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INTRODUCTION TO INVESTMENT

CONCEPTS OF INVESTMENT: ATTRIBUTES - ECNOMIC V/S FINANCIAL INVESTMENT - INVESTMENT AND

SPECULATION - FEATURES OF A GOOD INVRSTMENT – INVESTMENT PROCESS . FINANCIAL
INVESTMENT AVILABLE FOR INVESTMENT : MONEY MARKET INVESTMENT – CAPITAL MARKET
INVESTMENT. DERIVATIES - TYPES OF DERIVATIES.

INTRODUCTION

Investment involves allocating resources usually money with the expectation of generating on income of
profit .

The core objective of investment is to achieve a desired investment return with the boundaries of an
investor’s risk tolerance time horizon and financial goals.

MEANING

An investment is an asset or item accrued with the goal of generating income recognition.

Or

The act of putting money , efforts , time etc., into something to make a profit

INVESTMENT ATTRIBUTES

1. Risk: The possibility of losing some or all of the invested capital.

2. Return: The gain or loss on an investment over a specified period.

3. Liquidity: Investment can be converted into cash without significantly affecting its value.

4. Volatility: The degree of variation in the price of an investment over time.

5. Time horizon: The expected duration of investment is held before taking profit or reallocating funds.

6. Cost and fees: The expenses associated with buying , holding and selling and investment including
brokerage fees, fund management fees etc;,
ECONOMIC INVESTMENT V/S FINANCIAL INVESTMENT

A . Economic Investment :

it refers to the expenditure on capital goods that are used to produce goods and services in future.

Importance of economic investment

1 . Directly contributes to a country’s gross domestic product [GDP]

2 . It helps in enhancing the standard of living

3 . It drives technological advancement and innovation

Types of economic investment

1 . Business investment : Business investment includes investment in new factories machinery and
technology.

2 . Residential investment : This type involves spending on residential building and housing

3 . Public investment : Government spending on infrastructure projects education and health can
facilities falls under this category.

4 . Foreign direct investment (FDI) : FDI occurs when a company or individual from one country makes
an investment into physical assets or a company in other country

B . FINANCIAL INVESTMENT :

Financial investment is an assets that you put money into with the hope that it will grow into a larger
some of money

INVESTMENT OF FINANCIAL INVESTMENT

1 . Equities (stocks): A stock or any other security representing an ownership interest in a company

2 . Fixed – Income securities (Bonds): These are debt instruments issued in by corporation and
governments offering regular interest an payments and principal repayment at maturity

3 . Mutual fund and exchange – Traded funds (ETF’S): Pooling money from multiple investors to invest in
diversified portfolio of stocks , bonds or other assets.

4. Derivatives: this are the complex instruments derived from the value of underlying assets

5 . commodities : direct investment in physical goods like gold ,oil and agricultural products or indirectly
through future contracts
Basis of comparison Economic investment Financial investment
Definition Spending on capital goods Allocating capital returns
Focus Physical assets Financial assets
Examples Machinery, infrastructure Stock, bonds
Return Productivity growth Financial returns
Time horizon Long term Can vary
Liquidity Generally low Varies, often high
Objective To improve productivity To make financial gains
Scope A narrow concept A wider concept.
Assets Involves investment in real assets Involves investment in both real
only and financial assets
Which company? New companies usually invest in Developed company generally
economic investment make financial investment.
Accessibility Mainly corporations, government Individual, institutions

Investment and Speculation

Investment meaning :
 Investment is putting your money into something with the hope that it will grow and make more
money for you in the future.
 This could be buying stocks, real estate or starting a business.
 The main goal is to increase your wealth over time.

Features of investment:
1. Potential for returns: Investments are made with the expectation of earning a profit or income.
2. Risk: All investments are come up with some level of risk, ranging from low to high
3. Liquidity: This refers to how easily and investment can be converted into cash.
4. Income generation: Some investments are aimed at generating regular income such as bonds or
dividends paying stock.
5. Inflation: The key to beat inflation is buy investing in assets which give higher return.
6. Purchasing power :Every investor before making an investment considers the future purchasing
power of their powers.

