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Introduction to Investment and Securities
To understand the concept of investment
To explain process of investment To learn about various types of securities
To analyze various sources of investment information
Investment is the employment of funds on assets to earn income or capital appreciation. The individual who makes an investment is known as the investor. In economic terms, investment is defined as the net addition made to
the capital stock of the country.
In financial terms, investment is defined as allocating money to assets with a view to gain profit over a period of time. Investments in economic and financial terms are inter-related where an individual's savings flow into the capital market as financial investment, which are further used as economic investment.
4 Speculation Speculation means taking business risks with the anticipation of acquiring short term gain. It also involves the practice of buying and selling activities in order to profit from the price fluctuations. . An individual who undertakes the activity of speculation is known as speculator.
His holding period may be few days to months. Uses his own funds. Attaches greater significance to market behaviour and inside information. Time horizon Has a relatively longer planning horizon. His holding period is usually of one or more than one year.5 Difference between Investor and Speculator Base Investor Speculator Has a very short planning horizon. His risk is less. Funds . Uses borrowed funds along with his personal funds. Risk return Decision Attaches greater significance to fundamental factors and carefully evaluates the performance of the company./Moderate Return His risk is high/ High Return.
6 Gambling • Fundamental difference from speculation & Investment • Quick Results • Normally for fun not for income • Highly Risky not based on any economic activity • No surety of return .
of investment outlets .7 Why to Invest? • • • • • • Longer Life Expectancy Increase Rate of Taxation High Interest rates High Rate of Inflation Large Income Availability of a complex no.
Liquidity: The ease with which the investment is converted cash. Tax Shelter: It refers to the legal and regulatory protection to the investment.8 Investment Objectives Return Income: The total income. End period value Purchase period value + Dividends Return = 100 Purchase period value Risk: Variability in the return. the investor receives during his holding period. .
Capital gains Safety and security of Fund/Stability of Income Concealability .9 Cont. Periodic cash Receipts. Speculation. Convenience: Ease on making investment and Maintaining it further Capital Appreciation Aggressive growth. Hedge against inflation: The returns should be higher than the rate of inflation.
capital appreciation. safety of principal • Choice of the assets mix: risk tolerance and investment horizon of investors • Formulation of portfolio strategy: active or passive • Selection of Securities: fundamental & technical analysis. • Portfolio Execution: implementation of the portfolio plans • Portfolio Revision: rebalancing of portfolio • Performance Evaluation: periodic performance evaluation . yield to maturity.10 Portfolio Management Process • Specification of Investment Objectives/constraints: current income. credit rating tax shelter etc.
Marketable Financial Assets Real estate Precious Objects Insurance Policies .11 Investment Alternatives • • • • • • • • • Equity Preference Shares Debentures Bonds /Fixed Income Securities Money Market Instruments Non.
Fixed income securities Return Variable income securities Issuers Government Quasi-Government Public Sector Enterprises Corporates .12 Securities They are instruments which represent a claim over an asset or any future cash flows. Securities are classified on the basis of return and source of issue.
which are: Cumulative preference shares Non-cumulative preference shares Convertible preference shares Redeemable preference shares Irredeemable preference shares Cumulative convertible preference shares .13 Types of Preference Stocks There are different types of preference stocks.
A share is a portion of the share capital of a company divided into small units of equal value.14 Equity Shares Common stock or ordinary shares are most commonly known as equity shares. The advantages of equity shares are: Capital appreciation Limited liability Hedge against inflation . Stock is a set of shares put together in a bundle.
The directors or employees who have helped the company to achieve a significant market share. It forms a part of the equity share capital as its provisions. .15 Sweat Equity It is a new equity instrument introduced in the Companies (Amendment) Ordinance. 1998. limitations and restrictions are same as that of equity shares. Sweat Equity is for: The directors or employees involved in the process of designing strategic alliances.
They provide additional dividends in the place of voting rights. . They can be listed and traded on the stock exchanges.16 Non-voting Shares The shares that carry no voting rights are known as non-voting shares.
. These are issued by cashing on the reserves of the company. in addition to the cash dividends. These are issued without any payment for cash. A company builds up its reserves by retaining part of its profit over the years. to the existing shareholders are known as bonus shares.17 Bonus Shares Distribution of shares.
Preference stockholders do not have any voting rights. .18 Preference Stock Preference stock provides fixed rate of return. Preference stockholders do not have any share in case the company has surplus profits. it is a perpetual liability of the corporate. Like the equity.
