This document discusses the key differences between investment and speculation. Investment involves committing money for long-term gains with low to moderate risk and returns based on fundamentals. Speculation involves short-term, high risk bets with potential for high returns based on market psychology. The document also outlines the traditional two-step investment decision process of security analysis and portfolio management to evaluate individual assets and construct a balanced portfolio.

1. Understanding of Investment
&
Speculation

2. Investment Definitions
• Investment: An investment is the current
commitment of money or other resources in
the expectation of reaping future benefits.
(Kane, Bodie and Marcus 2005)

3. Speculation: Act of trading in an asset, or
conducting transaction, that has significant
risk of losing most or all of initial outlay, in
expectation of substantial gain.
Speculation Definitions

4. Definitions
Generally, “investments” refers to financial
assets and in particular to marketable securities.
Financial assets are paper or electronic claims
on some issuer, such as the government or a
company.
Marketable securities financial assets that are
easily and cheaply tradable in organized markets
Real assets are tangible assets such as gold,
silver, diamonds, real estate.

5. Investment
• Long term planning (at
least one year)
• Low or moderate risk.
• Low or moderate rate of
return.
• Investment decisions are
based on fundamentals.
• Investors leveraged its
own funds.
Speculation
• Short term Planning (few
days or months)
• High Risk.
• High rate of return.
• Decisions are based on
hearsay and market
psychology.
• Resort to borrowed funds.

6. If we do not invest, then?
 If we have savings and we do not invest, we
can’t earn anything on our savings.
 Second, the purchasing power of cash
diminishes in inflation
 This means that if savers do not invest their
savings, they will not only lose possible return
on their savings, but will also lose value of
their money due to inflation
If we do not invest, then?

7. The expected risk-return trade-off

8. Steps in the decision process
• Traditionally, the investment decision process
has been structured using two-steps:
– Security analysis
– Portfolio management

9. Security Analysis
Security analysis: this is the first part of
investment decision process
It involves the analysis and valuation of
individual securities
To analyze securities, it is important to
understand the characteristics of the various
securities and the factors that affect them
Then valuation model is applied to find out
their value or price

10. Security Analysis
Value of a security is a function of estimated
future earnings from the security and the risk
attached
For securities valuation, investors must deal
with economy, industry or the individual
company
Both the expected return and risk must be
estimated keeping in view the economic,
market or company related factors

11. Portfolio Management
The second major component of the decision
processes is portfolio management
After securities have been analyzed and
valued, portfolio of selected securities is made
Once a portfolio is made, it is managed with
the passage of time
For management, there can be two
approaches

12. Portfolio Management
Approaches to portfolio management:
◦ A. Passive investment strategy
◦ B. Active investment strategy
In Passive Strategy, investors make few changes in
the portfolio so that transactions costs, time and
search costs are minimum
In Active Strategy, investors believe that they can
earn better returns by actively making changes in
the portfolio