Chapter 1

Investment Scenario
Savings and Investment – Two sides of a coin
 What is Investment?
• Investment is the employment of funds on assets
with the aim of earning income or capital
appreciation
• Investment has 2 attributes
– Time
– Risk
• Present consumption is scarified to get a return in
the future
• Investment is a placement of capital in expectation
of deriving profit
 speculation
• Involves buying & selling activities with the
expectation of getting profit from the price
fluctuations.
• Interested in getting abnormal return
• Speculator is more interested in the market
action & its price movement
• Line b/w speculation & investment is very thin
 Gambling

• Game of chance
• Very short term investment, time horizon is
shorter than speculation
• People gamble as a way to entertain themselves,
earning income would be the secondary factor.
• No risk & return trade off in the gambling &
negative outcomes are expected.
• Financial analysis does not reduce the risk
proportion involved.
 INVESTMENT VS. SPECULATION

INVESTOR SPECULATOR

• PLANNING LONG SHORT

HORIZON
• RISK MODERATE HIGH
DISPOSITION
• RETURN MODEST HIGH
EXPECTATION
• BASIS FOR FUNDAMENTAL TECHNICAL
DECISIONS
• LEVERAGE NO HIGH
 INVESTMENT VS. Gambling
INVESTOR Gambler
Planning Long Very Short

Risk Disposition Moderate Very High

Return Expectation Modest Very High

Basis for decision Fundamental Perceptions

Leverage No Very High

 Investment Objectives
• Main objective are increasing the Rate of return & reducing
the Risk
• Liquidity
– Investment could be converted into cash without much
loss of time
– It depends on marketing & trading facility
• Hedge against inflation
– Rate of return should ensure a cover against the inflation
• Safety
– Investment avenue should be under the legal &
regulatory frame work along with the safety of the
principal
 INVESTMENT CONSTRAINT

• Liquidity

• Age

• Need for regular income

• Time horizon

• Risk Tolerance

• Tax Liability
Security is a generic term that refers to a debt or
equity IOU issued by a borrower or issuer.

- Debt security or bond – an IOU promising

periodic payments of interest and/or principal
from a claim on the issuer's earnings

- Equity or stock – an IOU promising a share in

the ownership and profits of the issuer
Stocks & Shares
• Interchangeably used, but there is a diff
• Share
– Share capital of a company is divided into a no of small
units of equal values called shares
• Stock
– Is the aggregate of a members fully paid up shares of equal
value merged into one fund.
• Equity shares have certain advantages
– Capital appreciation
– Limited liability
– Free tradeability
– Hedge against inflation
 Investment Classification

Investment

Financial Investment Real Investment

Fixed income Variable income

Real assets are tangible, material thing such as buildings, automobiles etc

Financial assets are pieces of paper representing an indirect claim to real

assets held by some one else
 INVESTMENT ALTERNATIVES

Investment
Avenues

Non-
marketable Money
Financial Market
Assets Instruments
InstrumentsI
Equity and
nstruments
Preference
Bonds
Shares

Mutual Fund
Schemes Life Insurance
Policies

Financial
Derivatives Real Assetss
 NON-MARKETABLE FINANCIAL ASSETS

• BANK DEPOSITS
• POST OFFICE TIME DEPOSITS (POTDs)
• MONTHLY INCOME SCHEME OF THE POST
OFFICE (MISPO)
• KISAN VIKAS PATRA (KVP)
• NATIONAL SAVINGS CERTIFICATE
• COMPANY DEPOSITS
• EMPLOYEES PROVIDENT FUND SCHEME
• PUBLIC PROVIDENT FUND SCHEME
 MONEY MARKET
INSTRUMENTS
• TREASURY BILLS -- It is an IOU of the
government, a promise to pay the stated amount after
expiry of the stated period from the date of issue.
They are issued at discount to the face value and at
the end of maturity the face value is paid
• CERTIFICATES OF DEPOSITS-- These are short
term deposits issued by banks which are transferable
from one party to other.
• COMMERCIAL PAPER -- It represents short term
unsecured promissory notes issued by firms that are
generally considered to be financially strong. It
usually has a maturity period of 90 days to 180 days.
• REPOS
 BONDS OR FIXED INCOME
SECURITIES

• Government dated Securities

• Savings Bonds

•PSU Bonds

•Private Sector Debentures

• Preference Shares
Bonds or debentures—Bonds or debentures represent
long term debt instruments. This generally comprises
of periodic interest payments over the life of the
instrument and principal payment at the time of
redemption.
Diff b/w bonds & debentures is
Long-term debt securities issued by the
Government of India or any of the State Government’s
or undertakings owned by them or by development
financial institutions are called as bonds.
Instruments issued by other entities are called
debentures.
 Types of Debentures
• Secured & Un secured debentures
– Unsecured have no charges on any specific assets of the
company
– Secured carry a fixed or floating charge on the assets of
the company.
• Convertible & Non – Convertible Debentures
– Convertible debentures are the ones which can be
converted into equity shares at the option of the
debenture holders.
• Registered & Bearer Debentures
– Based on transferability
– Bearer/Unregistered are freely negotiable & can be
transferred by simple endorsement
– Registered can be transferred only through Transfer
Deeds.
 Preference Shares
• So called because these have preference over equity shares in
the matter of distribution of post – tax profit,
• Have a prior claim on the assets of the company in the event of
liquidation.
• In terms of risk, these are less risky then equities, but more risky
than secured debentures
• Preference shares are entitled to a fixed dividend, and cumulative
preference share retain their retrospective claim on dividend
when the company is not in a position to declare any dividend.
• Sometimes these shares are convertible into equity shares after a
stated number of years,
• When preference shares are redeemable, the company pays off
the shareholder on a certain date, or issues equity shares of the
value,
• But when they are irredeemable, the shareholder gets the fixed
dividend in perpetuity or as long as the company lasts.
• Preference shareholders may or may not be given voting rights;
they can usually only vote if their dividends are in arrears.
Participants and Instruments In Debt Markets
The Structure of Indian Debt Market
 Equity Shareholders
• They are the owners of the company, sharing its risks,
profits, and losses.
• They have a residual claim on the earnings and assets
of a company.
• They are paid their share of the company’s profits after
all other claims are met, and in the event of the
liquidation of the company they share whatever is left
of the company after all its creditors have been paid.
• They enjoy limited liability, i.e., liability only to the
extent of their shareholding.
• Only equity shareholders are entitled to vote at the
company’s meetings, thus controlling the
management.
• If the company prospers, it is the equity shareholders
who is the greatest gainer.
 CLASSIFICATION OF EQUITY SHARES

