UNDERSTANDING

INVESTMENT
 Investment
Investment can be defined as the commitment of funds to one or more assets that will
be held over some future time period. Investment is concerned with the management of an
investors wealth, which is the sum of current income and the present value of all future income.
The Importance of Investment

1. Personal Aspect
Example :
Many employess today must decide whether their retirement funds are to be invested in
stock or bonds or some other alternative, and many people try some wealth durinmg
their working years by investing.
2. Retirement Decision

3. Building Wealth over Your Lifetime

INVESTMENT DECISION

The investment decision relates to the decision made by the investors or the top level
management with respect to the amount of funds to be deployed in the investment
opportunities.
The Basis of Investment Decision

Return
Investors wish to earn a return on their money.
Risk
Investors would like their returns as large as possible, however, this objectives is
constraints, primarily risk.
Structuring the Decision Process

Security Analysis
the first part of the investment decision process involves the valuation and analysis
of individual securities, which is referred to as security analysis.
Portfolio Management
the second major component of the decision process is portfolio management.
INVESTMENT ETHICS

Ethical investing depends on investors views.

Ethical investing gives individuals the power to allocate capital toward companies
that are in line with their personal views.
 INVESTMENT
ALTERNATIVRES
 Organizing Financial Assets

Hold the liabilities of traditional intermediaries, such as banks,

thrifts, and insurance companies.

Hold securities directly, such as stocks and bonds, purchased

directly through brokers and other intermediaries.

Hold securities indirectly, through mutual funds and pension

funds.
Major Types of Financial Assets

Nonmarketable

Money Market
Direct Investing
Capital Market

Financial Assets
Derivatives Market

Investment
Indirect Investing
Companies
 Nonmarketable Financial Assets

Saving Accounts,

Nonnegotiable Certificates of Deposit,

Money Market Deposit Accounts (MMDAs), and

U.S. Government Savings Bonds.

 Money Market Securities

Money Market Securities include short-term, highly liquid, relatively low-risk

debt instruments sold by governments, financial institutions, and corporations to
investors with temporary excess funds to invest.
Treasury Bills
Negotible Certificates of Deposit
Commercial Paper
Repurchase Agreement (RPs)
Bankers Acceptance
Fixed Income Securities
Securities with specified payments dates and amounts, primarily bonds. Technically, fixed income
securities consist of treasury bonds, municipal bonds, corporate bonds, assets backed securities,
mortgage related bond and money market securities.
1. Bonds
Bonds can be describe simply as long term debt instrument representing the issuers contractual
obligation, or IOU.

Characteristics :
a. Interest : Money paid periodically in return for the use of borrowed funds
b. Maturity:
The life of the bond or end of the investment
c. Principal
Amount of borrowed money
Type of bonds

1. Government bonds
Issued by the federal government

Savings bonds : they are purchased at half the face value and increase every 6 months until
face value is reached
Treasury bonds : certificate issued by U.S Treasury in exchange for at least 1,000 and
mature in more than 10 years
All these investments are the safest & most attractive because have no risk of default

These bonds usually have low interest rates = low returns

2. Corporate bonds

Issued by corporations and are usually used for long term investment
This is a riskier bond to inest in = business go bankrupt

3. Municipal bonds
Issued by state and local goverement and are graded as a safe, tax exempt investment.
Investor need to Examine Bonds Rating

Bonds are rated on how safe the investment is.

Rating examine the issuers financial strength
Kind of like a credit check for those providing investment

Rating from
AAA to BBB are safest bonds
BB to D are riskiest bonds (called junk bonds)
 Equity Securities

Preferred An equity security with an intermediate

claim (between the bondholders and the
stockholders) on a firm's assets and
Stock earnings.

Common Represents the ownership interest of

corporations, or the equity of the
stockholders. Can vote by proxy, and
Stock have limited liability on their investment.
DERIVATIVE SECURITIES

Derivatives are instruments which include:

a. Security derived from a debt instrument share, loan, risk instrument or contract for
differences of any other form of security.
b. A contract that derives its value from the price/index of prices of underlying
securities.
Types of Derivative Securities

Future contract
Future contract is an agreement between two parties to buy or sell an asset at a
certain time in the future, at a certain price. Future contracts are standardized and
stock exchanged traded.
 Options contract
An option is the right, but not the obligation to buy or sell something on a specified
date at a specified price. In the securities market, an option is a contract between
two parties to buy or sell specified number of shares at a later date for an agreed
price.
An option to buy anything is known as a CALL
while an option to sell a thing is called a PUT.