and Capital Market
 Primary and Secondary Market
 Financial Intermediaries
The Investment Process
 Set Investment Policy
 Perform Security Analysis
 Construct a Portfolio
 Revise the Portfolio
 Evaluate the Performance of the
Portfolio

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