2. Chapter ObjectivesChapter Objectives
To understand the concept of investmentTo understand the concept of investment
To explain process of investmentTo explain process of investment
To learn about various types of securitiesTo learn about various types of securities
To analyze various sources of investmentTo analyze various sources of investment
informationinformation
3. InvestmentInvestment
Investment is the employment of funds on assets to earn income or capitalInvestment is the employment of funds on assets to earn income or capital
appreciation.appreciation.
The individual who makes an investment is known as the investor.The individual who makes an investment is known as the investor.
In economic terms, investment is defined as the net addition made to theIn economic terms, investment is defined as the net addition made to the
capital stock of the country.capital stock of the country.
In financial terms, investment is defined as allocating money to assets withIn financial terms, investment is defined as allocating money to assets with
a view to gain profit over a period of time.a view to gain profit over a period of time.
Investments in economic and financial terms are inter-related where anInvestments in economic and financial terms are inter-related where an
individual's savings flow into the capital market as financial investment,individual's savings flow into the capital market as financial investment,
which are further used as economic investment.which are further used as economic investment.
4. SpeculationSpeculation
Speculation means taking business risks withSpeculation means taking business risks with
the anticipation of acquiring short term gain.the anticipation of acquiring short term gain.
It also involves the practice of buying andIt also involves the practice of buying and
selling activities in order to profit from theselling activities in order to profit from the
price fluctuations.price fluctuations.
An individual who undertakes the activity ofAn individual who undertakes the activity of
speculation is known as speculator.speculation is known as speculator.
5. Difference betweenDifference between
Investor and SpeculatorInvestor and Speculator
BaseBase InvestorInvestor SpeculatorSpeculator
Time horizonTime horizon Has a relatively longer planningHas a relatively longer planning
horizon. His holding period ishorizon. His holding period is
usually of one or more than oneusually of one or more than one
year.year.
Has a very short planningHas a very short planning
horizon. His holding periodhorizon. His holding period
may be few days to months.may be few days to months.
Risk returnRisk return His risk is less.His risk is less. His risk is high.His risk is high.
DecisionDecision Attaches greater significance toAttaches greater significance to
fundamental factors andfundamental factors and
carefully evaluates thecarefully evaluates the
performance of the company.performance of the company.
Attaches greater significanceAttaches greater significance
to market behaviour andto market behaviour and
inside information.inside information.
FundsFunds Uses his own funds.Uses his own funds. Uses borrowed funds alongUses borrowed funds along
with his personal funds.with his personal funds.
6. Investment ObjectivesInvestment Objectives
Return IncomeReturn Income: The total income, the investor receives: The total income, the investor receives
during his holding period.during his holding period.
RiskRisk: Variability in the return.: Variability in the return.
LiquidityLiquidity: The ease with which the investment is: The ease with which the investment is
converted into cash.converted into cash.
SafetySafety: It refers to the legal and regulatory protection to: It refers to the legal and regulatory protection to
the investment.the investment.
Hedge against inflationHedge against inflation: The returns should be higher: The returns should be higher
than the rate of inflation.than the rate of inflation.
End period value Purchase period value
+ Dividends
Return = 100
Purchase period value
−
×
7. SecuritiesSecurities
They are instruments which represent a claim overThey are instruments which represent a claim over
an asset or any future cash flows.an asset or any future cash flows.
Securities are classified on the basis of return andSecurities are classified on the basis of return and
source of issue.source of issue.
Fixed income securitiesFixed income securities
ReturnReturn
Variable income securitiesVariable income securities
IssuersIssuers
GovernmentGovernment
Quasi-GovernmentQuasi-Government
Public Sector EnterprisesPublic Sector Enterprises
CorporatesCorporates
8. The Investment ProcessThe Investment Process
The process of investment includes five stages:The process of investment includes five stages:
1.1. Investment PolicyInvestment Policy: The policy is formulated on the basis of: The policy is formulated on the basis of
investible funds, objectives and knowledge about investmentinvestible funds, objectives and knowledge about investment
sources.sources.
2.2. Security AnalysesSecurity Analyses: Economic, industry and company analyses: Economic, industry and company analyses
are carried out for the purchase of securities.are carried out for the purchase of securities.
3.3. ValuationValuation: Intrinsic value of the share is measured through: Intrinsic value of the share is measured through
book value of the share and P/E ratio.book value of the share and P/E ratio.
4.4. Portfolio ConstructionPortfolio Construction: Portfolio is diversified to maximise: Portfolio is diversified to maximise
return and minimise risk.return and minimise risk.
5.5. Portfolio EvaluationPortfolio Evaluation: The performance of the portfolio is: The performance of the portfolio is
appraised and revised.appraised and revised.
9. Types of Preference StocksTypes of Preference Stocks
There are different types of preference stocks,There are different types of preference stocks,
which are:which are:
Cumulative preference sharesCumulative preference shares
Non-cumulative preference sharesNon-cumulative preference shares
Convertible preference sharesConvertible preference shares
Redeemable preference sharesRedeemable preference shares
Irredeemable preference sharesIrredeemable preference shares
Cumulative convertible preference sharesCumulative convertible preference shares
10. Equity SharesEquity Shares
Common stock or ordinary shares are mostCommon stock or ordinary shares are most
commonly known as equity shares.commonly known as equity shares.
Stock is a set of shares put together in a bundle.Stock is a set of shares put together in a bundle.
A share is a portion of the share capital of a companyA share is a portion of the share capital of a company
divided into small units of equal value.divided into small units of equal value.
