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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
Investment Objectives
Investment Attributes
To enable and a reasonable comparison of various investment avenues,
the investor should study the following attributes.
Rate of return: The rate of return comprises of two parts i.e annual
income and capital gain or loss.
Risk: The risk of an investment refers to the variability of the rate of
return. It is the deviation of the outcome of an investment from its
expected value.
Marketability: It is desirable that an investment instrument be marketable.
Taxes: Some investment instruments provide tax benefits while other not.
Convenience: The degree of ease with which an investment can be
made and managed.
INVESTMENT CONSTRAINT
Liquidity
Age
Need for regular income
Time horizon
Risk Tolerance
Tax Liability
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
Speculator
Time
horizon
Risk
Willing to undertake
high risk.
Return
Decision
Consider inside
information, hearsays
and market behavior.
Funds
Safety
Economic Investment
Investment Process:
Investment Process
Investme
nt Policy
Investible
fund
Objectives
Knowledge
Analysis
Market
Industry
Company
Valuation
Intrinsic
value
Future value
Portfolio
Construction
Diversificatio
n
Selection
and allocation
Portfolio
Evaluation
Appraisal
Revision
FINANCIAL MARKETS
Market where entities
cantradefinancialsecurities,commodities
at lowtransaction costs and at prices that
reflectsupply and demand.
Securities include stocks and bonds, and
commodities include precious metals or
agricultural goods.
KINDS OF FINANCIAL
MARKET
MONEY MARKET
As per RBI A market for short terms
financial assets that are close substitute
for money, facilitates the exchange of
money in primary and secondary market.
A mechanism that deals with the
lending and borrowing of short term
funds.
Asegment of the financialmarket in
which financial instruments with high
liquidity and very short maturities are
traded.
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 debenturesBonds 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
Governments 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.
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 companys
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 companys meetings, thus controlling
the management.
If the company prospers, it is the equity
shareholders who is the greatest gainer.
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
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
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
book/Directory
of
the
stock
National Affairs
CSO
Economic Survey
Explanatory memorandum on Budget
RBI reports
Non Government eg. CMIE
Industry Data
Newspapers, Magazines
CMIE
BSE Directory of Information
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