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1 Introduction To Investments

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13 views

1 Introduction To Investments

Uploaded by

bhavnakaushik2000
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 16

Chapter 1

Introduction to
Investment and Securities
Chapter Objectives
 To understand the concept of investment
 To explain process of investment
 To learn about various types of securities
 To analyze various sources of investment
information
Investment
 Investment is the usage of funds on assets to get capital appreciation.
 The individual who makes an investment is known as the investor.
 In economic terms, investment is defined as the net addition made to the
capital stock of the country.
 In financial terms, investment is defined as allocating money to assets with
a view to gain profit over a period of time.
 Investments in economic and financial terms are inter-related where an
individual's savings flow into the capital market as financial investment,
which are further used as economic investment.
Speculation
 Speculation means taking business risks with
the anticipation of acquiring short term gain.
 It also involves the practice of buying and

selling activities in order to profit from the


price fluctuations.
 An individual who undertakes the activity of

speculation is known as speculator.


Difference between
Investor and Speculator
Base Investor Speculator
Time horizon Has a relatively longer planning Has a very short planning
horizon. His holding period is horizon. His holding period
usually of one or more than one may be few days to months.
year.
Risk return His risk is less. His risk is high.
Decision Attaches greater significance to Attaches greater significance
fundamental factors and to market behaviour and
carefully evaluates the inside information.
performance of the company.
Funds Uses his own funds. Uses borrowed funds along
with his personal funds.
Investment Objectives
 Return Income: The total income, the investor receives
during his holding period.
End period value  Purchase period value
+ Dividends
Return = 100
Purchase period value
 Risk: Variability in the return.
 Liquidity: The ease with which the investment is
converted into cash.
 Safety: It refers to the legal and regulatory protection to
the investment.
 Hedge against inflation: The returns should be higher
than the rate of inflation.
Investment Information
 An investor must have adequate knowledge about the
investment alternatives and markets before making
any kind of investment.
 The various sources from which an investor can
gather the investment information are:
 Newspapers, Investment dailies
 Magazines and Journals
 Industry Reports
 RBI Bulletin
 Websites of the SEBI, RBI and other private agencies
 Stock market information
The Investment Process
The process of investment includes five stages:
1. Investment Policy: The policy is formulated on the basis of
investible funds, objectives and knowledge about investment
sources.
2. Security Analyses: Economic, industry and company analyses
are carried out for the purchase of securities.
3. Valuation: Intrinsic value of the share is measured through
book value of the share and P/E ratio.
4. Portfolio Construction: Portfolio is diversified to maximise
return and minimise risk.
5. Portfolio Evaluation: The performance of the portfolio is
appraised and revised.
Securities
 They are instruments which represent a claim over
an asset or any future cash flows.
 Securities are classified on the basis of return and
source of issue.
Fixed income securities
 Return
Variable income securities
 Issuers
 Government
 Quasi-Government
 Public Sector Enterprises
 Corporates
Equity Shares
Common stock or ordinary shares are most
commonly known as equity shares.
 Stock is a set of shares put together in a bundle.
 A share is a portion of the share capital of a company
divided into small units of equal value.
 The advantages of equity shares are:
 Capital appreciation
 Limited liability
 Hedge against inflation
Bonus Shares
 Distribution of shares, in addition to the cash
dividends, to the existing shareholders are
known as bonus shares.
 These are issued without any payment for

cash.
 These are issued by cashing on the reserves of

the company.
 A company builds up its reserves by retaining

part of its profit over the years.


Preference Stock
 Preference stock provides fixed rate of return.
 Preference stockholders do not have any

voting rights.
 Like the equity, it is a perpetual liability of the

corporate.
 Preference stockholders do not have any share

in case the company has surplus profits.


Types of Preference Stocks
There are different types of preference stocks,
which are:
 Cumulative preference shares
 Non-cumulative preference shares
 Convertible preference shares
 Redeemable preference shares
 Irredeemable preference shares
 Cumulative convertible preference shares
Debenture
 It is a debt instrument issued by a company, which carries a
fixed rate of interest.
 It is generally issued by private sector companies in order to
acquire loan.
 The various features of a debenture are:
 Interest  Redemption  Indenture
 A company can issue various types of debentures, which are:
 Secured bonds or unsecured debenture
 Fully convertible debenture
 Partly convertible debenture
 Non-convertible debenture
Bond
 A bond is a debt security issued by the government, quasi-
government, public sector enterprises and financial institutions.
 Various features of a bond are:
 The interest rate is generally fixed
 It is traded in the securities market
 At the time of issue of bonds, maturity date is specified
 Some of the types of bonds that a company can issue are:
 Secured bonds and unsecured bonds
 Perpetual bonds and redeemable bonds
 Fixed interest rate bonds and floating interest rate bonds
 Zero coupon bonds
Chapter Summary
By now, you should have:
 Understood the concept of investment and

speculation
 Learnt about the various types of shares and

debentures
 Understood the various sources of investment

information

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