The advantages of equity shares are:The advantages of equity shares are:
Capital appreciationCapital appreciation
Limited liabilityLimited liability
Hedge against inflationHedge against inflation
11. Sweat EquitySweat Equity
It is a new equity instrument introduced in theIt is a new equity instrument introduced in the
Companies (Amendment) Ordinance, 1998.Companies (Amendment) Ordinance, 1998.
It forms a part of the equity share capital as itsIt forms a part of the equity share capital as its
provisions, limitations and restrictions are same asprovisions, limitations and restrictions are same as
that of equity shares.that of equity shares.
Sweat Equity is for:Sweat Equity is for:
The directors or employees involved in the process ofThe directors or employees involved in the process of
designing strategic alliances.designing strategic alliances.
The directors or employees who have helped the companyThe directors or employees who have helped the company
to achieve a significant market share.to achieve a significant market share.
12. Non-voting SharesNon-voting Shares
The shares that carry no voting rights areThe shares that carry no voting rights are
known as non-voting shares.known as non-voting shares.
They provide additional dividends in the placeThey provide additional dividends in the place
of voting rights.of voting rights.
They can be listed and traded on the stockThey can be listed and traded on the stock
exchanges.exchanges.
13. Bonus SharesBonus Shares
Distribution of shares, in addition to the cashDistribution of shares, in addition to the cash
dividends, to the existing shareholders aredividends, to the existing shareholders are
known asknown as bonus shares.bonus shares.
These are issued without any payment forThese are issued without any payment for
cash.cash.
These are issued by cashing on the reserves ofThese are issued by cashing on the reserves of
the company.the company.
A company builds up its reserves by retainingA company builds up its reserves by retaining
part of its profit over the years.part of its profit over the years.
14. Preference StockPreference Stock
Preference stock provides fixed rate of return.Preference stock provides fixed rate of return.
Preference stockholders do not have anyPreference stockholders do not have any
voting rights.voting rights.
Like the equity, it is a perpetual liability of theLike the equity, it is a perpetual liability of the
corporate.corporate.
Preference stockholders do not have any sharePreference stockholders do not have any share
in case the company has surplus profits.in case the company has surplus profits.
15. DebentureDebenture
It is a debt instrument issued by a company, which carries aIt is a debt instrument issued by a company, which carries a
fixed rate of interest.fixed rate of interest.
It is generally issued by private sector companies in order toIt is generally issued by private sector companies in order to
acquire loan.acquire loan.
The various features of a debenture are:The various features of a debenture are:
InterestInterest RedemptionRedemption IndentureIndenture
A company can issue various types of debentures, which are:A company can issue various types of debentures, which are:
Secured bonds or unsecured debentureSecured bonds or unsecured debenture
Fully convertible debentureFully convertible debenture
Partly convertible debenturePartly convertible debenture
Non-convertible debentureNon-convertible debenture
16. BondBond
A bond is a debt security issued by the government, quasi-A bond is a debt security issued by the government, quasi-
government, public sector enterprises and financial institutions.government, public sector enterprises and financial institutions.
Various features of a bond are:Various features of a bond are:
The interest rate is generally fixedThe interest rate is generally fixed
It is traded in the securities marketIt is traded in the securities market
At the time of issue of bonds, maturity date is specifiedAt the time of issue of bonds, maturity date is specified
Some of the types of bonds that a company can issue are:Some of the types of bonds that a company can issue are:
Secured bonds and unsecured bondsSecured bonds and unsecured bonds
Perpetual bonds and redeemable bondsPerpetual bonds and redeemable bonds
Fixed interest rate bonds and floating interest rate bondsFixed interest rate bonds and floating interest rate bonds
Zero coupon bondsZero coupon bonds
17. WarrantsWarrants
A warrant is a detachable instrument, which gives the right toA warrant is a detachable instrument, which gives the right to
purchase or sell equity shares at a specified price and period.purchase or sell equity shares at a specified price and period.
It is traded in the securities market where the investor can sellIt is traded in the securities market where the investor can sell
it separately.it separately.
Two types of warrants are:Two types of warrants are:
Detachable warrants:Detachable warrants: When the warrants are issued along with hostWhen the warrants are issued along with host
securities and detachable, then they are known as detachable warrants.securities and detachable, then they are known as detachable warrants.
Puttable warrants:Puttable warrants: Represent a certain amount of equity shares thatRepresent a certain amount of equity shares that
can be sold back to the issuer at a specified price, before a stated date.can be sold back to the issuer at a specified price, before a stated date.
Some of the advantages of warrants are:Some of the advantages of warrants are:
They have limited risk.They have limited risk.
They offer potential for unlimited profits.They offer potential for unlimited profits.
They can be traded in the securities market.They can be traded in the securities market.
18. Investment InformationInvestment Information
An investor must have adequate knowledge about theAn investor must have adequate knowledge about the
investment alternatives and markets before makinginvestment alternatives and markets before making
any kind of investment.any kind of investment.
The various sources from which an investor canThe various sources from which an investor can
gather the investment information are:gather the investment information are:
Newspapers, Investment dailiesNewspapers, Investment dailies
Magazines and JournalsMagazines and Journals
Industry ReportsIndustry Reports
RBI BulletinRBI Bulletin
Websites of the SEBI, RBI and other private agenciesWebsites of the SEBI, RBI and other private agencies
Stock market informationStock market information
19. Chapter SummaryChapter Summary
By now, you should have:By now, you should have:
Understood the concept of investment andUnderstood the concept of investment and
speculationspeculation
Learnt about the various types of shares andLearnt about the various types of shares and
debenturesdebentures
Understood the various sources of investmentUnderstood the various sources of investment
informationinformation