Objectives of investment:
1. Income: If your primary objective is income, you will have to sacrifice a degree of safety in order to
increase your returns.
2. Capital appreciation: This objective is to achieve growth in the value of the asset over time.
3. Financial goals : financial goals are the personal, big picture objectives you set for how you will save
and spend money.
4. Safety: In finance, our family`s safety is one of the main objectives of investment planning.
5. Beating inflation: Inflation gradually reduces the value of your money, to counter this investors aim to
make investments that generate higher returns.
6.Grow your savings: Investment is the only way to start growing your invested money.
7. Safeguard your money: Investing keeps your money safe from immediate and unnecessary
expenditure.
8. Capital appreciation: Capital preservation is an investment strategy that aims to preserve capital and
prevent less portfolio.
9. Minimizing taxes: Several kinds of investment can help you lessen your income tax burden.
10. Retirement: The another objective is saving up for retirement ,as it is a necessity in future.

Advantages of Investment
1. regular income.
2. Offer Investment allows individuals to grow their wealth over time.
3. Long term financial security.
4. A well planned investment strategy can provide financial security and long term goals.
5. Enjoy retirement.
6. Sustainable financial protection.
7. Certain investments offer tax advantages, helping you keep more of your earnings.
8. Death risk coverage.

Disadvantages of investment
1. A negative returns refers to a loss on investment.
2. Dividends is not fixed.
3. Selecting right financial investment security is not easy.
4. Demands skill and time.
5. No guarantee of returns.
6. Poses active risk.
7. Fluctuation in market price.
8. High tax bill.

Types of investments
1. Stocks: Shares in companies , potential dividends.
2. Bonds: Debt securities, providing regular interest payments.
3. Mutual funds and ETFs: Pooled investments managed by professional.
4. Real estate: Physical property investment.
5. Commodities: Physical goods like gold and oil.
6. Derivatives: Financial contracts based on value of under lying assets.
7. Commodities : direct investment in physical goods like gold ,oil and agricultural products or
indirectly through future contracts .

SPECULATION:
 Meaning : Speculation is when someone makes a guess or prediction about something, often based on
limited information or without solid evidence.

Mechanisms of speculation: Speculators employee various strategies and investments to execute their
trades.
 Day trading: buying and selling financial instruments within the same trading day.
 Swing trading: Holding positions for several days or weeks to capitalize on expected price
movements.
 Margin trading: Margin trading means we borrow from broker to invest in stocks.
 Derivatives: A derivative is a financial contracts whose value is based on the performance of an
underlying assets such as stocks or bonds.

Crypto currency speculation: It refers to the practice of buying, holding or trading digital currencies wiyh
the expectations of making profit from short term price fluctuation.

KEY DIFFERENCES BETWEEN INVESTMENT AND SPECULATION

BASIS OF COMPARISON INVESTMENTS SPECULATION

RISK LEVEL Lower risk Higher risk.
RETUEN EXPECTATION Steady, gradual Quick, high
OBJECTIVE Wealth growth Profit from volatility
TIME HORIZON Long term Short term
USE OF FUNDS Own funds Owned or borrowed funds
IMPACT BY MARKET Less affected Highly affected.
FLUCTUATION
MARKET APPROACH Buy and hold Buy and sell quickly.
STABILITY OF INCOME High Very low
MEANING The purchase of an asset with the Speculation is an act of conducting
hope of getting returns is called a risky financial transaction, in the
investment. hope of substantial profit.
SOURCE OF INCOME Earning of enterprise Change in market price.
INTENT TO PROFIT Changes in value Changes in prices.

FEATURES OF GOOD INVESTMENT:

1. Risk management: good investments are those where risks are well understood ,manageable
and aligned with the investors risk tolerance.
2. Transparency and regulation: Investments should be transparent ,providing clear information
about their structure, costs and risks .
3. Growth potential: The ability of an investment to grow in value over time is essential .
4. Inflation protection: A good investment should offer protection against inflation, ensuring that
the purchasing power of returns is not eroded overtime.
 5. Alignment with investment goals: A good investment aligns with investors specific goals ,
whether its for retirement, purchasing a home etc..
6. Market conditions: understanding and adopting the market conditions is crucial for identifying
good investments.
7. Low risk: while all investments carry some level of risk, good investments generally have a risk
level that is acceptable and give potential returns.
8. Tax efficiency: some investments offer tax benefits or are structured in a way that maximizes tax
liabilities ,which can enhance overall returns.
9. Liquidity: liquidity or ease where investment can be easily converted into cash with actually
affecting its value. Investment with high liquidity offer higher profits.
10. Reputable management: Investments managed by reputed individuals or organizations with a
proven track ,records success of the management or individual.

