Introduction to investment

Investment analysis and Portfolio

Management ACFN 3201

Alemitu A.(MSc)
 Introduction

• Security analysis is a pre-requisite for making investments.

• One makes investments for a return higher than what he can
get by keeping the money in a bank.
• In the finance field, it is a common knowledge that money or
finance is scarce and that investors try to maximize their return.
• But the finance theory states that the return is higher, if the risk
is also higher. Return and risk go together and they have a trade
off.
• The art of investment is to see that the return is maximized with
the minimum of risk, which is inherent in investments.
• But for making investment, we need to make security analysis.
 DEFINITION AND CONCEPT OF INVESTMENT
Investment according to Finance Term
• Investment means buying of Assets. For Examples
 Buying stocks and bonds
 Investing in real estate
These investments may then provide a future income and increase
in value (i.e., investing in real estate).
Generally, an investment is the current commitment of dollars for
a period of time in order to derive future payments that will
compensate the investor for
i. the time the funds are committed,
ii. ii. the expected rate of inflation, and
iii. iii. The uncertainty of the future payments
 Cont`d
Investor is trading a known dollar amount today for some
expected future stream of payments that will be greater
than the current outlay.
Why people invest and what they want from their
investments?
They invest to earn a return from savings due to their deferred
consumption.
They want a rate of return that compensates them for the
time, the expected rate of inflation, and the uncertainty of
the return.
This return, the investor’s required rate of return, is discussed
throughout this course. A central question of this course is
how investors select investments that will give them their
required rates of return.
 CHARACTERISTICS OF INVESTMENT

Investment refers to invest money in Financial, physical assets and

Marketable assets.
The important characteristics of investments are outlined as:
Risk
 Capital growth
 Return
 Purchasing power stability
 Safety
 Stability of income
 Liquidity
 Tax benefits.
 Marketability
 CHARACTERISTICS OF INVESTMENT…cond
1.Risk-Risk refers to the loss of principal amount of an investment
 Risk Depends on the investment maturity period is longer, risk will larger.
 Government or Semi Government bodies are issuing securities which have less risk.
 debt instrument or fixed deposit, the risk is less due to their secured and fixed
interest payable on them. For instance ; debentures.
 ownership instrument like equity or preference shares, the risk is more due to their
unsecured nature and variability of their return and ownership character.
The risk of degree of variability of returns is more in the case of ownership capital
compare to debt capital.
2. Return refers to expected rate of return from an investment.
 Return is the major factor which influences the pattern of investment that is made by
the investor. Investor always prefers to high rate of return for his investment.
3. Safety refers to the protection of investor principal amount and expected rate of
return.
if investor prefers less risk securities, he chooses Government bonds.
If the investor prefers high rate of return investor will choose private Securities and
Safety of these securities is low.
•
4. Liquidity
Liquidity refers to an investment ready to convert into cash position.
• Liquidity means that investment is easily realisable, saleable or marketable.
• When the liquidity is high, then the return may be low. An investor generally
prefers liquidity for his investments,
5. Marketability
• Marketability refers to buying and selling of Securities in market. Marketability
means transferability or saleability of an asset.
• Securities are listed in a stock market which is more easily marketable than
which are not listed.
• Public Limited Companies shares are more easily transferable than those of
private limited companies.
6. Capital Growth
• Capital Growth refers to appreciation of investment.
• Investors and their advisers are constantly seeking ‘growth stock’ in the right
industry and bought at the right time.
 7. Purchasing Power Stability
• Purchasing power stability has become one of the
import traits of investment.
• Commitment of current funds with the objective of
receiving greater amounts of future funds.
8. Stability of Income
• It refers to constant return from an investment
• Every investor always considers stability of monetary
income and stability of purchasing power of income.
9. Tax Benefits
• One concerned with the amount of income paid by the
investment.
• Another is the burden of income tax upon that income.
 INVESTMENT ACTIVITY
• Investment activity includes buying and selling of the
financial assets, physical assets and marketable assets
in primary and secondary markets.
• Investment activity involves the use of funds or savings
for further creation of assets or acquisition of existing
assets.
• Financial Assets are: Cash, Bank Deposit, P.F., LIC
Schemes, Pension Scheme, Post Office Certificates and
Deposits
• Physical Assets are: House, Land, Building and Flats,
Gold, Silver and other Metals, Consumer Durables
• Marketable Assets are: Shares, Bonds and
Government Securities
 CLASSIFICATION OF INVESTMENT
1. On the Basis of Physical Investments
 Physical investments are: · House , Land, Building, Gold and Silver and Precious stones
2. On the Basis of Financial Investment
 Financial investments further classified on the basis of:
A.  Marketable investments are:
· Shares
· Debentures of Public Limited Companies, particularly the listed company in
Stock Exchange
· Bonds of Public Sector Units
· Government Securities, etc.
2. Non-marketable investments are:
· Bank Deposits
· Provident and Pension Funds
· Insurance Certificates
· Post office Deposits
· Company Deposits
 Investment alternatives (Investment Avenues)
• The investment alternatives range from financial securities
to traditional non security investments.
• Financial services may be negotiable and non- negotiable.
The negotiable securities are financial securities that are
transferable.
• The negotiable securities may yield variable income or fixed
income. Securities like equity shares are variable income
securities.
• Bonds, debentures, government securities and money
market securities yield a fixed income.
• The non- negotiable financial instruments as the name
itself suggests is not transferable. Deposits offered by
banks, companies and Non- banking financial companies
are of this category.
 Negotiable securities
A. Variable Income Securities
• Equity shares: classifies into growth shares, defensive shares, cyclical shares and speculative
shares.
• Growth shares: The stocks that have higher rate of growth than the industrial growth rate in
profitability are referred to as growth shares.
• Income Shares: These stocks belong to companies that have comparatively stable operations and
limited growth opportunities.
B. Fixed income securities:
• Preference shares: Hybrid in nature. (Some of its features resemble bond and others the equity
shares). Like bonds they receive fixed income in the form of dividend.
• Debentures: Debentures offer fixed interest. If Investors sacrifices liquidity they get higher return.
• Bonds: Bonds are similar to the debentures but they are issued by the public sector.
• The value of the bond in the market depends upon the interest rate and the maturity.
• The common types of bonds are deep discount bonds, education bonds, retirement benefit bonds
and indexed bonds.
• Government securities: The securities issued by central, state government and quasi government
agencies are known as government securities or gilt edged securities.
• The rate of interest on these securities is relatively lower because of their high liquidity and safety.
 Securities Market
• Markets in which securities which maturities of one year or less
normally trade in the “Money market”
• Maturities of more than one year are bought and sold in the “capital
market”.
• New issues are made available in the “Primary market”;
• securities that are already outstanding and owned by investors are
usually bought and sold through the “Secondary market”.
• In the Primary market new issues of common stock; bonds and
preferred stock are sold by companies, Government and local
authorities, corporations, to acquire new capital.
• Once new issues have been purchased by investors, they change
hands in the secondary markets.
• There are two broad segments of the secondary markets (i) The organized stock
exchanges; (ii) The Over-the-Counter(OTC) market.
• The primary middlemen in the secondary markets are brokers and dealers. Broker
acts as an agent,
• Dealer acts as a principal in the transaction.
End of the Unit