Concept of Investment

 Concept of Investment –
Investment is the employment
of funds to get the return on it.
 In general terms, investment
means the use of money in the
hope of making more money.
 Concept of Investment
 In finance, investment means
the purchase of a financial
product or another item of
value with an expectation of
favorable future returns.
 Investment
 An investment is an asset or item
acquired to generate income or
appreciation.
 In an economic sense, an
investment is the purchase of
goods that do not consume today
but use in the future to create
wealth.
 Investment
 In finance, an investment is a
monetary asset purchased with
the idea that the asset will
provide income in the future or
will later sell at a higher price
for a profit.
 Saving and Investing

 Saving provides funds for

emergencies and for making
specific purchases in the
relatively near future
(usually three years or less).
 Investment vs. Speculation
 Investors take on calculated
risk as they attempt
to profit from transactions they
make in the markets.
 The level of risk undertaken in
the transactions is the main
difference between investing
and speculating.
 Investment vs. Speculation

 Whenever a person spends

money with the expectation
that the endeavor will return a
profit, they are investing.
 Investment vs. Speculation

 But what if the same person

spends money on an
undertaking that shows a high
probability of failure? In this
case, they are speculating.
 Investment vs. Speculation
 The primary difference between
investing and speculating is the
amount of risk undertaken.
 High-risk speculation is
typically akin to gambling,
whereas lower-risk investing
uses a basis of fundamental
analysis.
 KEY TAKEAWAYS

 The main difference between

speculating and investing is the
amount of risk involved.
 Investors try to generate a satisfactory
return on their capital by taking on an
average or below-average amount of
risk.
 KEY TAKEAWAYS

 Speculators are seeking to make

abnormally high returns from bets that
can go one way or the other.
 Speculative traders often utilize
futures, options, and short selling
trading strategies.
 Types of Speculative Traders
 Day trading is a form of
speculation.
 They generally hold their positions
for a day, closing once the trading
session is complete.
 Types of Speculative Traders
 A swing trader, on the other hand,
holds their position up to about
several weeks hoping to capitalize
on gains during that time.
 This is accomplished by trying to
determine where a stock's price
will move, taking a position, and
then making a profit.
 Types of Speculative Traders
Speculators can make many types of
trades and some of these include:
 FUTURE CONTRACTS
 PUT & CALL OPTIONS
 SHORT SELLING
 Arbitrage
 Arbitrage is a trading method
used on betting exchanges that
guarantees a profit by taking
advantage of price disparities
between and within markets.
 The outcome of the event is
known
 Arbitrage
 It is a trading technique
which benefits from price
differentials between two
markets to guarantee a
profit regardless of the
outcome.
 Market efficiency and arbitrage
opportunities

 If everyone has access to 100%

accurate information, then the
market would be efficient.
 Vice versa, if no-one had
information, or were informed by
poor data, then the market would
be inefficient.
 Market efficiency and arbitrage
opportunities
 No market is 100% efficient -
otherwise there would be no
arbitrage opportunities
 Arbitrage opportunities arise
from this market inefficiency.
 GAMBLING

 Gambling (also known as

betting) is the wagering of
money or something of value
on an event with an uncertain
outcome, with the primary
intent of winning money.
 Here the outcome of the
event is unknown
 Forms of investment

 Investments in
Physical Assets
 Investments in
Financial Assets
 Investment in Physical Assets

 A physical asset is an item of

economic, commercial, or
exchange value that has a material
existence.
 Physical assets are also known
as tangible assets.
 For most businesses, physical
assets usually refer to properties,
equipment, and inventory.
 Investment in Financial Assets

 A financial asset is a liquid

asset that gets its value from a
contractual right or ownership
claim.
 Cash, stocks, bonds, mutual funds,
and bank deposits are all are
examples of financial assets
 Forms of investment

 Financial assets do not necessarily

have inherent physical worth or
even a physical form.
 Rather, their value reflects factors
of supply and demand in the
marketplace in which they trade,
as well as the degree of risk they
carry.
 Investment Alternatives

 An alternative investment is a
financial asset that does not fall
into one of the conventional
investment categories.
 Conventional categories include
stocks, bonds, and cash.
 Investment Alternatives

 These are done by High Net-worth

Individuals.
 Alternative investments include
private equity or venture capital,
hedge funds, managed futures, art
and antiques, commodities, and
derivatives contracts.
 Investment objectives

 Financial advisor needs to have hands

on information about the investment
avenues
 Whenever the client visits, advisor
needs to gather some basic
information from the client, like;
 Questions
 What's your estimated annual income and net
worth?
 What's your average annual expenses?
 What's your goal for investing this money?
 When would you like to withdraw your money?
 Do you want the money to achieve
substantial capital growth or are you more interested
in maintaining the principal value?
 What's the maximum decrease in the value of your
portfolio that you would be comfortable with?
 What's your level of knowledge with investment
products such as stocks, fixed income, mutual
funds, derivatives, etc.?
 Basic Investment Objectives

