FUNDAMENTALS OF

INVESTMENTS
Power Point Presentations
Prepared By
Dr. Rajanikant Verma

Part 1 : Unit I

Unit I
The investment decision process, Types of
investments commodities, real estate
and financial assets, the Indian securities
market, the market participants and
trading of securities, security market
indices, sources of financial information,
concept of return and risk, impact of Taxes
and inflation on return.
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Meaning of Investment
Investment is a term, which is frequently
used in the field of economics, business
management, finance and it means
savings or savings made through delayed
consumption. Investment can be divided
into different types according to various
theories and principles.

A particular amount of money is invested

in the bank or an asset is bought in the
anticipation that some return will be
received from the investment in the future.

There can be a number of definitions of

Investment. While dealing with the various
options of investment, the definitional
variations of investment need to be kept in
mind.

Important points in Definitions

Commitment of present funds
Expectations of returns
Risk involved in respect of returns
Security analysis
Appreciation or reduction in capital value
Price for waiting
Different views
Investment Vs Speculation Vs Gambling

Investment Goals and Plans

1. Key Factors
a. Return
b. Risk
c. Taxes

2. Providing Needed Liquidity

a. Liquidity
b. Reasons for having liquid assets on hand

3. Quantifying Investment Goals

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Investment in terms of Economics:

According to economic theories, investment is defined as the per

unit production of goods, which have not been consumed, however,
will be used for the purpose of future production. Examples of this
type of investments are tangible goods like construction of a factory
or bridge and intangible goods like 6 months of on-job training. In
terms of national production and income, Gross Domestic Product
(GDP) has an essential constituent, which is called as gross
investment.

In economics, investment is the production per unit time of goods

which are not consumed but are to be used for future production.
Examples include tangibles (such as building a railroad or factory)
and intangibles (such as a year of schooling or on-the-job training).
In measures of national income and output, gross investment I is
also a component of Gross domestic product (GDP), given in the
formula GDP = C + I + G + NX, where C is consumption, G is
government spending, and NX is net exports. Thus investment is
everything that remains of production after consumption,
government spending, and exports are subtracted.

Investment in terms of Business Management:

According to business management

theories, investment refers to tangible
assets like machinery and equipments and
buildings and intangible assets like
copyrights or patents and goodwill. The
decision for investment is also known as
capital budgeting decision, which is
regarded as one of the key decisions.

Investment in terms of Finance:

In finance, investment refers to purchasing securities or

any other financial assets from the capital market or
money market or purchasing real properties with high
market liquidity for example, gold, silver, real properties,
and precious items. Financial investments are
investment in stocks, bonds, and many other types of
security investments. Indirect financial investments can
also be done with the help of mediators or third parties,
such as pension funds, mutual funds, commercial banks,
and insurance companies.

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Investment in terms of Personal Finance:

According to personal finance theories, an

investment is the implementation of money
for buying shares or mutual funds or
purchasing an asset with the involvement
of the factor of capital risk.

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Investment in terms of Real Estate:

According to real estate theories, investment is

referred to money utilized for buying property for the
purpose of ownership or leasing. Also in this case,
the factor of capital risk is involved.

Investment in terms of Commercial Real Estate:

It involves real estate investment in properties for
commercial purposes such as renting.
Investment in terms of Residential Real Estate:
This is the most basic type of real estate investment,
which involves buying of houses as real estate
properties.
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Purpose of Investment
Longer life expectancy
Retirement plan
High Rate of taxations
High interest rate
High rate of inflation
Larger income
Availability of numbers of plans

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Types of Assets

Real Assets
Examples
Tangible,

moveable, Immoveable
Used for production of goods and services

Financial assets
Examples
Paper

securities
Represent Financial claim

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The main functions assigned to the financial assets

are two:

To distribute the savings between the different

economic agents, from those with a condition of
surplus to those in need of funds.

