The document discusses investment and the investment process. It defines investment as committing funds with the expectation of a positive return. The main characteristics of investment are return, risk, safety, and liquidity. The objectives of investment are maximizing return, minimizing risk, maintaining liquidity, hedging against inflation, and increasing safety. The investment process involves framing an investment policy, analyzing opportunities, valuing assets, constructing a portfolio, and evaluating performance.

2. Investment:
Investment is an activity that is engaged in by people who have
savings and investments are made from savings. But all savers are not
investors so investment is an activity which is different from saving.
If one person has advanced some money to another, he may
consider his loan as an investment. He expects to get back the money
along with interest at a future date.
Another person may have purchased one kilogram of gold for
the purchase of price appreciation and may consider it as an investment.
Yet another person may purchase an insurance plan for the
various benefit it promises in future. That is his investment.
Investment involves employment of funds with the aim of
achieving additional income or growth in values or the commitment of
resources which have been saved in the hope that some benefits will
accrue in future.

3. Thus, investment may be defined as, “ a commitment of funds made
in the expectation of some positive rate of return”.
In the financial sense, investment is the commitment of a
person’s funds to derive future income in the form of interest, dividend,
premiums, pension benefits or appreciation in the value of their capital.
Purchasing of shares, debentures, post office savings certificates,
insurance policies are all investments in the financial sense. Such
investments generate financial assets.
In the economics sense, investment means the net additions to
the economy’s capital stock which consists of goods and services that
are used in the production of other goods and services. Investment in
the sense implies the formation of new and productive capital in the
form of new constructions, plant and machinery, inventories etc. Such
investments generate physical assets.
The money invested in financial investments are ultimately
converted into physical assets. Thus, all investments result in the
acquisition of some assets either financial or physical.

4. Characteristics of Investment:
 Return:
Investments are made with the primary objective of deriving a return. The
return may be received in the form of capital appreciation plus yield. The
difference between the sales price and the purchase price is capital
appreciation. The dividend or interest received from the investment is the
yield.
 Risk:
Risk may relate to loss of capital, delay in repayment of capital, non-payment
of interest, or variability of returns. While some investments like
government securities and bank deposits are riskless, others are more risky.
The risk of an investment depends on the following factors :
1) The longer the maturity period, the larger is the risk.
2) The lower credit worthiness of the borrower, the higher is the risk.
3) Investments in ownership securities like equity shares carry higher risk
compared to investments in debt instruments like debentures and bonds.
Risk and return of an investment are related. Normally, the higher the risk, the
higher is the return.

5.  Safety:
Safety is another feature which an investor desires for his investments.
The safety of an investment implies the certainty of return of capital without
loss of money or time. Every investor expects to get back his capital on
maturity without loss and without delay.
 Liquidity:
An investment which is easily saleable or marketable without loss of
money and without loss of time is said to possess liquidity. Some investments
like company deposits, bank deposits, P.O. deposits, NSC, NSS etc are not
marketable. Some investment instruments like preference shares and
debentures are marketable but there are no buyers in many cases and hence
their liquidity is negligible. Equity shares of companies listed on stock
exchanges are easily marketable through the stock exchanges.
An investor generally prefers liquidity for his investments, safety of his
funds, a good return with minimum risk or minimisation of risk and
maximisation of return.

6. Objectives of Investment:
The main objectives of investments are:
 Maximisation of return
 Minimisation of risk
Other subsidiary objectives are:
 Maintaining liquidity
 Hedging against inflation
 Increasing safety
 Saving tax
Maximisation of return:
The rate of return could be defined as the total income the investor receives
during the holding period, stated as a percentage price at the beginning of the
holding period.

7. Return = Capital Appreciation + Yield ( Dividend, Interest)
Return = End period value – Beginning period value + Yield value
Beginning period value
If a particular share is bought in 2011 at Rs.50 and sold in 2012 at Rs.60 and
the dividend yield is Rs.5, then what would be the return?
Minimizing the risk:
The risk of holding securities is related to the probability of the actual
return becoming less than the expected return. If we consider the financial
assets available for investment, we can classify them into different risk
categories. Government securities would constitute the low risk category as
they are practically risk free. Debentures and preference shares of companies
may be classified as medium risk assets. Equity shares of companies would
form the high risk category of financial assets.