INVESTMENT PROCESS:

Investment process is frame work that guides investor in systematically achieving their financial goals.

 Understanding investment goals and objectives: The foundation of investment process is a clear
articulation of investors goals and objectives , identifying goals helps in risk tolerance and
liquidity needs etc..,
 Assessing risk tolerance and investment horizon:
Assessing the risk tolerance involves evaluating how comfortable you are with possibility of
losing money in your investments.
Investment horizon refers to the length of time that you plan to hold your investments before
needing to access the money.
 Asset allocation: It is the process of distributing investments among different asset classes, such
as stock , bond etc..,
 Security selection: Once asset is determined, the next step is selecting securities within each
asset class.
 Portfolio construction: It refers to the process of selecting and combining different assets like
stocks, bonds and other investments, in such a way that aims to achieve specific financial goals
while managing risk.
 Execution: It is the act of buying and selling securities to construction of portfolio.
 Monitoring and rebalancing: It means to review your portfolio to ensure it remains aligned with
your goals and risk tolerance and make adjustments as needed.
 Performance evaluation: Evaluating the performance of investments portfolio is essential to
understand its success in meeting the investment objectives.
 Tax consideration: Tax consideration refer to the you need to think about when making financial
decisions, taking into account how they might affect your tax.
 Review and adjustment: The investment process is dynamic it needs regular reviews of
investment strategy and adjustments if any to be made according to market conditions.
 Ethical and sustainable investing: It means putting your money into companies or funds that
align with your values and have positive environmental, social and governance (ESG) practices.

FINANCIAL INSTRUMENTS

Money market:
Money market is used to define a market where short term financial assets with a maturity up to one
year are traded. In other words the money market is a mechanism which facilitate the lending and
borrowing of instruments which are generally for the duration less than a year.

Money market is a part of a larger financial market which consists of numerous smaller sub-
market like bill market, expectance market, call money market etc.., Besides, the money market
deals are not out in money/cash , but other instruments like trade bills, government papers,
promissory notes, etc.., but the money market transactions can’t be done through brokers as
they have to be carried out via mediums like formal documentation, oral or written
communication.

Features of money market instruments

I. Safety: Since the issuer of money market instruments have strong credit rating it
automatically means that the money instruments issued by them will also be safe.
II. Liquidity: They are considered highly liquid are they are fixed-Income securities which
carry short maturity periods of a year or less.
III. Discounted price: One of the main futures of money market instruments is that they are
issued at a discount on their face value.

Purpose of money market:

I. Provides fund at a short notice : Money market offers an excellent opportunity to

individuals small and big corporations, banks of borrowing money at very short
notice.
It is better for institutions to borrow funds from the market instead of borrowing
from banks, as the process is hassle-free and the interest rate of this asset is also
lower than that of commercial loans.
II. Maintains liquidity in the market : Maintains one of the most crucial functions of
the money market is to maintain liquidity in the economy.
Some of the money market instruments are an important part of the monitory policy
frame work.
III. Utilization of surplus funds: Money market makes it easier for investors to
dispose off their surplus , retaining their liquid nature, and earn significant profits on
the same .
It facilitates investors savings into investment channels.
 IV. Helps in monitory policy: A developed money market helps RBI in efficiently
implementing monitory policy. This further helps RBI in formulating the future
monitory policy, deciding long term interest rates, and suitable banking policy.
V. Aids in financial mobility: Money market helps in financial mobility by allowing
easy transfer of funds from one sector to another.
This ensures transparency in the system.

MONEY MARKET INSTRUMENTS:

1) Bankers Acceptance:
 A financial instruments produced by an individual or a corporation , in the name of
the bank is known as banker’s acceptance.
 It requires the issuer to pay the instrument holder a specified amount on
predetermined date, which ranges from 30 to 180 days, starting from the date of
issue of the instrument
 Banker’s acceptance is issued at a discounted price, and the actual price is paid to the
holder at maturity.
 The difference between the two is profit made by the investor.
2) Treasury bills:
 They are issued by the RBI on behalf of central government for raising money. They
have short term maturities with highest upto one year.
 Currently, T-Bills are issued with 3 different maturity periods, which are, 91 days T-
Bills, 182 days T-Bills, 1year T-Bills.
 T-Bills are issued at a discount to the face value. At the maturity, the investers get the
face value amount.
 They are the safest short term fixed income investments as they are backed up by the
government of India.
3) Repurchase agreement:
 Repurchases agreement are a formal agreement between two parties, where one
party sells a security to another, with the promise of buying it back at a later date
from the buyer.
 It is also called sell buy transaction.
 The seller buys the security at a pre-determined time and amount which also includes
the interest rate at which the buyer agreed to buy the security
 The interest rate charge buy the buyer for agreeing to buy the security is called the
repo rate.
4) Certificate of deposits:
 A certificate of deposits (CD) is issued directly buy a commercial bank, but it can be
purchased through brokerage firms.
 It comes with the maturity date ranging from 3 months to 5 years and can be issued
in any denomination.
 
