1. 1
CHAPTER#1
What is investment?
The term of investing can cover a wide range of activities .It often refers to investing money
in certificate of deposit, bonds, common stock or mutual funds. Most knowledgable
investment would include other paper assets such as warrants, puts and calls, future
contracts and convertibles securities as well as tangible assets. Investment encompasses
very conservative positions as well as aggressive speculations.
INVESTMENTS
“The commitment of funds to one or more assets that will be held over some future time period.”
The field of investments therefore involves the study of the investment process. Investments
is concerned with the management of an investors wealth, which is the sum of current
income and the present value of all future income. Although, the field of investments
encompass many aspects , it can be thought of in terms of two primary functions such as
Security analysis and Portfolio management.
CHARACTERISTICS OF INVESTMENTS
Certain features characterize all investments. The following are the main characteristics of
investments:
1: RETURN
All investments are characterized by the expectation of a return. In fact, investments are
made with the primary objective of deriving a return. The return may be received in the
form of yield plus capital appreciation. The difference between the purchase price and sale
price is the capital appreciation. The dividend or interest received from the investment is the
yield. Different types of investments promised different rates of return. The return from an
investment depends upon the nature of investment, the maturity period and a host of other
factors.
2: RISK
Risk is inherent in any investment. The risk may relate to loss of capital, delay in repayment
of capital and non-payment of interest or variability of returns. The risk of an investment
depends on the following factors:
2. 2
1) The longer the maturity period, the longer is the risk.
2) The lower the credit worthiness of the borrower, the higher is the risk.
The risk varies with the nature of investment. Investment in ownership securities like
equities share carry higher risk compared to investment in debt instruments like bonds and
debentures.
3:SAFETY
The safety of an investment implies the certainty of return of capital without loss of money
or time. Safety is another feature which an investor desires for his/her investments. Every
investor expects to get back his capital on maturity without loss or delay.
4:LIQUIDITY
An investment which is easily sellable or marketable without loss of money and time is said
to possess liquidity. Some investment instruments like preference shares and debentures are
marketable but there are not buyers in many cases and hence their liquidity is negligible.
Equity shares of company listed on stock exchanges are easily marketable through stock
exchanges. An investor generally prefers liquidity for his investment, safety of his fund and a
good return with minimize risk and maximization of return.
OBJECTIVES OF INVESTMENTS
Different objectives of investment are as follows:
1: SAFETY
Perhaps there is truth to the axiom that there is no thing such as completely safe and
secure investment. Yet we can get close to ultimate safety for our investment funds through
the purchase of government issued securities in stable economic systems or through the
purchase of the highest quality corporate bonds issued by the economy top companies. Such
securities are arguably the best means of preserving principal while receiving a specified rate
of return. The safest investments are usually found in the money market ,which includes security
such as T-bills, CDs, commercial papers etc or in the fixed income market in the form of
municipal, government, and corporate bonds.
2: INCOME
The safest investments are also the ones that are likely to have the lowest rate of income
return or yield. Investors must inevitably sacrifice a degree of safety if they want to increase
their yields. This is the inverse relationship between safety and yield as yield increases, safety
generally goes down and vice versa. In order to increase their rate of investment return and
take on risk above that of money market instruments or government bonds, investors may
3. 3
choose to purchase corporate bonds or preference shares with lower investment ratings.
Investment grade bonds rated at A or AA are slightly riskier than AAA bonds , but presumably
also offer a higher income return than AAA bonds. Mostly investors , even the most
conservative-minded ones want some level of income generation in their portfolios, even if it
just to keep up with the economy rate of inflation.
3: GROWTH OF CAPITAL
Growth of capital is most closely associated with the purchase of common stock particularly
growth securities, which offer low yield but considerable opportunity for increase in value. For
this reason, common stock generally ranks among the most speculative of investments as their
return depends on what will happen in an un-predictable future. Blue chip stocks by contrast
can potentially offer the best of all world by possessing reasonable safety, modest income
and potential for growth in capital generated by long term increase in corporate revenues and
earnings as the company matures.
4: TAX MINIMIZATION
An investor may pursue certain investments in order to adopt tax minimization as part of his
investment strategy. A highly paid executives, for example, may want to seek investments with
favourable tax treatment in order to lessen his overall income tax burden. Making
contributions to an IRA or other tax-sheltered retirement plan such as a 401(K) can be an
effective tax minimization strategy.