8. Maintaining Liquidity:
Liquidity depends upon marketing and trading facilities. If a portion of
the investment could be converted into cash without much loss of time, it helps
the investor to meet emergencies. Stocks are liquid only if they command a
good market by providing adequate returns through dividends and capital
appreciation.
Hedging against inflation:
The rate of return should ensure a cover against inflation to protect against a rise
in prices and fall in the purchasing value of money. The rate of return should be
higher than the rate of inflation otherwise the investor will experience loss in
real terms.
Increasing safety:
The selected investment avenue should be under the legal and regulatory
framework. If it is not under the legal framework, it will be difficult to represent
grievances. Approval of the law itself adds a flavour of safety. From the safety
point of view, investments can be ranked as follows: bank deposits, government
bonds, UTI units, nonconvertible debentures, convertible debentures, equity
shares and deposits with non-banking financial companies.

9. Investment and Speculation:
Investment and speculation involve purchase of assets like shares and
securities. Traditionally, investment is distinguished from speculation with
respect to three factors, viz., risk, capital gain and time period.
speculation is about taking up the business risk in the hope of achieving
short-term gain. Speculation essentially involves buying and selling activities
with the expectation of making a profit from price fluctuations.
Ex: If a person buys a stocks for its dividend, he may be termed as an investor. If
he buys with the anticipation of a price rise in the future and the hope of selling it
again, he would be termed as speculator. The dividend line between speculation
and investment is very thin because people buy stocks for dividends and capital
appreciation.

10. Difference between investor and speculator:
Investor Speculator
Time horizon Plans for a longer time horizon. His
holding period may be from one
year to few years.
Plans for a very short
period. His holding period
varies from few days to
months.
Risk Assumes moderate risk. Willing to undertake high
risk.
Return Likes to have moderate rate of
return associated with limited risk.
Like to have high returns
for assuming high risk.
Decision Considers fundamental factors and
evaluates the performance of the
company regularly.
Consider inside
information, hearsays and
market behavior.
Funds Uses his own funds and avoids
borrowed funds.
Uses borrowed funds to
supplement his personal
resources.
Safety He chooses the investment
alternative which has high degree of
safety. Here safety is primary and
Focuses more on return
than the safety.

11. Investment and Gambling:
A gamble is usually a very short-term investment in a game or chance.
Gambling is different from speculation and investment. Typical example of
gambling are horse races, card games, lotteries etc. The time horizon involved in
gambling is shorter than in speculation and investment. Earning an income from
gambling is a secondary factor. Risk and return trade-off is not found in gambling
and negative outcomes are expected.

12. Investment Process:
Investment Process
Investmen
t Policy
Analysis Valuation
Portfolio
Construction
Portfolio
Evaluatio
n
 Investible
fund
 Objectives
 Knowledge
 Market
 Industry
Compan
y
 Intrinsic value
 Future value
Diversificatio
n
 Selection
and allocation
Appraisal
Revision
Stages of the Investment
Process

13. The investment process involves a series of activities leading to the purchase of
securities or other investment alternatives.
The process can be divided into five stages:
1. Framing of the investment policy
2. Investment analysis
3. Valuation
4. Portfolio construction
5. Portfolio evaluation.
1) Framing of the investment policy:
For systematic functioning, the government or investor, formulates the
investment policy before proceeding to invest. The essential ingredients of the
policy are:
a) Investible funds:
Funds may be generated through savings or from borrowings. If the funds are
borrowed, the investor has to be extra careful in the selection of investment
alternatives. He must make sure that the returns are higher than the interest he
pays.

14. b) Objectives:
The objectives are framed on the premises of the required rate of return,
need for regular income, risk perception and the need for liquidity. The risk
taker’s objective is to earn a high rate of return in the form of capital
appreciation whereas the primary objective of the risk-averse is the safety of
principal.
c) Knowledge:
Knowledge about investment alternatives and markets plays a key role in
policy formulation. Investment alternatives range from security to real estate.
The risk and return associated with investment alternatives differ from each
other.
The investor should be aware of the stock market structure and functions
of the brokers. The modes of operations are different in the BSE, NSE and
OTCEI. Brokerage charges are also different. Knowledge about stock
exchanges enables an investor to trade the stock intelligently.

