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Inv't Chapter - 1

Investment involves allocating resources for future benefits, with financial investments typically yielding returns over time. Key characteristics of investments include return, risk, and liquidity, while objectives focus on maximizing returns and hedging against inflation. The document distinguishes between investment, speculation, and gambling, and outlines various investment alternatives, including financial and real assets.

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0% found this document useful (0 votes)
18 views32 pages

Inv't Chapter - 1

Investment involves allocating resources for future benefits, with financial investments typically yielding returns over time. Key characteristics of investments include return, risk, and liquidity, while objectives focus on maximizing returns and hedging against inflation. The document distinguishes between investment, speculation, and gambling, and outlines various investment alternatives, including financial and real assets.

Uploaded by

seid mohammed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 32

CHAPTER 1

INTRODUCTION TO INVESTMENT
1.1 WHAT IS INVESTMENT?
• In broad sense, “an investment is a
sacrifice of current money or other
resources for future benefits”.
• Financial investment is the allocation of
money in assets that are expected to
yield some gains over a period of time.
• It is an exchange of financial claims
such as stocks and bonds for money.
They are expected to yield returns and
1 experience capital growth over the
02/14/2025
It may mean many things to many
persons.
 advancing some money to another for
interest
 deposit money in a bank account
 purchase a long term Gov’t Bond
 invest in equity shares of a company
 buy gold
 acquire a piece of land or invest in
some other form.

Characteristics of Investment
1.
2 Return 02/14/2025
• The return may be received in the form
of yield or capital appreciation or both.
 Yield- dividend of interest received
from the investment.
 Capital appreciation- difference
between the sale price and the
purchase price.
• The return from an investment depends
upon the nature of the investment, the
maturity period and a host other
factors.
2. Risk
•3 This risk may relate to loss of capital,
02/14/2025
• While some investments like
government securities and bank
deposits are almost riskless, others are
more risky.
• The risk of an investment depends on
the following factors.
1. The longer the maturity period, the
larger the risk.
2. Risk varies with the nature of
investment. Investments in ownership
securities like equity shares carry high
risk compared to investments in debt
4 securities like debentures and bonds.
02/14/2025
• Risk and return of an investment are
related. Normally, the higher the risk,
the higher is the return.
3. Liquidity
• An investment which is easily saleable
or marketable without loss of time and
money is said to possess liquidity.
• Most of the investments on financial
assets are liquid in nature.
• Some investments like company
deposits and bank deposits are not
marketable but they can be withdrawn
5 when required with some penalty.02/14/2025
Objectives of Investment
1. Maximization of return and
Minimization of risk:
• Investors, in general, desire to earn as
large returns as possible with the
minimum of risk.
• Minimizing risk and maximizing the
return are interrelated objectives in
investment management.
• If we consider the financial assets
available for investment, we can
classify them into different risk
6 categories. 02/14/2025
 Debentures and preference shares of
companies may be classified as
medium risk assets.
 Equity shares of companies would from
the high risk category of financial
assets.
Every investor tries to maximize his
welfare by choosing optimum
combination of risk and expected return
in accordance with his preference and
capacity.
2. Hedging against inflation
•7 The rate of return should ensure a02/14/2025
• The rate of return should be higher
than the rate of inflation; otherwise, the
investor will experience loss in real
terms.
• For example, if inflation is at an
average rate of 8%, then the rate of
return from an investment should be
more than 8 % to induce savings flow
into investment.

8 02/14/2025
Investment vs Speculation
• Investment and speculation are two
terms which are closely related.
• Both involve purchase of financial
assets like shares and securities.
• Speculation is taking up the business
risk in the hope of achieving short-term
gain.
• Speculation essentially involves buying
and selling activities with the
expectation of making a profit from
price fluctuations.
9 02/14/2025
Differences between Investor and
Speculator:
Factor Investor Speculator
Time Invests for a longer period Invests for short period usually
factor usually from one year to few few days to months (less than
years 6 months)
Risk Assumes moderate risk Willing to undertake high risk

Return Likes to have moderate rate of Likes to have high returns for
return associated with limited assuming high risk. Mostly
risk. Mostly interested in interested in capital gains
income from investments. rather than income on
investments.
Decision Considers fundamental factors Considers technical factors and
and evaluates performance of market behavior rather than
the company regularly before fundamental factors and
investing. company performance.
Funds Generally uses his own funds Uses borrowed funds to
and avoids borrowed funds. supplement his personal
10 02/14/2025
resources.
Investment vs Gambling
• Typical examples of gambling are horse
races, Buying lottery tickets, card
games, betting etc.
 Firstly, the time horizon involved in
gambling is very shorter than in
speculation and investment. The results
are known immediately or some days in
gambling.
 Secondly, people gamble to entertain
themselves.
• Earning an income from gambling is a
11 secondary factor. 02/14/2025
1.2 Investment Alternatives
• There are many investment avenues or
alternatives
• They fall into two broad categories, viz.
A.Financial assets and
B. Real assets.
• Financial assets are paper (or
electronic) claims on the issuer such as
Bank or Government or a corporate
body.
• The important financial assets are
equity shares, corporate debentures,
12 government securities, deposits with
02/14/2025
• Real assets represent tangible assets
like residential house, commercial
property, agricultural land, gold,
precious stones etc.
A. Financial Assets:
1. Deposits: A good portion of the
financial assets of individuals is held in
the form of deposits.
2. Money market instruments: In
simple words, Debt instruments which
have a maturity of less than one year
at the time of issue are called money
13 market instruments. 02/14/2025
Major money market instruments are:
• Treasury bills
 Treasury bills are the obligations of
government which are issued generally
for a period between 91 days and 364
days.
 They do not carry interest rate; instead
they are issued at discount and
redeemed at par.
 Treasury bills are readily transferred in
the secondary market.