5: MARKETABILITY OR LIQUIDITY
Many of the investments we have discussed are reasonably illiquid, which means they can not
be immediately sold and easily converted into cash. Achieving a degree of liquidity, however,
requires the sacrifice of a certain level of income or potential for capital gains. Common stock
is often considered the most liquid of investments, since it can usually be sold within a day or
two day of the decision to sell. Bonds can also be fairly marketable but some bonds are
highly illiquid or non tradable possessing a fixed term. Similarly, money market instruments
may only be redeemable at the precise date at which the fixed term ends. If investors seek
liquidity, money market assets and non tradable bonds are not likely to held in portfolios.
6: CAPITAL PRESERVATION
Capital preservation is a strategy you often associate with elderly people who want to make
sure they do not outlive their money. Retired on nearly retired people often use this strategy
to hold on the detention has. For this investor, safety is extremely important even to the
extent of giving up return for security. The logic for this safety is clear. If they lose their
money through foolish investment and are retired, it is unlikely they will get a chance to
replace it. Investors who use capital preservation tend to invest in bank CDs. US Treasury
issues, saving accounts.
4. 4
7: SPECULATION
The speculation is not a true investor but a trader who enjoys jumping into or out of stocks
as if they were bad shoes. Speculators or traders are interested in quick profits and used
advanced tracking techniques like shorting stocks, trading on the margin, options and other
special equipments. Speculators keep eyes open for a quick profit situation and hope to trade
in and out without much thought about the underlying companies. Many people try
speculating in the stock market with the misguided goal of getting rich. It does not work that
way
8: TOTAL RETURN
Total return is the need to grow the capital base through capital appreciation and reinvestment of that appreciation.
IMPORTANCE OF INVESTMENTS
If you are just starting out and beginning an investment program may be something that has
not been on your rode. You may be more concerned with how to pay for items like food
and gasoline. However, if you can scrap together even a small amount of money for
investment purpose, you will be on your way to creating a much rosier financial picture in the
years to come. The importance of investment with personal and professional aspects are as
follows:
A: THE PERSONAL ASPECTS
It is important to remember that all individuals have wealth of some kind; if nothing else, this
wealth may consist of the value of their services in the marketplace. Most individuals must
make investment decisions sometime in their lives. For example, many employees today make
investment decide whether their retirement funds are to be invested in stocks or bonds or
some other alternative. And many people try to build some wealth during their working years
by investing.
1: SAVINGS FOR RETIREMENT
Depending solely on social security benefits as your source of retirement income probably
would not cut it unless you plan to subsist on a diet of rice and water. Unless your company
offers a sizable pension plan, you will probably need to start an investment program as early
as possible to ensure a comfortable retirement. IRAs offer an easy way to invest for
retirement and also provide certain tax benefits. If your employer offers a 401(K) plan, you can
benefit from the matching funds that many companies will deposit in your account on your
behalf.
5. 5
2: PUTTING YOUR MONEY TO WORK
If you have a job, you are undoubtedly familiar with the concept of working for your money.
Investing allows you to turn the tide by making your money work for you. Trough the
magic of compound interest , for example, your accumulated interest actually earns additional
money without you having to lift a finger. Consequently, your original investment can
multiply greatly over time.
3: FINANCIAL RESOURCE
Some investment can fulfill more than one financial purpose and serve as a valuable
resource. For instance, when you purchase a home , it may appreciate in value and yield a
handsome profit when you sell it. Additionally, as you make your monthly mortgage
payments you build up equity, which is the amount of your ownership stake in the property.
You can borrow against your accumulated equity by taking out a home equity loan or
home equity line of credit to help you more immediate financial needs.
4: BEATING INFLATION
In addition to making for uncomfortable sleeping, stuffing your money under a mattress does
little to mitigate the impact of inflation over time. Putting your money in a regular bank
savings account would not help much either because of the typically minuscule interest rates.
While placing your money in investment vehicles, such as stocks and mutual funds, introduces
an element of risk, you stand a much better chance of outpacing the inflation rate
throughout a period of years.
5: INCREASES VISION
Vision is not about to see the things happening but it is to see through the future happenings.