15. 2) Security Analysis:
Securities to be brought are scrutinized through market, industry and
company analyses after the formulation of investment policy.
a) Market analysis
The growth in Gross Domestic product and inflation is reflected in stock
prices. Recession in the economy results in a bear market. Stock prices may
fluctuate in the short run but in the long run, they move in trends. The investor
can fix his entry and exit points through technical analysis.
b) Industry analysis:
An analysis of the performance, prospectus and problems of an industry of
interest is known as industry analysis. The risk factors related to the automobile
industry are different from those related to the information technology industry.
The performance of an industry reflects the performance of the companies it
consists of.

16. c) Company analysis:
The purpose of company analysis is to help the investors make better
decisions. The company's earnings, profitability, operating analysis, capital
structure and management have to be screened. A company with a high product
market share is able to create wealth for investors in the form of capital
appreciation.
3) Valuation:
Valuation helps the investor determine the return and risk expected from an
investment in common stock.
Intrinsic value of the share is measured through the book value of the share and
price earning ratio. Simple discounting models can be adopted to value the
shares.
Future value of securities can be estimated by using a simple statistical
technique like trend analysis. The analysis of the historical behavioral of price
enables the investor to predict the future value.

17. 4) Construction of a portfolio:
A portfolio is a combination of securities. By constructing a portfolio,
investors attempt to spread risk by not putting all their eggs into one basket and it
also helps to meet their goals and objectives.
a) Diversification:
The main objective of diversification is the reduction of risk in the form of
loss of capital and income. A diversified portfolio is comparatively less risky than
holding a single portfolio. Several models are available to diversify a portfolio.
i) Debt and equity diversification:
Debt instruments provide assured returns with limited capital appreciation.
Common stock provide income and capital gain but with a flavor of uncertainty.
ii) Industry diversification:
Banking industry shares may provide regular returns but with limited capital
appreciation. Information technology stocks yield higher returns and capital
appreciation.
iii) Company diversification:
Securities from different companies are purchased to reduce the risk.
Technical and fundamental analysts suggest the investors to buy the securities.

18. b) Selection and allocation:
Securities have to be selected based on the level of diversification and funds
are allocated for selected securities.
5) Portfolio Evaluation:
It is the process which is concerned with assessing the performance of the
portfolio over a selected period of time in terms of return and risk.
a) Appraisal:
Developments in the economy, industry and relevant companies from
which stocks are bought have to be appraised. The appraisal warns of the loss
and steps can be taken to avoid such losses.
b) Revision:
It depends on the results of the appraisal. Low-yielding securities with
high risk are replaced with high-yielding securities with low risk factor. The
investor periodically revises the components of the portfolio to keep the
return at a level.

19. Investment Avenues:
Investment Avenues
Securities Deposits Postal Schemes Insurance Real Assets
Stocks
Bonds/Securiti
es
G-securities
Money market
instruments
Derivatives
Mutual Funds
Bank
Deposits
 Non-
Banking
Financial
Company
(NBFC)
deposits
 Monthly
Income
Scheme(MIS)
 National
Saving
Scheme(NSS)
Vikas Patras
Public
Provident
Fund(PPF)
Life Insurance
policies
 Unit Linked
Insurance Plan
(ULIP)
Real
estate
Precious
metals
Art and
antiques

20. Investment Avenues:
1) Negotiable investments
2) Non-negotiable investments
I) Negotiable investments:
a) variable income securities
b) Fixed income securities
Variable income securities - Equity shares
Equity shares are commonly referred as common stock or ordinary shares.
The most common classification under this shares are:
a) Large-cap, mid-cap and small-cap stocks:
The large-cap stocks are shares of high market capitalization, the small-cap
ones have a low market capitalization and the mid-cap ones fall in between
these two.

21. b) Blue chip shares:
The shares of companies which have a consistent track record and are doing
exceedingly well compared with other companies are known as blue chip
shares. Ex: Reliance, SBI, ICICI, HDFC, ONGC, Infosys, TCS, Wipro, HLL,
ITC, Tata Steel and Jindal Steel.
c) Growth shares:
Stocks that have a higher rate of growth in profitability than the industry
growth rate are referred to as growth shares.
d) Income shares:
These stocks belong to companies that have stable operations and pay
regular dividends.
e) Defensive shares:
Defensive stocks are relatively unaffected by market movements. Ex: a
host of pharmaceutical stocks posted returns even in the period of market
slowdown.
f) Cyclical shares:
The upward and downward movements of the business cycle affect the
business prospects of certain companies and their stock prices. Such shares
provide low to moderate current yield. Ex: automobile sector stocks are affected
by business cycle.