The options for investing your savings are

continually increasing, but every one of them
can still be categorized according to three
fundamental characteristics:
 Safety,
 Income, and
 Growth.
 Investment Objectives

 Objectives define the purpose of

setting the portfolio.
 Generally, the objectives are
concerned with
› return and
› risk considerations.
 Risk Objective

Risk tolerance
 When the ability to accept all types
of risks and willingness is combined,
it is termed as risk tolerance.
Risk aversion
 When the investor is unable and
unwilling to take the risk, it indicates
risk aversion.
 Steps undertaken to determine risk
objective:
 Specify Measure of Risk: in
absolute or relative terms
 Investor’s Willingness: Individuals
investors and Institutional investors
 Investor’s Ability: long term or
short term
 Return Objective
 Required Return:
› A required return indicates the return which needs
to be achieved at the minimum for the investor.
 Specific Return Objectives:
› An investor having a high return objective needs to
have a portfolio with a high level of expected risk.
 Specify Measure of Return
› Nominal return
› Real returns
 Desired Return
› High return
› Low return
 Investment Constraints
 Investment constraints are the
factors that restrict or limit the
investment options available to an
investor.
 Internal constraints are generated
by the investor himself
 External constraints are
generated by an outside entity, like
a governmental agency.
 Direct and Indirect Investments

 A direct investor is wholly

responsible for the asset, has control
over it, reaps all of the rewards and
assumes all of the risks.
An example of a direct investment
would be owning a house and
acting as a landlord
 Direct and Indirect Investments
 Indirect investors let others buy and
sell the assets, while assuming no
ownership of the assets, reaping
only a share of any profits that are
distributed among all of the indirect
investors.
Examples of indirect investments
are mutual funds, pension fund,
equity investments
 Factors to
consider while
making
investment
decisions
 Investment
planning factors
Investmen Return on
t period investment

Factors to consider
Risk while making Budget
investment
decisions
volatilit
Liquidity
y

Inflation
Taxation
rate
 Return on Investment
(ROI)
 Return on investment is the benefit that the
investor gains after deducting the cost of the
investment.
 It can be in the form of interest, dividends or
capital appreciation (an increase in the value of
assets).
 The return on investment should be expressed as
the net after-tax income.
 The net after-tax return should be higher than
the inflation rate.
 There is usually a direct link between risk and
return on investment.
 Risk
 In finance, risk refers to the possibility
of losing money due to unforeseen
circumstances.
 The higher the potential return, the
higher the potential risk of losing
money.
 For example, investing in shares has a
higher risk than investing in a fixed
deposit, but it also promises higher
returns.
 Investment Period /
Investment Term
Investment period is the duration (length
of time) of the investment, which can
influence the return on investment.
 Long-term investments must be held
for more than a year, while short-term
investments are held for one year or
less.
 The investment period depends on the
personal needs of the investor.
 Liquidity
Liquidity, refers to how quickly and easily
an investment can be converted to cash.
 In case of emergencies, there should
be an amount of capital allocated to an
investment that can be easily
converted to cash.
 Many shares on the stock market are
considered fairly liquid because they
can be easily sold to other traders in
the market.
 Taxation / Tax
Implications
Tax is a compulsory fee that citizens
must pay to the government.
 Different investments have different
tax rates.
 The investor must consider income tax
implications in order to secure a high
net after-tax return.
 A good investment must produce a
good after-tax income
 Inflation Rate
Inflation is the continuous rise in the prices
of general goods and services, which leads
to a decrease in the value of money
 A good investment should have a return
on investment that is higher than the
inflation rate.
 Some investments such as property and
shares are positively impacted by
inflation. Their value can increase as
inflation rises
 Volatility /
Fluctuations on Investment Markets
Volatility is a rise and fall of market
prices. If a market goes through frequent
swings or fluctuations, it is seen as highly
volatile. Low volatility means that the
investment, market or economy is stable
 Market volatility is usually associated
with investment risk.
 Investment Planning Factors /
Portfolio Construction
When planning investments, you should
consider the safest possible investment
opportunities. Although some investments
offer low returns, they can be safer than
those that offer higher gains.
 Explore opportunities that have a
history of good returns.
 To minimise risk, you should divide
investments between the different
investment options
 Budget

The investor’s budget is the amount of

capital that the investor has.
 Investors must budget for unexpected
costs.
 The budget should provide for
emergencies, savings and investments.
 Investors can decide how much of their
surplus money can go to investments.