expectation of receiving a larger amount of resources in the future. • It involves the sacrifice of current money with the hope of receiving larger amount in the future. • It involves the element of risk and time. • The hope of receiving larger amount in the future is not guaranteed. • Investment involves the purchase of assets that will generate certain return proportional to the amount of risk assumed over a period of time. Type of Assets
• Assets can be classified as:
– Real Assets • Assets which contribute directly to the productive of an economy by produce good or services that can be – Tangible » eg.: land, buildings and machines – Intangible » eg.: knowledge – Financial Assets • It is a claim on real assets or on the income they generate. Eg.:stocks & bonds Type of Financial Assets
ownership share in a company. • The common stock holder is part-owner and is entitled to receive dividends the company may declare. • The performance depends on the success of the firm and the income generated by its real assets. • Quite risky
• Derivatives Fixed Income Security
• A fixed income security promises a
certain amount of return on a regular basis which can be constant amount or vary depending on term agreed upon. • It also has a fixed maturity date when the principal amount will be paid by the issuer. • Eg.: Bonds. Derivative
• A derivative security is an asset
where its value is determined by or derived from the value of another investment vehicle. • Eg.; Futures & options Market Participants
• Participants in the financial
market can be divided into 3 groups: – Providers of fund – Users of fund – Financial intermediaries Fund Providers
• Fund providers are households who earn
more than they consume (net savers). • They can be investors, which will purchases securities issued by firms which needed funds. • The investors can be further classified as; – Retail • Individual – Institutional • Provident and pension funds, investment companies, insurance companies, banks Fund Users
• The users of fund are business firms and
the government. • However, the government can be either act as: – Lender • When its budget is surplus (total revenue is larger than total expenditures) – Borrower • When its budget is deficit (total expenditure is more than total revenue) • The government borrows from the public through the issue of Treasury bill (TB) and Malaysian Government Securities (MGS). Financial Intermediaries
• Financial intermediaries are institutions that
bring lenders and borrowers together and can be regarded both as a provider and as users of funds. • The financial intermediaries also act as underwriters, which means that any shares not bought by investors will be bought by the banker, to ensure the corporation receive the total amount of funds it wants to raise. Investment Process
• The investment process involves five
basic steps; – Setting investment objectives – Establishing investment policy – Selecting a portfolio strategy – Selecting the assets – Measuring and evaluating performances Setting Investment Objectives
• Objectives are goals that investors want to achieve
in their investment. • The objectives must be clearly defined such as the type of return, his investment horizon and the amount of risk that can be tolerated. • For example; – Some investors may want safety of principal, stable income and low risk. – Some investors may be more interested in high return and can undertake high risks. • These objectives must be reasonable and attainable. Establishing Investment Policy
• The investment policy is a written document which
states the asset allocation decision and the constraints of the investors in satisfying the investment objectives. • Asset allocation decision involves determining the proportion of funds to be invested in major assets classes, such as; stocks, bonds and real estates. • Some investors face constraint that will affect their asset allocation decision, such as; life insurance companies can only invest about 10% of their portfolio in the stock market. Selecting a Portfolio Strategy
• The investor has to decide on the type of
investment strategy, either; – active • The investors or investment manager actively manages the investments by changing the proportion of assets in the portfolio. • The investors always searching for new information in identifying undervalued securities (current market price is lower than its intrinsic value or expected price) or – passive • The investors invest in a well-diversified portfolio without find the miss-priced securities Selecting Assets
• It involves selecting individual
companies or securities within each asset class. • Security analysis is required. For eg.: – Fundamental Analysis • Economy analysis • Industry analysis • Company’s financial position Monitoring & Evaluating Performance • In this step, the return on the portfolio is measured and compared against a benchmark, such as; –Kuala Lumpur Composite Index (KLCI) –EMAS Index Risk & Return
• In general, there is a positive
relationship between risk & return. • Investment with high risk tend to give high expected return and vice versa. Return Speculative stocks Blue-chip stocks Unit Trusts Bonds T bills