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Lecture 1
Americanbusinessmagnate OftenintroducedasLegendary Investor Wasrankedastheworld's wealthiestpersonin2008andis thethirdwealthiestpersoninthe worldasof2011 Bought his first share at the age of 11 and now regrets that he was too late !! Bought a small firm at the age of 14 with savings from delivering news papers.
BecomingaBillionaire
Step
1 :- Saving
Step
2 :- Investing
FindMoneytoSave
Watch the daily Leaks.!!!!
Save Rs. 10 per day (Lunch, Soda, Snacks etc.) 10 x 7 = Rs.70 a week ! 70 x 4 = Rs. 280 a month !! 280 x 12 = Rs. 3360 a year !!!
A little adds up..
Gains
Some investments can be very successful. Rs. 8,000 invested VIP Industries in September 2010 in would have been worth Rs. 18,480 in August 2011
And Losses
Rs.10,000 invested in September 2010 in Koutons Retail would have been reduced to Rs.700 by August 2011.
Variability
The
essentially feature of stock prices is unpredictable variability Portfolio management is about coping with the variability Investment analysis is about underlying longer-term trends The same principles apply to both
Variability
Variability
Variability
Overview
This
semester is about investment in financial portfolios Investment is defined as a sacrifice made now to obtain a return later
Two
Real investment is the purchase of land, machinery, etc Financial investment is the purchase of a "paper" contract
Overview
Real
Financial
investment can provide finance for real investment decisions Financial investment can guide real investment decisions
Investment Activity
Cash Bank Deposits PF LIC Pension Schemes Post office Deposits and Certifications Saver Investor 1. House, Land, Flats, Buildings 2. Gold, Silver and other Metals 3. Consumer Durables
Shares, Bonds, Government Securities Mutual Fund Schemes, UTI Units etc.
Use
a. Technical analysis the examination of past prices for trends b. Fundamental analysis true value based on future expected returns
Portfolio Construction
Identify
Portfolio Evaluation
the performance of portfolio previous three steps
Assess
Portfolio Revision
Repeat
Financial Investment
Commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in the form of interest, income {dividend}, or appreciation of the value of the instrument. It is related to saving or deferring consumption
Real Investment
Money
invested in tangible and productive assets such as plant and machinery, as opposed to investment in securities or other financial instruments.
Components of Investment
There are numerous components to investment Markets: where assets are bought and sold, and the forms of trade Securities: the kinds of securities available, their returns and risks Investment process: the decision about which securities, and how much of each Financial theory: the factors that determine the rewards from investment (and the risks)
Markets
A
market is any organized system for connecting buyers and sellers There are many security markets Markets may have a physical location
May
Markets
vary in the securities that are traded and in the way securities are traded
Characteristics of Markets
There
Most
Characteristics of Markets
Trades
firms Trades on the secondary market do not raise additional capital for firms The secondary market is still important
It gives liquidity to primary issues. New securities would have a lower value if they could not be subsequently traded It signifies value. Trading in assets reveals information and provides a valuation of the assets. This helps to guide investment decisions
Characteristics of Markets
Markets
Some
assets, such as most bonds, have a fixed lifespan Common stock have an indefinite lifespan
Brokers
A
broker is a representative appointed by an individual investor Brokers have two conflicting roles
An advisor: a broker can offer investment advice and information A sales person: brokers are rewarded through commission and have an incentive to encourage trade
full-service broker is a brokerage house that can offer a full range of services including investment advice and portfolio management
Securities
The standard definition of a security is: "A legal contract representing the right to receive future benefits under a stated set of conditions" The piece of paper defining the property rights held by the owner is the security
Return
Return = end - of - periodwealth--beginning - of - periodwealth beginning - of - periodwealth
V0
V1 V0 r= 100 V0
Return
Example
An
initial investment of Rs.10,000 is made. One year later, the value of the investment has risen to Rs.12,500. The return on the investment is
Example
An
investment initially costs Rs.5,000. Three months later, the investment is sold for Rs.6,000. The return on the investment per three months is
6000 5000 r= 100 = 20% 5000
risk inherent in holding a security is the variability, or the uncertainty, of its return Factors that affect risk are 1. Maturity
Underlying
factors have more chance to change over a longer horizon Maturity value of the security may be eroded by inflation or currency fluctuations Increased chance of the issuer defaulting the longer is the time horizon
Creditworthiness
The governments of the developed countries are all judged as safe since they have no history of default in the payment of their liabilities
Some
countries have defaulted in the recent past Corporations vary even more in their creditworthiness. Some are so lacking in creditworthiness that an active ''junk bond'' market exists for high return, high risk corporate bonds that are judged very likely to default
Priority
Bond
holders have the first claim on the assets of a liquidated firm Bond holders are also able to put the corporation into bankruptcy if it defaults on payment
4.
Liquidity
Liquidity
relates to how easy it is to sell an asset The existence of a highly developed and active secondary market raises liquidity A security's risk is raised if it is lacking liquidity
Underlying Activities
The
economic activities of the issuer of the security can affect how risky it is Stock in small firms and in firms operating in hightechnology sectors are on average more risky than those of large firms in traditional sectors
greater the risk of a security, the higher is expected return Return is the compensation that has to be paid to induce investors to accept risk Success in investing is about balancing risk and return to achieve an optimal combination The risk always remains because of unpredictable variability in the returns on assets
Venture Funds Highest Risk (Company Deposits) Return Equity Shares PSU Bonds UTI Unit, Mutual Funds Lowest Risk
Classes of Instruments
On
the basis of Ownership or debt nature of instruments On the basis of period to maturity On the basis of issuers credibility.