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Outline
Introduction (Real v/s Financial asset) Investment Features and Objectives Sources of Investment Information Why do individuals invest? Why Study Investments? Features and objectives Types of investors
Real assets Physical assets (land, building, machinery, knowledge) Financial assets Paper assets (stocks, bonds, derivatives, currencies)
Meaning of Investments
Commitment of money that is expected to generate additional money Current commitment of funds for a period of time to desire future payments that will compensate the investor for
The time the funds are committed The expected rate of inflation, and The uncertainty of the future payments
Investment
The individual who makes an investment is known as the investor. In economic terms, investment is defined as the net addition made to the capital stock of the country.
In financial terms, investment is defined as allocating money to assets with a view to gain profit over a period of time.
Investments in economic and financial terms are inter-related where an individual's savings flow into the capital market as financial investment, which are further used as economic investment.
Basic element of all investment decisions: trade-off between expected return and risk
Knowledge of investments help investors understand the relationship between risk and return Manage their own wealth
To become a licensed broker, CFA/CFP, Security Analyst, Portfolio Manager.
Investment as a Profession
Features of Investment :
Objectives of Investment :
Safety Regularity of income Capital Appreciation Minimization of Risk Liquidity Hedge against Inflation Tax Considerations Arbitrage
Types of Investors
Investment Constraints :
Time Investors Age Risk Tolerability Liquidity / Marketability Need for Regular Income Tax Liability / Exemption
Inadequate comprehension of return and risk. Vaguely formulated investment policy. Naive extrapolation of the past. Cursory decision-making. Simultaneous Switching Misplaced love for cheap stocks. Over diversification and under-diversification. Buying shares of familiar companies Wrong attitude toward losses and profits. Tendency to speculate.
Speculation
Speculation means taking business risks with the anticipation of acquiring short term gain. It also involves the practice of buying and selling activities in order to make profit from the price fluctuations. An individual who undertakes the activity of speculation is known as speculator.
Funds
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Investment Policy: The policy is formulated on the basis of investible funds, objectives and knowledge about investment sources. Security Analysis: Economic, industry and company analysis are carried out for the purchase of securities. Valuation: Intrinsic value of the share is measured through book value of the share and P/E ratio. Future value of securities can be estimated using trend analysis Portfolio Construction: Portfolio is diversified to maximise return and minimise risk. Several modes are available: Debt and equity; industry diversification; company diversification. Portfolio Evaluation: The performance of the portfolio is appraised and revised.
Investment Information
An investor must have adequate knowledge about the investment alternatives and markets before making any kind of investment. The various sources from which an investor can gather the investment information are:
Newspapers, Investment dailies Magazines and Journals Industry Reports RBI Bulletin Websites of the SEBI, RBI and other private agencies Stock market information
FINANCIAL MARKETS A financial market is a market for creation and exchange of financial assets. Financial markets play a very pivotal role in allocating resources in the economy by performing three important functions as they : Facilitate price discovery. Provide liquidity. Reduce the cost of transacting.
Financial markets considerably reduce the following costs of transacting Search cost Information cost