Investment

Investment has different meanings in finance and economics. In economics, investment is the accumulation of newly produced physical entities, such as factories, machinery, houses, and goods inventories. In finance, investment is putting money into an asset with the expectation ofcapital appreciation, dividends, and/or interest earnings. This may or may not be backed by research and analysis. Most or all forms of investment involve some form of risk, such as investment in equities, property, and even fixed interest securities which are subject, among other things, to inflation risk. t is indispensable for project investors to identify and manage the risks related to the investment.

Definition of 'Security' A financial instrument that represents: an ownership position in a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option. A security is a fungible, negotiable financial instrument that represents some type of financial value. The company or entity that issues the security is known as the issuer. For example, the issuer of a bond issue may be a municipal government raising funds for a particular pro ect. !nvestors of securities may be retail investors - those who buy and sell securities on their own behalf and not for an organi"ation - and wholesale investors - financial institutions acting on behalf of clients or acting on their own account. !nstitutional investors include investment banks, pension funds, managed funds and insurance companies. Definition of 'Portfolio' A grouping of financial assets such as stocks, bonds and cash e#uivalents, as well as their mutual, e$change-traded and closed-fund counterparts. %ortfolios are held directly by investors and&or managed by financial professionals.

Portfolio Management
A Portfolio Management refers torefers to the science of analyzing the strengths, weaknesses, opportunities and threats for performing wide range of activities related to the ones portfolio for maximizing the return at a given risk. It helps in making selection of e!t "s #$uity, %rowth "s &afety, and various other tradeoffs.

Major tasks involved with Portfolio Management are as follows.

Taking decisions about investment mi$ and policy 'atching investments to ob ectives Asset allocation for individuals and institution (alancing risk against performance There are basically two types of portfolio management in case of mutual and e$change-traded funds including passive and active.

%assive management involves tracking of the market inde$ or inde$ investing. Active management involves active management of a fund)s portfolio by manager or team of managers who take research based investment decisions and decisions on individual holdings. Objectives Of Portfolio Management

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Security of Principal Investment " nvestment safety or minimi#ation of risks is one of the most important objectives of portfolio management. $ortfolio management not only involves keeping the investment intact but also contributes towards the growth of its purchasing power over the period. The motive of a financial portfolio management is to ensure that the investment is absolutely safe. %ther factors such as income, growth, etc., are considered only after the safety of investment is ensured.

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Consistency of Returns " $ortfolio management also ensures to provide the stability of returns by reinvesting the same earned returns in profitable and good portfolios. The portfolio helps to yield steady returns. The earned returns should compensate the opportunity cost of the funds invested.

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Capital Growth " $ortfolio management guarantees the growth of capitalby reinvesting in growth securities or by the purchase of the growth securities. ( portfolio shall appreciate in value, in order to safeguard the investor from any erosion in purchasing power due to inflation and other economic factors. ( portfolio must consist of those investments, which tend to appreciate in real value after adjusting for inflation.

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Marketability " $ortfolio management ensures the flexibility to the investment portfolio. ( portfolio consists of such investment, which can be marketed and traded. *uppose, if your portfolio contains too many unlisted or inactive shares, then there would be problems to do trading like switching from one investment to another. t is always recommended to invest only in those shares and securities which are listed on major stock exchanges, and also, which are actively traded.

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Liquidity " $ortfolio management is planned in such a way that it facilitates to take maximum advantage of various good opportunities upcoming in the market. The portfolio should always ensure that there are enough funds available at short notice to take care of the investor,s liquidity requirements.

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iversification of Portfolio " $ortfolio management is purposely designed to reduce the risk of loss of capital and/or income by investing in different types of securities available in a wide range of industries. The investors shall be aware of the fact that there is no such thing as a #ero risk investment. More over relatively low risk investment give correspondingly a lower return to their financial portfolio.

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!avorable "a# Status " $ortfolio management is planned in such a way to increase the effective yield an investor gets from his surplus invested funds. /y minimi#ing the tax burden, yield can be effectively improved. ( good portfolio should give a favorable tax shelter to the

investors. The portfolio should be evaluated after considering income tax, capital gains tax, and other taxes. The objectives of portfolio management are applicable to all financial portfolios. These objectives, if considered, results in a proper analytical approach towards the growth of the portfolio. 0urthermore, overall risk needs to be maintained at the acceptable level by developing a balanced and efficient portfolio. 0inally, a good portfolio of growth stocks often satisfies all objectives of portfolio management.

*inancial 'arkets
!n economics, typically, the term market means the aggregate of possible buyers and sellers of a certain good or service and the transactions between them. The term +market+ is sometimes used for what are more strictly exchanges, organi"ations that facilitate the trade in financial securities, e.g., a stock e$change orcommodity e$change. This may be a physical location (like the ,-./, (./, ,./) or an electronic system (like ,A.0A1). 'uch trading of stocks takes place on an e$change2 still, corporate actions (merger, spinoff) are outside an e$change, while any two companies or people, for whatever reason, may agree to sell stock from the one to the other without using an e$change. Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a stock e$change, and people are building electronic systems for these as well, similar to stock e$changes.

