Investment Securities. alternatives & attributes


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Investment Securities. alternatives & attributes

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Investment Securities. alternatives & attributes

  1. 1. Investment Alternatives & Investments Attributes
  2. 2. Organizing Financial Assets • It is necessary for all investors to understand the basic nature of different investment alternatives • Investors can invest directly in financial assets i.e. they themselves buy and sell securities (Direct investing) • Investors can buy and sell the shares of investment companies which in turn hold securities (Indirect investing)
  3. 3. Direct investing • Non-Marketable Financial assets – Saving deposits – Certificate of deposit – Money market deposits accounts – US saving bonds – Provident Fund Schemes – Life Insurance Money Market securities – T-bills – Negotiable certificates of deposits – Commercial papers – Repurchase agreements – Banker’s acceptance
  4. 4. Direct investing • Capital market securities A. Fixed income securities – Treasury or government bonds – Corporate bonds B. Equity securities – Preferred stock – Common stocks Derivative Securitas – Options – Futures
  5. 5. Type of Common Stocks • Blue-Chip Shares: Stock of Large, well-established and financially sound company that operated for many years. • Income Share: A class of shares that has little room for Capital appreciation but gives the holders a portion of all income earned by the company. • Growth Stock: Stocks of Company whose earnings are expected to be grow at an above average rate relative to the market.
  6. 6. • Cyclical Stock: An equity security whose prices are effected by ups and down in the overall company. Cyclical stock typically relates to the companies that sell discretionary items that consumers can afford to buy in the booming economy. • Speculative Stock: These are low price shares and the possibility of -albeit remote- of wind fall profits are two of their more attractive characteristics.
  7. 7. Indirect Investing • Investment companies – Unit trusts – Open end mutual fund – Close – end mutual fund
  8. 8. Money Market Securities • Money market securities include short-term, highly liquid, relatively low risk debt instruments • This market is dominated by financial institutions like banks • Maturity of money market securities range from one day to one year • Investor may directly or indirectly invest in these instruments
  9. 9. Types of Money marekt securites • Treasury bills • This is a short term money market security sold at discount by government and redeemed at face value • Return or yeild on t-bills is calculated as follows:             − = Daysin 365 . )Pr..( Maturiy X pricePur icePurvalueFace Yield
  10. 10. • Commercial Papers • Same as t-bills, the only difference is that it is issued by a firm • Negotiable certificates of deposits • Investors deposits money in a banks in return they get a deposits certificates that can be negotiated • Upon maturity, principal plus interest is paid to the depositor
  11. 11. • Repurchase agreements • Short-term sales of government securities with an agreement to repurchase the securities at a higher price • Bankers acceptance • It is an order to a bank by a customer to pay a sum of money at a future date • Once the bank accepts it, it is the banker’s responsibility to pay to the holder • It can be traded in the secondary market • It allows traders to substitute the bank’s credit standing for their own • Used in foreign trade
  12. 12. Capital market securities • Capital market encompasses fixed-income and equity securities with maturities greater than one year • Risk is much higher than the money market securities • Marketability is poorer in some cases • It includes both debt and equity securities
  13. 13. Debt (Fixed income securities) • Bonds • It is a long term debt instrument • It is a fixed income security because interest rate is fixed at the time of issue • Buyer can sell the bond before maturity, the priced received will depend on the level of interest rates at that time
  14. 14. Characteristics of bond • Par value or face value of most bonds is $1000 • Typical bonds have a maturity time • Most bonds are coupon bonds, where coupon refers to the periodic interest that the issuer pays to the holder of the bond • Interest on bonds is typically paid semi- annually
  15. 15. Life Insurance • Endowment Insurance: Participating and Non Participating Endowment. Endowment policies have maturity values. • Whole Life Assurance: The policy provide benefits on death. It is useful mean of transfer of expected wealth. • Unit Linked policies: Unit linked plan are investment oriented product.
  16. 16. • Term Assurance: This is a pure protection which provides benefits on death on specified terms like 5, 10 or 20 years. • Immediate Annuity: This type of policy meets the policyholder’s need for a regular income for example after his or her retirement. • Deferred Annuity: policyholders pays a regular premium for a period up to specified “Vesting date”. The premium buy a regular income for policyholder from the vesting date. Life Insurance
  17. 17. Different Attributes of investment • To enable and a reasonable comparison of various investment avenues, the investor should study the following attributes. 1. Rate of return: The rate of return comprises of two parts i.e annual income and capital gain or loss. Rate of Return = Annual Income + (Ending price – Beginning Price) Beginning Price 2. Risk: The risk of an investment refers to the variability of the rate of return. It is the deviation of the outcome of an investment from its expected value.
  18. 18. Different Attributes of investment 3. Marketability: It is desirable that an investment instrument be marketable. An investment instrument is considered to be highly marketable when: - It can be transacted quickly - The transaction cost including brokerage is low. - The price change between two transactions is negligible. 4. Taxes: Some investment instruments provide tax benefits while other not. Tax benefits are mainly three types; -Initial tax benefits -Continuing tax benefits -Terminal tax benefits
  19. 19. Different Attributes of investment 5. Convenience: The degree of ease with which an investment can be made and managed. The degree of convenience vary from one investment the other.
  20. 20. • With reference to Maturity - Money Market - Capital Market • With reference to Nature of claim -Debt Market -Equity Market • With reference to seasoning of claim -Primary market -Secondary market Classification of Financial Markets
  21. 21. Classification of Financial Markets • Timing of Delivery -Cash or Spot Market -Forward or future Market • Organisational structure - Exchange traded market - Over the counter market