22. g) Speculative shares:
Shares that have a lot of speculative trading in them are referred to as
speculative shares.
Fixed Income Securities:
Fixed income shares are categorized as follows:
a) Preference shares:
The biggest advantage is the tax-exempt status of the preference share’s
dividend.
b) Debentures / Bonds:
Debentures are generally issued by the private sector companies as a long-term
promissory note for raising loan capital. The company promises to pay
interest and principal as stipulated whereas bond is a long-term debt instrument
that promises to pay a fixed annual sum as interest for a specified period of time.
Public sector companies and financial institutions issue bonds.
c) Government Securities:
The securities issued by the central government, state government and quasi-government
agencies are known as government securities or gilt-edged securities.
It is a secure financial instrument, which guarantees the income and capital.

23. d) Money market securities:
These have a short term maturity, say less than a year. Common money
market instruments are treasury bills, commercial paper and certificate of deposit.
i) Treasury bills:
It is fundamentally an instrument of short-term borrowing by the government
of India to help the cash management requirements of various segments of the
economy. Generally, treasury bills are of 91 days. Since the interest rates offered
on treasury bills are low, individuals very invest in them.
ii) Commercial Papers:
It is a short term negotiable instrument with a fixed maturity period. It is an
unsecured promissory note issued by the company either directly or through
Banks.
iii) Certificate of deposit:
It is a marketable receipt of funds deposited in a bank for a fixed period at a
specified rate of interest.

24. II) Non-negotiable instruments:
Deposits:
a) Bank deposits:
The banks offer current account, savings account and fixed deposit account
with a fixed rate of return.
b) Non-Banking Financial Companies (NBFC) :
It is one of the financial intermediate company which comes under the
purview of RBI. Security of the deposits with the NBFCs is lower than of the
deposits with banks.
Postal Savings:
Postal savings like National Savings Certificate (NSC), Kisan Vikas Patra
(KVP), Monthly income scheme, Senior citizen scheme, PPF are considered as
reliable form of investment because they are backed by the Government of India
under Indian Postal department. Postal savings schemes offered to lower-middle
class and lower class investors but now middle income and higher-income groups
are also considering this avenue with the increase in the uncertainties.

25. Life Insurance:
It is contract for payment of a sum of money to the person assured on the
happening of the event insured against. The core feature of the is protection and
elimination of risks. Insurance emerge as a combination of both investment and
assurance. The major advantages it includes are : protection, easy payment,
liquidity and tax relief.
Unit Linked Insurance Plan (ULIP):
This is a market-linked insurance plan. It provide life insurance combined
with savings at market-linked returns. The premiums is mainly invested in risk-free
securities like government securities and fixed income securities.
Real Assets:
• Gold
• Silver
• Real estate refers to various fixed assets which can be classified into three
categories: Residential Property, Commercial property, Land.
• Art
• Antiques

26. Risk return trade-off:
The principal that potential return rises with an increase in risk. Low levels
of uncertainty (low risk) are associated with low potential returns whereas high
levels of uncertainty (high risk) are associated with high potential returns.
According to risk return trade-off, invested money can render higher
profits only if it is subject to the possibility of being cost.
The trade off which an investor faces between risk ad return while
considering investment decisions is called Risk Return Trade-off.
Ex: Mr. Rohan faces a risk return trade-off while making his decision to invest.
If he deposits all his money in a SB account, he will earn a low return, but all his
money will be insured up to an amount of Rs. 1 Lakh.
The risk return spectrum also called the risk return trade-off which is the
relationship between the amount of return gained on an investment and the
amount of risk undertaken in that investment. The more return sought, the more
risk that must be undertaken.

27. Capital Market:
Capital market deals with medium term and long term funds. It refers to all
facilities and the institutional arrangements for borrowing and lending term funds
(medium term and long term). The demand for long term funds comes from private
business corporations, public corporations and the government. The supply of
funds comes largely from individual and institutional investors, banks and special
industrial financial institutions and Government.
It is the market segment where securities with maturities of more than one
year are bought and sold. Equity shares, preference shares, debentures and bonds
are the long-term securities traded in the capital market.
Capital market is classified in two ways:
1) Primary Market ( New Issue Market)
2) Secondary Market ( Stock Market)

28. Primary Market:
• Primary market is the new issue market of shares, preference shares and
debentures.
• Stocks available for the first time are offered through the new issue market.
The issuer may be the new company or the exit company.
• The issuing houses, investment bankers and brokers act as the channels of
distribution for a new issue. They take responsibility for selling the stocks to the
public.
•The issuer can be considered as manufacturer.
Types of Issues:
• Public Issue which is a method of raising a funds through the issue of shares to
investors in the primary market by companies.
• Preferential issue means when listed companies issue securities to a selected
group of persons. It may be financial institutions, mutual funds or high net
worth individuals.
• Rights issues means an issue of capital offered by a company to its existing
shareholders through a letter of offer. In other wards, a listed company issues
fresh securities only to its existing shareholders.