!ntroduction - Types 3f *inancial 'arkets And Their 4oles

A financial market is a broad term describing any marketplace where buyers and sellers participate in the trade of assets such as e#uities, bonds, currencies and derivatives. *inancial markets are typically defined by having transparent pricing, basic regulations on trading, costs and fees, and market forces determining the prices of securities that trade *inancial markets can be found in nearly every nation in the world. .ome are very small, with only a few participants, while others - like the ,ew -ork .tock /$change (,-./) and the fore$ markets - trade trillions of dollars daily. !nvestors have access to a large number of financial markets and e$changes

representinga vast array of financial products. .ome of these markets have always been open to private investors2 others remained the e$clusive domain of ma or international banks and financial professionals until the very end of the twentieth century. Capital Markets A capital market is one in which individuals and institutions trade financial securities. 3rgani"ations and institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds. Thus, this type of market is composed of both the primary and secondary markets. Any government or corporation re#uires capital (funds) to finance its operations and to engage in its own long-term investments. To do this, a company raises money through the sale of securities - stocks and bonds in the company5s name. These are bought and sold in the capital markets. Stock Markets .tock markets allow investors to buy and sell shares in publicly traded companies. They are one of the most vital areas of a market economy as they provide companies with access to capital and investors with a slice of ownership in the company and the potential of gains based on the company5s future performance. This market can be split into two main sections: the primary market and the secondary market. The primary market is where new issues are first offered, with any subse#uent trading going on in the secondary market. Bond Markets A bond is a debt investment in which an investor loans money to an entity (corporate or governmental), which borrows the funds for a defined period of time at a fi$ed interest rate. (onds are used by companies, municipalities, states and 6... and foreign governments to finance a variety of pro ects and activities. (onds can be bought and sold by investors on credit markets around the world. This market is alternatively referred to as the debt, credit or fi$ed-income market. !t is much larger in nominal terms that the world5s stock markets. The main categories of bonds are corporate bonds, municipal bonds, and 6... Treasury bonds, notes and bills, which are collectively referred to as simply +Treasuries.+ (*or more, see the Bond Basics Tutorial.)

Money Market The money market is a segment of the financial market in which financial instruments with high li#uidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to ust under a year. 'oney market securities consist of negotiable certificates of deposit(70s), banker5s acceptances, 6... Treasury bills, commercial paper, municipal notes, eurodollars, federal funds and repurchase agreements (repos). 'oney market investments are also called cash investments because of their short maturities. The money market is used by a wide array of participants, from a company raising money by selling commercial paper into the market to an investor purchasing 70s as a safe place to park money in the short term. The money market is typically seen as a safe place to put money due the highly li#uid nature of the securities and short maturities. (ecause they are e$tremely conservative, money market securities offer significantly lower returns than most other securities. 8owever, there are risks in the money market that any investor needs to be aware of, including the risk of default on securities such as commercial paper. Cash or Spot Market !nvesting in the cash or +spot+ market is highly sophisticated, with opportunities for both big losses and big gains. !n the cash market, goods are sold for cash and are delivered immediately. (y the same token, contracts bought and sold on the spot market are immediately effective. %rices are settled in cash +on the spot+ at current market prices. This is notably different from other markets, in which trades are determined at forward prices. The cash market is comple$ and delicate, and generally not suitable for ine$perienced traders. The cash markets tend to be dominated by so-called institutional market players such as hedge funds, limited partnerships and corporate investors. The very nature of the products traded re#uires access to far-reaching, detailed information and a high level of macroeconomic analysis and trading skills. Derivatives Markets The derivative is named so for a reason: its value is derived from its underlying asset or assets. A derivative is a contract, but in this case the contract price is

determined by the market price of the core asset. !f that sounds complicated, it5s because it is. The derivatives market adds yet another layer of comple$ity and is therefore not ideal for ine$perienced traders looking to speculate. 8owever, it can be used #uite effectively as part of a risk management program. (To get to know derivatives, read The Barnyard Basics Of Derivatives.) xamples of common derivatives are forwards, futures, options, swaps and contracts-for-difference (7*0s). ,ot only are these instruments comple$ but so too are the strategies deployed by this market5s participants. There are also many derivatives, structured products and collaterali"ed obligations available, mainly in the over-the-counter (non-e$change) market, that professional investors, institutions and hedge fund managers use to varying degrees but that play an insignificant role in private investing. Forex and the !nterbank Market The interbank market is the financial system and trading of currencies among banks and financial institutions, e$cluding retail investors and smaller trading parties. 9hile some interbank trading is performed by banks on behalf of large customers, most interbank trading takes place from the banks5 own accounts. The fore$ market is where currencies are traded. The fore$ market is the largest, most li#uid market in the world with an average traded value that e$ceeds :;.< trillion per day and includes all of the currencies in the world. The fore$ is the largest market in the world in terms of the total cash value traded, and any person, firm or country may participate in this market. There is no central marketplace for currency e$change2 trade is conducted over the counter. The fore$ market is open => hours a day, five days a week and currencies are traded worldwide among the ma or financial centers of ?ondon, ,ew -ork, Tokyo, @Arich, *rankfurt, 8ong Bong, .ingapore, %aris and .ydney. 6ntil recently, fore$ trading in the currency market had largely been the domain of large financial institutions, corporations, central banks, hedge funds and e$tremely wealthy individuals. The emergence of the internet has changed all of this, and now it is possible for average investors to buy and sell currencies easily with the click of a mouse through online brokerage accounts. (*or further reading, see The

