2. 2
Investment can be viewed as sacrifice
of present consumption in expectation
for a handsome return to be reaped in
the future.
Definition: foregoing the present
consumption in expectation of having a
greater consumption opportunities in
the future.
3. Definition: claims that organizations sell in order to
finance their financial needs, usually evidenced by legal
documents.
Example:???
Advantage: the existence of an efficient market resulting
high liquidity (easy to buy and sell).
Disadvantage: need to have a full understanding on how
the markets works and must go through broker or remiser
in order to get access into market.
4. Definition: tangible assets/physical capitals that generate
income.
Example: ???
Advantage: owning a real asset that has both investment and
aesthetic value.
Disadvantage: lack of the existence of an efficient market to
sell real assets on short notice. Involve paperwork, middleman
and commission to be paid.
5. ISSUES INVESTOR SPECULATOR GAMBLER
Definition
Process of
committing funds
into one or more
assets to obtain
return
Process of
committing funds
into one or more
assets and betting
to obtain return
Betting on certain
outcome that
depends on luck
Purpose
Way to earn an
income
Income and
entertainment
More on
entertainment
6. ISSUES INVESTOR SPECULATOR GAMBLER
Time horizon
Long run (at least
one year)
Short-term
oriented (only a
few days, weeks or
months)
Very short-time
period
Investment
decision
Make a careful
analysis
Based on rumors,
intuitions or
simple market
analysis
Depend on luck
Risk assume
Low to moderate
risk, therefore low
and moderate
return
Moderate to high
risk-moderate to
high return
High risk, high
return
7. ISSUES INVESTOR SPECULATOR GAMBLER
Income
expectation
Moderate capital
appreciation
Rapid capital
appreciation
Rapid capital
appreciation
Sources of funds
Prefer use own
money rather than
borrowing funds
through financial
institutions
Uses own money
to buy securities
and sometimes
borrows money
from money
broker or financial
institutions
Usually borrows
money from
money broker or
financial
institutions
8. RISK RETURN TIME
INVESTMENT Substantial /
Low
Substantial /
Low
Medium /
Long
SPECULATION Substantial /
High
Substantial /
High
Short /
Medium
GAMBLING High High Short
SAVINGS Low Low Short/Medium
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9. Mainly determined by the investors’ personal characteristics such
as age, sex, health, family responsibilities and past experiences.
These factors will affect the investors’ willingness to assume risk.
Investors invest in any kind of investment program fro two main
goal:
1. Personal goal
2. Financial goal
10. 1. Insurance Protection: insurance is not only a form of savings but
also provides financial protection for a family just in case
anything happens to the breadwinner. However, it gives
relatively low return as compared to some other more lucrative
investment program.
2. Providing a Home: a house not only serve as shelter but also as an
investment especially if the house is in an area where property
values are expected to rise.
11. 3. Reserve for emergency: all individual should have some kind of
savings or reserve fund to meet any unexpected needs in the
future.
4. Children’s education: children’s education is getting more and
more expensive nowadays. Investment programs provide the
opportunities to save money for the children’s education.
5. Providing for retirement: to prepare for a comfortable
retirement and to ensure that we have sufficient funds to pay
any medical expenditures and to live comfortably during
retirement period.
12. 1. Safety of principal: maintaining the original value of the
investment and protecting the purchasing power of the funds.
Investment program should be readily marketable and has price
stability.
2. Assurance of income and financial independence: investors will
have a stability of income, example, interest and dividend.
13. 3. Protection against inflation: inflation will reduce a purchasing
power. The value of money is decreasing as time goes on.
4. Liquidity of portfolios: measured by how easy can securities be
converted into cash without losing its principal.
5. Portfolio diversification: ‘don’t put your eggs in one basket’. If
portfolio is properly diversified, the risk involved can be
sufficiently reduced.
15. (i) Personal objectives
- insurance protection
- providing a home
- liquidity reserves/reserve for emergency
- large needs before retirement/children’s education
- providing for retirement
(ii) Financial objectives
- safety of principal
- assurance of income
- protection against inflation
- liquidity of portfolios
- portfolio diversification
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16. Involves comparing the type of industry and
the kind of security whether fixed or variable.
To understand the future share price
behavior, the expected return and risk
involved.
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17. Determine the value of the securities base on the present
value of future stream of income.
Compared to the current market price to determine the
attractiveness of the security.
If value of security is underprice – should be bought, held
until price is right for reselling.
If value of securities is overprice – should be sold.
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18. A group of investment with different patterns
of returns over time.
Requires knowledge about personal and
financial objectives – should considering the
timing, selection of investment and allocation
of savings to different investment.
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20. Refers to whether an investor can allocate
some portion of savings for investment
activities.
More savings to cater for present and future
financial requirement, less financial
constraints.
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21. Refers to how well an investor can absorb the
consequences of investment decision such as
emotions like greed, fear and caution.
If investors cannot control their emotion,
might end up making wrong and costly
investment decision.
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22. Refers to the lack of expertise in managing the
investment activities.
Might not have the time or proper knowledge
to analyze the investment alternatives.
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23. RISK
Def: uncertainty about the size of future return on a
principal amount of money invested.