• BLUE-CHIP SHARES

• GROWTH SHARES

• INCOME SHARES

• CYCLICAL SHARES

• DEFENSIVE SHARES

• SPECULATIVE SHARES

•SWEAT EQUITY
•Share issued at a discount to employees and directors
•Shares issued for consideration other than cash such as intellectual
property, etc
 MUTUAL FUND SCHEMES
• Mutual Funds— A mutual fund represents a vehicle for
collective investment. When an investor invests in a
scheme he becomes owner to the extent of the units
held by him.
• Classified as
•Open ended & closed ended
•On basis of objective classified as
•Growth schemes & income scheme
•Equity Schemes
• Balanced Schemes
• Debt Schemes
 INSURANCE POLICIES

• Endowment Assurance– sum assured payable on the

date of maturity or death

• Whole Life Assurance-- sum assured payable on the

death & premium payable throughout life

• Money Back Plan

• Unit Linked Plan

• Term Assurance
 FINANCIAL DERIVATIVES

A derivative is an instruments whose value depends on the

value of some underlying asset.

Futures A futures contract is an agreement between two

parties to exchange an asset for cash at a predetermined
future date for a price that is specified today.

Options An option gives its owner the right to buy or sell

an underlying asset on or before a given date at a
predetermined price.
 REAL INVESTMENT
Land and House Property
Residential House

Commercial Property

Agricultural Land

Suburban Land

Gold and Silver

Precious Stones

Art Objects
 Security Invt Non Security Invt
Traded on Market

• Equity Shares • National Saving Scheme

• Preference Shares – Post Office
• • Public Provident Fund
Debentures
• • Corporate Fixed
Warrants
Deposits
• Gilt Edged Securities
• Deposits with Banks
– Treasury Bills
– Public Sector Bonds • Mutual Funds
 Warrant (QP)
Warrant entitles the holder to buy stock of the
company at a specified price, which is usually higher
than the stock price at time of issue.

They are usually attached to a debenture or a bond

 Sweat Equity
•Share issued at a discount to employees and
directors
•Shares issued for consideration other than cash
such as intellectual property, etc
 Investment Methods
• Fundamental Analysis
• Technical Analysis
Sources of Economic and Industry data :

1)CSO

2)The report of economic survey, which is an input

to the Central Govt.’s Budget.

3)Weekly Statistical Statements, Monthly Bulletin,

Annual Reports of R.B.I.

4)Non Govt. organizations like CMIE and

Commerce Research Bureau who collect
and present the data related to economy and
industries in capsule form
Sources of Market Data

1)Stock Exchanges’ Daily Official List

2)Official year book/Directory of the stock

exchanges

3)Business Newspapers and magazines

4)Reports, Periodical newsletters of the brokers.

Sources of Company Data

1) Annual Report of the company

2) Official Directory of the stock exchanges

3) Business Newspapers and magazines like Outlook

profit, Dalal Street, Capital Market etc.

4) Reports, Periodical newsletters of the brokers like The

Horizon of Kotak Securities Ltd.

5) Kothari’s Economic and Investment Guide of India

6) The Company News and Notes, a monthly publication

of The Department of Company Affairs
Sources of International economic data
1) International Financial Statistics of IMF

2) Moody’s and Standard and Poor’s manuals

3) Capital International Perspective, a Geneva

Publication

4) International Newspapers and periodicals.

 New ways to serve the customers:.
CIMM – It is the database of a well known research
organization, called as The Center for Monitoring Indian
Economy. It provides both qualitative and quantitative
information.

CLINE-OLE -- This package is designed and marketed

by Capital Market which gives detailed information about
economy, industry and companies.

VANS – This package gives detailed information and the

access to the articles and news published in the
magazines and newspapers.
 Investment Information (QP)
• International Affairs
– Newspapers, Magazines
– Financial Institutions – World Bank, IMF, ADB

• National Affairs
– CSO
– Economic Survey
– Explanatory memorandum on Budget
– RBI reports
– Non Government eg. CMIE

• Industry Data
– Newspapers, Magazines
– CMIE
– BSE Directory of Information
 Investment Information contd (QP)
• Company Data
– Annual reports
– BSE Directory of Information
– News papers
– Office of Registrar of companies
– Company News and Notes – Department of company affairs

• Market Data
– Stock Exchanges
– BSE Directory of Information
– RBI reports
– News papers
– Brokerages