Most CD’s offers a fixed maturity date and the interest rate, and they attract a
penalty for with drawing prior to the time of maturity.
5) Commercial papers:
 Commercial papers is an unsecured loan issued by large institutions or corporations to
finance short term cash flow needs, such a inventory and accounts payables.
 It is issued at a discount, with the difference between the price and the face value of
the commercial paper being the profit to inventor.
 Only institution with high credit rating can issue commercial paper, and it is therefore
considered a safe investment.
 Commercial paper comes with a maturity date between 1 month and 9 months.

Capital Market
The capital market involves a diverse range of players, each playing a specific role in the Insurance,
Trading and investments in various financial instruments. These participants collectively contribute to the
functioning and efficiency of capital market.

(or)

Capital market is a place whre buyers and sellers indulge in trade (buying/selling) or financial securities
like bonds, stocks etc.., The trading is undertaken by participants such as individuals and institutions.
Capital market trades mostly in long-term securities.

Types of capital market

I. Primary market:
a. Primary market is the market for new shares or securities.
b. A primary market is one in which a company issues new securities in exchange for cash
from investors (buyer).
c. It deals with trade of new issues of stocks and other securities sold to investors.
d. In primary market the company sells the shares to the investors at a fixed price.
e. The parties involved in primary market are the company and the investors.
f. A primary market is where the securities are issued for the first time.
g. The frequency of selling the securities is only for once.
h. There is no organization set up.
i. A securities once sold here cannot be resold here.
j. Prices are determined and decided by the management of the company.

II. Secondary market:

a. Secondary market offers the trading of already issued securities.
b. It is also known as after market or share market.
c. Here the trading takes place between investors.
 d. The investors buy and sells among themselves.
e. There is geographical setup and organizational presence.
f. The price depends upon the demand of supply.
g. Frequency of selling is many as possible.
h. Securities maybe bought and sold many times but not the first time
i. Investors gain or lose profit according to market conditions
j. The intermediaries are the brokers.

Players of capital market

1) Issuers:
 Corporations: A companies issues stocks and bonds to raise capital for expansions,
research and development and other business activities.
 Government: Government issue bonds and securities to fund public projects and
meet budgetary requirements.
2) Investors:
 Individual investors : Retail investors who buy and sell security for investment.
 Institutional investors: Large entities such as mutual funds, pension funds,
insurance companies and hedge funds, investing on behalf of their clients or policy
holders.
3) Intermediaries:
 Investment banks: Facilitate the issuance of securities in the primary market,
underwriting in the new offerings, and advising issuers on the pricing and structure
of the securities
 Underwriters: Assist in the distribution and sale of newly issued securities.
 Brokers and dealers: Facilitate the buying and selling of securities in the secondary
market by acting as intermediaries between buyers and sellers.
4) Regulatory bodies:
 Securities and exchange commission: In the United States regulates and overseas
securities markets, protecting investors and maintaining market integrity.
 Security and exchange board of India (SEBI): In India, regulates and supervises
securities market, ensuring investor protection and market transparency.
5) Stock exchanges:
 National stock exchange: A major stock exchange in India.
 New york stock exchange (NYSE): A prominent stock exchange in the united states.
6) Auditors:
 Independent auditors who verify the financial statements of issuers, ensuring
accuracy and transparency in financial reporting.