To generate a risk transfer from the issuer of the

assets to the receiver of the same. This is so
because the assets constitute a payment
compromise that will be sensible to the positive or
negative oscillations from the activities of the issuer
of these assets. The issuer is transferring part of the
risk derived from its investment action.
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In reference to the main characteristics of the financial assets:

Liquidity: They are easy to convert into liquid money thanks to the
existence of a market that the issuer of the assets doesnt fulfill the
agreement, the payment of principle and interests. Its worth to
emphasize that it is not understood a risk of an asset whatever
happens with the oscillations of the quotes on the market.

So then, in the case of assets issued by private companies. The risk

will be associated to the solvency capacity of its activities.

In reference to the assets issued by the government, for example,

the risk would be minimum due to the guarantee that it offers.

Profitability: its referred to the capacity of the asset to produce

interests or other yields for the acquirer as a counter measure for its
cession of funds and for assuming the risks.

The financial assets can be classified attending different criterions.

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Types of Investments

Risk less vs Risk free

Direct vs Indirect (P. 9 Preeti Singh)

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Features of Investment Programme

Safety of Principal
Liquidity
Income stability
Appreciation and Purchasing Power
stability
Legality and freedom from care
Tangibility

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The Difference Between

Investment & Speculation

Investment & speculation are overlapping and used interchangeably.

In Speculation there is an investment of funds with an expectations of some

return in the form of capital profit resulting from the price change and sale of
investment.

Speculation means the ownership of an asset with the intent to profit from
expected changes in supply or demand.

For example, a speculator buys a share of stock not to benefit from the
dividends or the earnings of a company, but because he expects the
demand for the stock to rise, lifting its price. Similarly, one speculates in a
commodity such as silver because one expects demand to shift, or one
might sell short wheat (selling to buy back later) if one thinks the supply will
increase more than others expect. Speculators in currencies expect
changes in foreign exchange prices due to shifts in supply and demand.

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Investments are also usually not considered gambling, although some

investments can involve significant risk. Examples of investments
include stocks, bonds and real estate. Starting a business can also be
considered a form of investment. Investments are generally not
considered gambling when they meet the following criteria:

Positive expected returns (at least in the long term)

Economic utility

Underlying value independent of the risk being undertaken

Some speculative investment activities are particularly risky, but are still
usually considered separately from gambling:

Securities derivatives, such as options or futures, where the value of

the derivative is dependent on the value of the underlying asset at a
specific point in time (typically the derivative's associated expiration
date)

Foreign currency exchange (forex) transactions

Prediction markets

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The Difference Between

Investment & Speculation
Basis

Investment

Speculation

Time Horizon Long Term

Short Term

Risk

Limited

High

Return

Low

High

Use of Funds Personal savings

Borrowed

Purpose

Safety, Liquidity, Profitability

and Stability

Market Behavior

Decisions

Based on Performance of
Company (Fundamental
analysis)

Demand Supply,
haunches & beliefs

Investors

Owner

Third Party

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Gambling

The difference between investment and gambling is very

simple.

Investment id planned, evaluated and careful allocation

of funds which offers safety of principal, moderate and
consistent returns and long term commitment whereas
gambling is just opposite , it involves high risk, high
return with thrill and excitement. Its is based on rumors,
haunches, unplanned, non scientific and without knowing
the nature of risk

One of the most widespread forms of gambling involves

betting on horse or greyhound racing, game of cards,
lottery etc.
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The Investment Process

Five steps:
Set

investment policy
Perform security analysis
Construct a portfolio
Revise the portfolio
Evaluate performance
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STEP 1: Investment Policy

Identify investors unique objective

Determine amount of investable wealth

State objectives in terms of risk and return

Identify potential investment categories

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Step 2: Security Analysis

Using potential investment categories,
find mispriced securities
Using fundamental analysis

Intrinsic

value should equal discounted present

value

Compare current market price to true market

value
Identify undervalued securities

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Step 3: Construct a Portfolio

Identify specific assets and proportion of
wealth in which to invest
Address issues of

Selectivity
Timing
Diversification

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Step 4: Portfolio Revision

Periodically repeat step 3
Revise if necessary

Increase/decrease existing securities

Delete some securities
Add new securities

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Step 5: Portfolio Performance Evaluation

Involves periodic determination of portfolio

performance with respect to risk and
return
Requires appropriate measures of risk and
return

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Thanks

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