19 Debenture It is a debt instrument issued by a company. It is generally issued by private sector companies in order to acquire loan. which carries a fixed rate of interest. which are: Secured or unsecured debenture Fully convertible debenture Partly convertible debenture Non-convertible debenture . The various features of a debenture are: Interest Redemption Indenture A company can issue various types of debentures.
20 Bonds/Fixed Income Securities • Government Securities • Saving bonds • Private Sector debentures • PSU bonds • Preference shares .
21 Money Market Instruments • Treasury Bills • Certificates of deposits • Commercial papers • Repos .
22 Non Marketable financial assets • • • • • • • • Bank deposits Post Office time deposits Monthly Income schemes of the Post office Kisan Vikas Patra National Saving certificates Company Deposits Employees Provident fund scheme Public Provident fund Scheme .
23 Real Estate • • • • • • Residential House/Flats Cooperative Group Housing Society Flats Commercial property Agricultural land Suburban land Time share in a Holiday resort .
24 Precious Objects • Gold & silver • Precious stones/Gems • Art Objects • • • • • • • Endowment Policy Money back Plan Whole life Insurance Unit Linked plan Term Insurance Immediate Annuity Deferred Annuity Insurance Policies .
25 Decision Process • Finance(Spending) decisions and Investment(Savings) decisions have encompassed the three major areas of spending in aggregate economy: GNP = C+I+G+F GNP= Gross National Product C= spending by Individual for personal consumption I = Gross private domestic investment by business firms G = Governmental purchases F = Net Foreign spending .
26 Finance decisions: Sources of money • Quantum of money required • Duration of Time for which money needed • Cheapest source for obtaining the require sum of money Investment decisions: Budgeting of money • Total money available to invest • Allocation of money between current consumption & reinvestment • Optimal rate of total investment • Choice of specific asset to be purchased • Proportion of total money to be invested in a particular asset • Frequency of evaluation of the performance of the portfolio .
27 • Optimal investment decisions can be made only after the source i. since the cost of financing depends upon the expected profit and risk of the project to be financed. • Vice versa. • The investor reinforces his bargaining position by analysing the investment opportunities offered to him by Business finance Manager • The power of selection or rejection forces the finance manager to offer only those opportunities that will meet their requirements of the mass of investors who make up market .e. total cost can be determined only after the investment decisions has been made. the cost of financing will be determined.
28 Approaches to investment Decision making • Fundamental approach: Based on Intrinsic Value(undervalued & overvalued) • Psychological approach: Optimistic/Pessimistic • Academic approach: sophisticated methods of investigation(Market Price. Risk & Return) • Electic approach: Combination of all three .
and worth disposing. worth holding. .29 Investment decision Process • Basic standards & benchmarks • Gauging the prevailing mood of investors and relative strengths of supply and demand forces • Perceiving that market is not so well ordered • Conduct of some Fundamental analysis to establish certain value ‘anchors’ • Applying technical analysis to assess the state of the market psychology • Combine both the above analysis to determine which securities are of worth buying. • Respecting the market price and should not showing excessive zeal in ‘Beating’ the market • Acceptance of the fact that the research for a higher level of return often necessitates the assumption of a higher level of risk.
30 Common Errors in Investment Management • Inadequate comprehension of Risk & Return • Vaguely formulated investment policy • Naive Extrapolation of the past • Cursory decision making • Untimely entries & exits • High Cost • Over Diversification & Under diversification • Wrong attitude towards losses & Profit .
31 Qualities for successful investing • Contrary thinking • Patience • Composure • Flexibility & openness • decisiveness .
• Financial Instruments: Creditorship securities. Equity Market. etc. Primary Market. Certificate of deposits). Public debt Instrument. Ownership securities. Private debt instrument. Future Market. Secondary market. Spot market. Exchange traded market.32 The Investment Environment • Financial Market: Debt market. Indirect Equities • Financial Intermediaries: Expedite transfer from one owner to another . Capital Market. Special debt instrument(PSU Bonds. Money Market. Off the counter market(decentralized & customised) .
Investment dailies Magazines and Journals Industry Reports RBI Bulletin Websites of the SEBI. RBI and other private agencies Stock market information . The various sources from which an investor can gather the investment information are: Newspapers.33 Investment Information An investor must have adequate knowledge about the investment alternatives and markets before making any kind of investment.
• What qualities are required for successful investment • Discuss the attribute that one should consider while evaluating an investment • Discuss briefly the key steps involved in Portfolio management process • Describe briefly the following approaches to investment decision making: Fundamental Psychological Academic Eclectic .34 Questions • Discuss in detail the common errors in Investment management.
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