For investing, you need a good vision into the future and should be able to interpret the
futuristic phenomena of a company s perspective. So good vision fetches you more returns and
will contribute to your success at all the fields.
6: INCREASES KNOWLEDGE
As investment does not mean buying and selling only and it needs a through research in the
various aspects of stock market and the
company , it will improve your knowledge. It
develops your knowledge in various fields. Learning more knowledge makes you to err seldom
and which in turn make you a successful investor.
7: DESIRES FOR FAMILY MEMBERS
It is your social responsibility towards your family members to look after them. It also includes
to take care of their personal desires also. And you are the first responsible person to fulfill
their wishes time to time. So if you invest carefully and get good returns and become rich
6. 6
by that you may easily fulfill all the desires of yourself as well as your family members also.
So investment plays a vital role in satisfying your family members wishes.
8: FULFILLING PERSONAL GOALS
If you have a desire for having a luxurious apartment and a luxurious car of your own, then
it is obvious that these desires may be fulfilled by a planned investment and savings. As you
invest more, you tend to become richer .And as you become richer , you may find no difficulty
in achieving your personal goals is the essence of your success in every aspect of your life.
9: INCREASES WEALTH
Besides making you financially independent, investment makes you rich also. As you invest
more and more money for a long time, it will definitely make you more richer.In the
presence generation, it is of utmost importance to be rich as it gives more benefits in each and
every aspect of your life. So investment increases your returns and at the same time make
you wealthy. As you become more wealthy, you will have more financial freedom and vice
versa. So wealth is also an important factor of our lifestyle.
10: FINANCIAL INDEPENDENCE
The most important thing is an investment gives you financial independence. If you invest
your money from the beginning, you need not to worry about the future financial needs. As
future is uncertain and there may be a situation in your life where you require a large
amount of money to get out of that situation with minimal loss. So to effectively protect
yourself from such type of situation you must include the habits of saving and investing. It
may be because of your children s education, marriage and medication. Let it be anything
which demands lot of money you may surpass it if you have invested.
B: INVESTMENT AS A PROFESSION
In addition to the above reasons, the world of investments offer several rewarding careers
both professionally and financially. A study of investments in an essential part of becoming a
professional in this field.
11: INVESTMENT BANKERS AND TRADERS
In the course of selling of new securities, issuers often rely on an investment banker for the
necessary expertise as well as the ability to reach widely dispersed suppliers of capital. Along
with performing activities such as helping corporations in mergers and acquisitions, investment
banking firms specialize in the design and sale of securities in the primary market while
operating simultaneously in the secondary markets. Investment bankers act as intermediaries
between issuers and investors. The issuers sell its securities to investment bankers, who turn
sell the securities to the investors.
12: SECURITY ANALYSTS AND PORTFOLIO MANAGERS
7. 7
A range of financial institutions including brokerage firms and investment bankers as well as
banks and insurance companies need the services of security analysts. Brokerage firm needs
them to support their registered representatives who in turn serve the public. Investment
bankers need analysts to assist in the sale of new securities and in the valuation of firms as
possible merger or acquisition candidates. Banks and insurance companies own portfolio of
securities that must be evaluated in order to be managed. Financial firms also need portfolio
managers to manage the portfolio of securities handled by these organizations. Portfolio
managers are responsible for making the actual buy and sell decisions.
13: STOCKBROKERS AND FINANCIAL ADVISERS
Traditionally, brokerage firms offered a variety of services to the investors particularly
information and advice. Brokerage firms consist of full service brokers and discount brokers .
Today, investors can obtain a wide variety of information on the economy, particular industries,
individual companies and the bond market from full service brokers . Brokers act as middleman
matching clients with independent money managers. Finally, the number of financial advisers
continues to grow. This area has employment opportunities for people interested in the
investment field. These advisers must be registered with the Securities and Exchange
Commission.
14: CFA DESIGNATION
Individuals interested in the field opposed to financial planning, should consider studying to
receive the “ CHARACTERED FINANCIAL ANALYST (CFA) DESIGNATION”. This is a professional
designation for people in the investment areas. The CFA designation is widely recognized in
the investment industry today. It serves as an indication that areas of knowledge relevant to
investing have been studied and that high ethical and professional standards have been
recognized in the field of investment.
