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Investment Alternatives

&
Investments Attributes
Organizing Financial Assets
• It is necessary for all investors to understand
the basic nature of different investment
alternatives
• Investors can invest directly in financial assets
i.e. they themselves buy and sell securities
(Direct investing)
• Investors can buy and sell the shares of
investment companies which in turn hold
securities (Indirect investing)
Direct investing
• Non-Marketable Financial assets
– Saving deposits
– Certificate of deposit
– Money market deposits accounts
– US saving bonds
– Provident Fund Schemes
– Life Insurance
Money Market securities
– T-bills
– Negotiable certificates of deposits
– Commercial papers
– Repurchase agreements
– Banker’s acceptance
Direct investing
• Capital market securities
A. Fixed income securities
– Treasury or government bonds
– Corporate bonds
B. Equity securities
– Preferred stock
– Common stocks
Derivative Securitas
– Options
– Futures
Type of Common Stocks
• Blue-Chip Shares: Stock of Large, well-established
and financially sound company that operated for
many years.
• Income Share: A class of shares that has little
room for Capital appreciation but gives the holders a
portion of all income earned by the company.
• Growth Stock: Stocks of Company whose earnings
are expected to be grow at an above average rate
relative to the market.
• Cyclical Stock: An equity security whose prices are
effected by ups and down in the overall company.
Cyclical stock typically relates to the companies that
sell discretionary items that consumers can afford to
buy in the booming economy.
• Speculative Stock: These are low price shares and
the possibility of -albeit remote- of wind fall profits
are two of their more attractive characteristics.
Indirect Investing
• Investment companies
– Unit trusts
– Open end mutual fund
– Close – end mutual fund
Money Market Securities
• Money market securities include short-term,
highly liquid, relatively low risk debt
instruments
• This market is dominated by financial
institutions like banks
• Maturity of money market securities range
from one day to one year
• Investor may directly or indirectly invest in
these instruments
Types of Money marekt securites
• Treasury bills
• This is a short term money market security
sold at discount by government and redeemed
at face value
• Return or yeild on t-bills is calculated as
follows:

 ( Face.value  Pur. Pr ice)   365 


Yield    X 
 Pur . price   Maturiy in Days 
• Commercial Papers
• Same as t-bills, the only difference is that it is
issued by a firm
• Negotiable certificates of deposits
• Investors deposits money in a banks in return
they get a deposits certificates that can be
negotiated
• Upon maturity, principal plus interest is paid
to the depositor
• Repurchase agreements
• Short-term sales of government securities with an
agreement to repurchase the securities at a higher price
• Bankers acceptance
• It is an order to a bank by a customer to pay a sum of
money at a future date
• Once the bank accepts it, it is the banker’s responsibility to
pay to the holder
• It can be traded in the secondary market
• It allows traders to substitute the bank’s credit standing for
their own
• Used in foreign trade
Capital market securities
• Capital market encompasses fixed-income and
equity securities with maturities greater than
one year
• Risk is much higher than the money market
securities
• Marketability is poorer in some cases
• It includes both debt and equity securities
Debt (Fixed income securities)
• Bonds
• It is a long term debt instrument
• It is a fixed income security because interest
rate is fixed at the time of issue
• Buyer can sell the bond before maturity, the
priced received will depend on the level of
interest rates at that time
Characteristics of bond
• Par value or face value of most bonds is $1000
• Typical bonds have a maturity time
• Most bonds are coupon bonds, where coupon
refers to the periodic interest that the issuer
pays to the holder of the bond
• Interest on bonds is typically paid semi-
annually
Life Insurance
• Endowment Insurance: Participating and Non
Participating Endowment. Endowment
policies have maturity values.
• Whole Life Assurance: The policy provide
benefits on death. It is useful mean of transfer
of expected wealth.
• Unit Linked policies: Unit linked plan are
investment oriented product.
Life Insurance
• Term Assurance: This is a pure protection
which provides benefits on death on specified
terms like 5, 10 or 20 years.
• Immediate Annuity: This type of policy meets
the policyholder’s need for a regular income
for example after his or her retirement.
• Deferred Annuity: policyholders pays a regular
premium for a period up to specified “Vesting
date”. The premium buy a regular income for
policyholder from the vesting date.
Different Attributes of investment
• To enable and a reasonable comparison of various investment
avenues, the investor should study the following attributes.

1. Rate of return: The rate of return comprises of two parts i.e


annual income and capital gain or loss.

Rate of Return = Annual Income + (Ending price – Beginning Price)


Beginning Price

2. Risk: The risk of an investment refers to the variability of


the rate of return. It is the deviation of the outcome of an
investment from its expected value.
Different Attributes of investment
3. Marketability: It is desirable that an investment instrument
be marketable. An investment instrument is considered to be
highly marketable when:
- It can be transacted quickly
- The transaction cost including brokerage is low.
- The price change between two transactions is negligible.
4. Taxes: Some investment instruments provide tax benefits
while other not. Tax benefits are mainly three types;
-Initial tax benefits
-Continuing tax benefits
-Terminal tax benefits
Different Attributes of investment
5. Convenience: The degree of ease with which an
investment can be made and managed. The degree
of convenience vary from one investment the other.
Classification of Financial Markets
• With reference to Maturity
- Money Market
- Capital Market
• With reference to Nature of claim
-Debt Market
-Equity Market
• With reference to seasoning of claim
-Primary market
-Secondary market
Classification of Financial Markets
• Timing of Delivery
-Cash or Spot Market
-Forward or future Market
• Organisational structure
- Exchange traded market
- Over the counter market