RETURN
Def: the future value amount that we are going to get from
an investment activity.
RISK & RETURNTRADEOFF
Def: Risk and return are positively correlated.
Higher rate of return, High risk the investment
alternative.
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24. (1) Risk Averse
- Conservative type.
- require an additional expected return to compensate the high
risk that involved.
- will make sure that they will get a return for each dollar they put in
an investment.
(2) RiskTaker
- Aggressive type.
- Willing to accept a large amount of risk for a small increase in
the expected return.
(3) Risk Neutral
- Moderate type.
- Would be satisfied if they will get only the principal that they put in
the investment.
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26. Uncontrollable and external factors affecting the
price of securities.
Cannot diversified.
E.g.: changes in economy, politic & social, business,
interest rate, inflation and war.
Three sources:
i. Purchasing power/inflation risk
ii. Market risk
iii. Interest rate risk
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27. When inflation rate increases, the amount of
principal and income received will not provide the
same purchasing power as its original value.
If the price of goods and services rises due to the
increase in inflation rate (rising cost of production &
excess demand), the investor actually losing the
purchasing power.
Affects investor who buy long-term fixed income
securities and who holds surplus funds in the bank.
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28. Invest in common shares as they tend to increase in
value over time. Good hedge against inflation.
Diversify by buying real estates, precious metals
such as gold, art objects & other valuable
commodities. Tend to increase in value at the same
rate or higher than rate of inflation.
Invest in short-term securities such as short-term
bonds because short maturity allows investors to
make necessary adjustments. Less affected by the
increase in interest rate.
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29. Possibility of loss due to fluctuations in stock price.
The decrease in value of the principal invested
caused by changes in prices of securities due to
tangible and intangible events.
Such as political, sociological and economic factors.
Psychological factors such as rumors, speeches by
important people.
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30. Investing in growing firm and financially sound because price
of shares potentially will increase in the long run.
Study and carefully examine the past security price behavior.
E.g. Stocks with growth patterns in the past will continue to
do so in the future provided there is no change in the
company’s expectation of its product and market.
Buy securities at the right time.
Price low – BUY Price high – SELL
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31. Fluctuation of interest rate that will affect the
future market values & size of future income.
Loss of the principal value because of the
change in the interest rate paid on newly
issued securities.
When interest rate rises, lower the stock prices
– less demand from buyers.
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32. Invest in short-term securities to minimize
the effect of fluctuation in interest rate. The
closer the bond to its maturity date, the more
certain will be the price.
Invest at different time on securities with
different maturity periods.
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33. Controllable and internal factors affecting a
particular industry.
Can diversified.
E.g.: labor strike and mismanagement.
Two sources:
i. Business risk
ii. Financial risk
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34. Relate to the efficiency of the management in
handling the business (internal) and how it
responds to factors outside its control
(external) such as business cycle.
Affect the general operation of the company
such as increase in operating cost, reducing
the operating profit.
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35. Invest in leading companies in the industry or
smaller firms with low earning record that
shows signs of improvement.
Diversify by buying securities from different
companies of different industries.
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36. Refers to the method through which the
company plans its financial structure.
Company that borrows to finance its operation
carries high financial risk because it has to
bear high interest expense which affect low
net profit resulting low earning per share
(EPS).
The more debt the company has, the riskier it
is for shareholders.
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37. Investing in firms that use more equity
financing than debt financing.
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38. 38
TOTAL RISK
SYSTEMATIC RISK UNSYSTEMATIC RISK
1. Due to common factor.
2. Affects return on all securities.
3. Cannot be protected against through
diversification.
4. Sources:
a) Purchasing power/inflation risk
b) Market risk
c) Interest rate risk
1. Due to unique factor.
2. Affects return on one security.
3. Can be protected against through
diversification.
4. Sources:
a) Business risk
b) Financial risk
39. Investment is defined as making a current commitment of funds in order to enjoy a
higher level of consumption in the future.
Investing and speculating are different mainly because investors expect not more
than a fair return for the risk that they undertake whereas speculators assume high
risk with an intention to make quick profit through rapid increase in the price of the
securities.
A well-informed investor with well-defined investment objectives and full
understanding of financial constraints has a greater chance of making a successful
investment decision.
Risk and return is positively correlated, the higher the risk the higher the return and
vice-versa.
An investor’s attitude toward risk can be explained by 3 terms: risk averse, risk
taker and risk neutral.
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40. Two types of risk: systematic and unsystematic risk.
Sources of systematic risk: purchasing power/inflation risk, market risk and
interest rate risk.
Purchasing power risk can be avoided by: including more variable-income
securities in the investment portfolio, holding more short-term securities and
investing more in real assets.
Market risk can be avoided by: avoiding securities with volatile price movement,
following the principal of buy low sell high and not being panic easily when the
price of securities go down.
Interest rate risk can be avoided by: choosing short-term fixed-income securities,
buying securities with different maturity period and holding securities until
maturity.
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41. The sources of unsystematic risk are: business risk and financial risk.
Business risk can be avoided into choosing to invest in firms with good
management team and diversifying the investment portfolio.
Financial risk can be avoided by investing in firms that use more equity
financing than debt financing.
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