Instruments in capital market

 1) Equity securities:
 Common stocks: Represents ownership in corporation giving share holders voting
rights and claim on a portion of the companies profit.
 Preferred stock: Combine features of both equity and debt, providing share holders
with fixed dividends and preference in assets distribution in case of liquidation.
2) Debt securities:
 Bonds: fixed income securities that represents a loan made by an investor to an
issuer. Bonds pay periodic interest and return the principal at maturity.
 Debentures: Unsecured bonds not backed by specific assets, relying on a isuuers
credit worthiness.
3) Mutual funds:
 Pooled investment funds that collect money from many investors to invest
diversified portfolio of stocks, bonds, or other securities.
4) Commercial papers:
 Short term debt instruments issued by corporations to raise funds for immediate
financing needs.
 Commercial papers typically have maturity ranging from few days to one year.
5) Treasury bills:
 Short term debt securities issued by a government providing a low risk investment
options.
 T-bills are sold at discount and mature at face value.
6) Perpetual bonds:
 It is bonds with no fixed maturity date paying periodic interest indefinitely.
 The issuer as the option to redeem the bond but is not obligated to do so.

DERIVATIVES
MEANING OF DERIVATES: Derivatives are financial instruments whose value is derived from the value of
an underlying asset, Index, or rate ,common underlying asset include stock ,bonds ,commodities,
currencies interest rates, and market indexes, The main types of derivatives are future, option, forwards
and swaps.

FEATURES OF DERIVATIVES

1) Leverage: Derivatives often require a small initial investment relative to the value of the
underlying asset ,allowing for greater exposure.
2) Hedging: They are used to mitigate or manage risk by providing a way to lock in prior rates
3) Speculation: Traders use derivatives to bet on the future direction of market prices to makes
profits.
 4) Liquidity: Derivatives markets, especially those for standardized contracts, tend to be highly
liquid.
5) Price discovery: They contribute to more efficient market pricing by reflecting expectations
about future movement of underlying assets.

ADVANTAGES OF DERIVATIVES :

I. Risk management: Derivatives can be used to hedge risks related to price movements of
underlying assets.
II. Access to other inaccessible markets: They provide exposure to assets or markets that might be
difficult to trade directly.
III. Leverage: They allow investors to gain large exposure with a relatively small investment.
IV. Liquidity: Derivatives markets are often very liquid, making, it easy to enter and exit positions.
V. Arbitrage opportunities: They can be used to take advantage of price difference between
markets to achieve risk free profits.

Disadvantages of derivatives:
I. Complexity : Derivatives cab be done complex and difficult to understand, especially for
inexperienced investors.
II. Risk of significant losses: While they can be used to hedge risks, they also lead to
significant losses if the market moves against the position.
III. Leverage risk: The leverage effect can amplify losses as well gains.
IV. Counterparty risk: In-over-the-counter (OTC ) derivatives, there is a risk that the other
party may default on the contract.
V. Regulatory and legal risk: Derivatives are subject to regulatory changes which can impact
their performance and the markets in which they are traded.

DERIVATIVES TYPES:
1) Futures: Futures are standardized contracts to buy or sell an asset at a
predetermined price at a specified future date. They are traded on exchanges
,which standardize the quantity and quality of the asset. Futures are used by
investors to hedge against price changes or speculate on market movements of
commodities, currencies, indices, and more.
2) Options: Options provide the buyer the right ,but not the obligations, to buy
(call option) or sell (put option) an underlying asset at a specified strike price
before or at the contract’s expiration, options are used for heading , speculation
,or generating income through premium collection. They can be traded on
exchanges or over the counter.
3) Swaps: Swaps are private agreements between two parties to exchange cash
flow or other financial instruments for a specified period. The most common types
are interest rate swaps , currency swaps, and commodity swaps. Swaps are used
primarily for heading purpose, such as exchanging a variable interest rate for a
fixed rate to manage borrowing costs.
4) Forwards: Forwards are customized contracts between two parties to buy or sell
an asset at a specified price on a future date. Unlike futures, , forwards are traded
over the counter and can be tailored to any commodity , amount and settlement
process. They are widely used in forex and commodities markets for hedging
against price movements .
5) Credit derivatives: Credit derivatives are financial instruments used to transfer
the credit risk of an underlying entity without actually transferring underlying
asset. The most common form is the credit default swap (CDS) which provides
protection against the default of a borrower. Credit derivatives are used by lenders
to manage their exposure to credit risk.
6) Exotic derivatives: Exotic derivatives are complex version of standard
derivatives , which include non- standard underlying assets, payoffs, or
settlements methods. They are customized to fit specific needs of investors and
can include products like barrier options, digital options , and weather derivatives.