14 02/14/2025
• Commercial paper
 Commercial papers are issued by
corporations, financial institutions,
primary dealers etc.
 Commercial papers can be issued for
maturities between 7 days and one
year.
 They are issued at discount and
redeemed at par like treasury bills.
• Certificates of deposits
 Issued by banks or eligible financial
institutions.
15 Banks issue for 7 days to one year. 02/14/2025
• Repos
 A “repo” involves a simultaneous “sale
and re-purchase” agreement.
A repo works as follows:
 Party “A” needs short term funds and
Party “B” wants to make a short term
investment. Party “A” sells securities to
Party “B” at a certain price and
simultaneously agrees to re-purchase
the same after a specified time at a
slightly higher price.
• The difference between the sale price
16 and the re-purchase price represents
02/14/2025
3. Bonds and Debentures: Bonds or
debentures represent long-term debt
instruments.
• The issuer of a bond promises to pay a
stipulated steam of cash flows
(interest).
• The important features of debentures
are as follows:
 Interest rate on debenture is fixed
 secured by a charge on the immovable
properties
 issued generally for a long period

17 paid back after the maturity period
02/14/2025
4. Preference shares- Preference share
represent a hybrid security because it has
the characteristics of both equity share
and debentures.
• Preference shares carry a fixed rate of
dividend
• Dividend on preference shares is
generally cumulative because dividend
skipped in one year has to be paid in
the subsequent years before equity
dividend can be paid
• Preference shares are redeemable – the
18 redemption period is usually 7 to 02/14/2025
12
19 02/14/2025
5. Equity shares: Equity capital
represents ownership capital.
• Equity shareholders collectively own
the company.
• They bear risk and enjoy the rewards of
ownership.
• While fixed income securities may be
more important to most of the
investors, equity shares seem to
capture their interest the most because
of the rewards and penalties associated
with them.
20 02/14/2025
• The par value is stated in the
memorandum and written on the share
scrip
• Generally the par value of equity
shares is Birr 1, or Birr 10.
• Sometimes par value of equity share
may b Birr 5 or 50 or 100 or 1000.
• The issue price is the price at which the
equity share is issued
• When the issue price exceeds par
value, it is referred to as the share
premium
•21 Market value of an equity share is02/14/2025
the
22 02/14/2025
6. Mutual Funds- If you find it difficult to
invest directly into securities and shares,
you invest in financial assets through a
mutual fund.
• A mutual fund represents a vehicle for
collective investment.
• Mutual funds invest their funds in mixer
of financial assets i.e., shares, bonds,
and money market instruments.
• No guarantee of return is provided by
the mutual funds but generally high
rate of return is achieved by the
23 investor through a mutual fund. 02/14/2025
7. Insurance Products: Insurance
policies offer both the protection and
savings.
• Term insurance policy provides only
protection
• Endowment and whole life insurance
policies provide both protection and
savings
• Annuities offer income after retirement
and in old age.
B. Real Estate or Real Assets: In
addition to the financial assets, investors
are
24 likely to be interested in the following
02/14/2025
Precious Metals:
• Gold
• Silver
• Platinum
Precious Stones:
• Diamonds
• Others precious stones
Art objects and collections:
• Paintings
• Sculptures (memorials)
• Antiques (traditional objects) etc.

25 02/14/2025
1.3 Investment Companies
• Investment companies are financial
intermediaries that collect funds from
individual investors and invest those
funds in a potentially wide range of
securities or other assets.
• Pooling of assets is the key idea behind
investment companies.
• Each investor has a claim to the
portfolio established by the investment
company in proportion to the amount
invested.
•26 These companies thus provide a 02/14/2025
1.4 Securities Market
• Different types of securities are traded
in the securities market.
• These may include ownership
securities, Long-term debt securities,
and short-term debt securities.
• The nature of return and risk involved
in short-term securities is vastly
different from that of long-term
securities.
• Hence, on the basis of the maturity
period of securities traded in the
27 market, the securities market is 02/14/2025
Money Market: Money market is the
market for short-term financial assets
with maturities of one year or less than
one year.
• It comprises of Treasury bills,
commercial paper, certificates of
deposit, repo market etc.
• Since these instruments being close
substitutes for money, the market for
their trading is known as money
market.

28 02/14/2025
Capital market: Capital market, on the
other hand, is the market segment where
securities with maturities of more than
one year are bought and sold.
• Equity share, preference shares,
debentures, and bonds are the long-
term securities traded in the capital
market.
• The capital market is the source of
long-term funds for business and
industry.
• Capital market may be classified as primary
29
market or secondary market depending 02/14/2025
on whether the securities traded are newly
Primary market: The market
mechanism for buying and selling of new
issues of securities is known primary
market.
• This market is also known as new
issues market because it deals in new
issues of securities.
• When a new company is floated, its
shares are issued to the public in the
primary market as an Initial public offer
(IPO).
• If the company subsequently decides to
30 include debt in its capital structure by
02/14/2025
Secondary Market: The secondary
market, on the other hand, deals with
securities which have already been issued
and are owned by investors, both
individuals and institutions.
• These outstanding and owned
securities are traded among investors.
• The buying and selling of these
securities take place in stock
exchanges.
• Hence, stock exchanges constitute the
secondary market in securities.
31 02/14/2025
END of CHAPTER ONE

Thank You!

32 02/14/2025

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