Foreign Exchange Interbank Market.) Primary Markets vs" Secondary Markets A primary market issues new securities on an e$change. 7ompanies, governments and other groups obtain financing through debt or e#uity based securities. %rimary markets, also known as +new issue markets,+ are facilitated by underwriting groups, which consist of investment banks that will set a beginning price range for a given security and then oversee its sale directly to investors. The primary markets are where investors have their first chance to participate in a new security issuance. The issuing company or group receives cash proceeds from the sale, which is then used to fund operations or e$pand the business. (*or more on the primary market, see our IPO Basics Tutorial.) The secondary market is where investors purchase securities or assets from other investors, rather than from issuing companies themselves. The .ecurities and /$change 7ommission (./7) registers securities prior to their primary issuance, then they start trading in the secondary market on the ,ew -ork .tock /$change, ,asda# or other venue where the securities have been accepted for listing and trading. (To learn more about the primary and secondary market, read Markets Demystified.) The secondary market is where the bulk of e$change trading occurs each day. %rimary markets can see increased volatility over secondary markets because it is difficult to accurately gauge investor demand for a new security until several days of trading have occurred. !n the primary market, prices are often set beforehand, whereas in the secondary market only basic forces like supply and demand determine the price of the security. .econdary markets e$ist for other securities as well, such as when funds, investment banks or entities such as *annie 'ae purchase mortgages from issuing lenders. !n any secondary market trade, the cash proceeds go to an investor rather than to the underlying company&entity directly. (To learn more about primary and secondary markets, read !ook at Primary and "econdary Markets.) #he O#C Market

The over-the-counter (3T7) market is a type of secondary market also referred to as a dealer market. The term +over-the-counter+ refers to stocks that are not trading on a stock e$change such as the ,asda#, ,-./ or American .tock /$change (A'/C). This generally means that the stock trades either on the overthe-counter bulletin board(3T7(() or the pink sheets. ,either of these networks is an e$change2 in fact, they describe themselves as providers of pricing information for securities. 3T7(( and pink sheet companies have far fewer regulations to comply with than those that trade shares on a stock e$change. 'ost securities that trade this way are penny stocks or are from very small companies. #hird and Fo$rth Markets -ou might also hear the terms +third+ and +fourth markets.+ These don5t concern individual investors because they involve significant volumes of shares to be transacted per trade. These markets deal with transactions between brokerdealers and large institutions through over-the-counter electronic networks. The third market comprises 3T7 transactions between broker-dealers and large institutions. The fourth market is made up of transactions that take place between large institutions. The main reason these third and fourth market transactions occur is to avoid placing these orders through the main e$change, which could greatly affect the price of the security. (ecause access to the third and fourth markets is limited, their activities have little effect on the average investor.

*inancial institutions and financial markets help firms raise money. They can do this by taking out a loan from a bank and repaying it with interest, issuing bonds to borrow money from investors that will be repaid at a fi$ed interest rate, or offering investors partial ownership in the company and a claim on its residual cash flows in the form of stock. F$nctions of Financial Markets

!ntermediary F$nctions: The intermediary functions of a financial markets include the following: #ransfer of %eso$rces: *inancial markets facilitate the transfer of real economic resources from lenders to ultimate borrowers.

nhancing income: *inancial markets allow lenders to earn interest or dividend on their surplus invisible funds, thus contributing to the enhancement of the individual and the national income. Prod$ctive $sage: *inancial markets allow for the productive use of the funds borrowed. The enhancing the income and the gross national production. Capital Formation: *inancial markets provide a channel through which new savings flow to aid capital formation of a country. Price determination: *inancial markets allow for the determination of price of the traded financial assets through the interaction of buyers and sellers. They provide a sign for the allocation of funds in the economy based on the demand and supply through the mechanism called price discovery process. Sale Mechanism: *inancial markets provide a mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and li#uidity of such assets. !nformation: The activities of the participants in the financial market result in the generation and the conse#uent dissemination of information to the various segments of the market. .o as to reduce the cost of transaction of financial assets. Financial F$nctions

%roviding the borrower with funds so as to enable them to carry out their investment plans. %roviding the lenders with earning assets so as to enable them to earn wealth by deploying the assets in production debentures. %roviding li#uidity in the market so as to facilitate trading of funds. it provides li#uidity to commercial bank it facilitate credit creation it promotes savings

it promotes investment it facilitates balance economic growth it improves trading floors