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Basics of Investment
 

Basics of Investment

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Investment, Speculation, Risk, Return, Gambling, Portfolio Return, Security Analysis

Investment, Speculation, Risk, Return, Gambling, Portfolio Return, Security Analysis

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    Basics of Investment Basics of Investment Presentation Transcript

    • Amit Joshi
    • Investment A process of sacrificing now for the prospect of gaining something later. Three points should be there for investment:  Time  Today’s Sacrifice  Prospective gain It is employment of funds with the purpose of earning additional income or growth in value.
    • Definition “Sacrifice of certain present value for some uncertain future”. Sharpe/Alexander Investment aims at multiplication of money at higher or lower rates depending upon whether it is a long term or short term investment, and whether it is risky or risk free rate of return
    • Investment Vs. Speculation
    • Investment Vs. Speculation Risk  Normally risk involved in investment is lower profits or loss of profits.  Speculation may result in a very high profit or high losses.  So risk involved in speculation is very high as compared to investments. Capital Gain  The motive of investment is achievement of capital appreciation.  The motive of speculation is to achieve profit through price changes. Time  If securities are purchased and investor does not expect an immediate return on it and waits for long term benefit, it is termed as investments  If a person expects fast return on his investment and disposes of the assets in the short time, then it is termed as speculation.
    • Objectives Of Investment InSecurities Income Capital Appreciation  Conservative Growth  Aggressive Growth  Speculation Returns  Periodic cash receipts  Capital gain Safety and security of funds Risks Liquidity Tax Considerations
    • Securities
    • Classification of Investments Physical Investments  Tangible in nature  Some are useful for further production (Capital goods)  Some are not useful for further production Financial Investments  Used for consumption; or  Used for production of goods and services; or  For further creation of assets.
    •  Marketable and Non Marketable Investments  Investments listed at stock exchanges are easily marketable  Non marketable securities which can not be traded in market (Insurance Policy of a person) Transferable and Non Transferable Investments  Generally marketable securities are transferable whereas non marketable securities are not transferable.
    • Mode of Investment Direct Investment Alternatives:  Fixed Principal Investment  Variable principal investments  Non security investments Indirect Investment Alternatives:  Mutual Funds.  Insurance  Investment Companies  Pension Funds
    • Features of an IdealInvestment Programme Safety and Security Liquidity Regularity and Stability of Income Stability of Purchasing Power Capital Appreciation Tax Benefits Legality Convertibility Tangibility
    • Measurability of Risk Beta
    • Portfolio Management Emphasis is put on identifying the collective importance of investor’s holdings. Portfolio should meet the needs of an investor/ Need for careful evaluation of risk and return from securities.
    • Process of Investment Analysis Investment Policy  It provides the raw material for the portfolio in choosing various securities as per the needs of investor. Investment Analysis  To determine the future risk and return in holding various types of individual securities.
    •  Valuation of Securities  Valuation of securities should be done on the basis of its present worth. Portfolio Construction  Portfolio should be constructed by keeping risk and return profile of an investor. Portfolio Evaluation and Revision  Evaluation of portfolio is necessary time to time depending upon the market conditions.
    • Risks Systematic Risk ( Undiversifiable Risk) Market Risk Interest Rate Risk Inflation Rate Risk Unsystematic Risk ( Diversifiable Risk) Business Risk Financial Risk Liquidity Risk
    • RISKDIVERSIFIABLE/ NON –unique risk DIVERSIFIABLE or systematic riskStrikes Changes in government policies –Increase in competition monetary policy, fiscal policy,Technical breakdown or foreign policy, corporate taxesobsolescence WarInadequate raw material Earthquake, floods, rains,Change in management. tsunamis etc.Loss of a big contract etc.
    • RETURNS Change in Dividend the value of regular cash stock over t flow -timeValue of stock in beginning
    • Portfolio Rate of ReturnR p = Wx R x + W y R y