29. Parties involved in the new issue:
1) Managers to the issue:
• Drafting the prospectus
• Preparing a budget expenses related to the issue.
• Suggesting the appropriate timing of the public issue
• Assisting in marketing the public issue successfully.
• Advising the company in the appointment of parties involved in it.
• Directing the various agencies
2) Registrar to the issue:
The registrar to the issue is appointed in consultation with the lead
managers. They receive the share applications from various collections centers.
They arrange for the dispatch of the share certificates. They hand over the
details of the share allocation and related documents to the company.
3) Underwriters:
Underwriting is a contract in which an underwriter gives an assurance to
the issuer that the he will subscribe to the securities offered in the event of non-subscription
by the persons to whom they are offered. Ex: financial institutions,
banks, brokers and approved investment companies.

30. 4) Bankers to the issue:
Bankers to the issue are responsible for collecting the application money along
with the application form. They charge commission as brokerage.
5) Advertising Agents:
Advertising plays s key role in promoting a public issue. The advertising
agencies take responsibility for giving publicity to the issue through appropriate
platforms.
Secondary Market:
Secondary market deals with securities which have already been issued and
are owned by investors. The buying and selling of securities already issued and
outstanding take place in stock exchanges. Hence, stock exchanges constitute the
secondary market in securities.

31. Stock Exchange:
The stock exchange were once physical market places where the agents of
buyers and sellers operated through the auction process. These are being replaced
with electronic exchanges where buyers and sellers are connected only by
computers over a telecommunication network.
Auction trading is giving way to “screen-based” trading where bid prices
and offer prices are displayed on the computer screen. Bid price refers to the price
at which an investor is willing to buy the security and offer price refers to the
price at which an investor is willing to sell the security.
A stock exchange may be defined in different ways. In simple terms, stock
exchange is “ A centralized market for buying and selling stocks where the price is
determined through supply-demand mechanisms”.
According to the Securities Contracts Act, 1956, “ Stock exchange means
any body of individuals, whether incorporated or not, constituted for the purpose
of assisting, regulating or controlling the business of buying, selling or dealing in
securities”.

32. Functions of Stock Exchange:
Maintains Active Trading
Shares are traded on the stock exchanges, enabling the investors to buy and
sell securities. The prices may vary from transaction to transaction. A
continuous trading increases the liquidity or marketability of the shares traded
on the stock exchanges.
 Fixation of Prices
Price is determined by the transactions that flow from investors’ demand and
supplier’s preferences. Usually the traded prices are made known to the public.
This helps the investors to make better decisions.
 Ensures Safe and Fair Dealing
The rules, regulations and by-laws of the stock exchanges’ provide a measure
of safety to the investors. Transactions are conducted under competitive
conditions enabling the investors to get a fair deal.
 Aids in Financing the Industry
A continuous market for shares provides a favorable climate for raising capital.
The negotiability of the securities helps the companies to raise long-term
funds. When it is easy to trade the securities, investors are willing to subscribe
to the initial public offerings. This stimulates the capital formation.

33.  Dissemination of Information
Stock exchanges provide information through their various publications. The
publish the share prices traded on daily basis along with the volume traded.
Directory of Corporate information is useful for the investors’ assessment
regarding the corporate. Handouts, handbooks and pamphlets provide
information regarding the functioning of the stock exchanges.
 Performance Inducer
The prices of stock reflect the performance of the traded companies. This
makes the corporate more concerned with its public image and tries to
maintain good performance.
 Self-regulating Organization
The stock exchanges monitor the integrity of the members, brokers, listed
companies and clients. Continuous internal audit safeguards the investors
against unfair trade practices. It settles the disputes between member brokers,
investors and brokers.

34. How a trade actually takes place on a stock exchange?