Basics of Investment Avenues

8/13/2019 Basics of Investment Avenues

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Introduction to

Investment and Securities


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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


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Investing is the purchase of assets with

the goal of increasing future income.

Savings is the portion of current income

not spent on consumption.

Investments


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Risk

The chance that the value of an investment will

decrease.

Return

The profit or yield from an investment.

Liquidity

The ability of an investment to be converted

into cash quickly without loss of value.


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Savings

Low risk

Low return

High liquidity

Investments

High risk

High return

Low liquidity


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Today, a large soft drink at

your favorite fast-food place

costs 10.00. You buy the

soft drink but also decide to

save some money for the

future as well. So you put10 Rupee in your savings

account, where it earns

10%.

NEFE


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One year later, the Rupee in

your saving account is worth

11. You take the money outand visit your favorite

convenience store, hoping

to buy another delicious

beverage. Unfortunately,

drinks now cost 12.

NEFE


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The point? Inflation can

work against your money.You need to learn to invest

wisely, follow the rate of

inflation, and make sure your

investment rates are higherthan those of inflation.


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The time value of money refers to the fact

that a dollar in hand today is worth more

than a dollar promised at some future time.


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Refers to the amount of money to which an

investment will grow over a finite period of

time at a given interest rate.

Put another way, future value is the cashvalue of an investment at a particular time in

the future.


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Respond to this statement on

your guided notes and thendiscuss it with a partner.How does it relate to futurevalue?


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Picture from NEFE
http://www.nefe.org/http://www.nefe.org/http://www.nefe.org/http://www.nefe.org/


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What is the relationship between risk and

return?


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Saving for a senior trip Saving for a down payment on a house

Saving for retirement


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Sample Student Work


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Sample Student Work


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Investment is the employment of funds on assets to earn income or

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.


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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 theprice fluctuations.

An individual who undertakes the activity of

speculation is known as speculator.


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Base Investor Speculator

Time horizon Has a relatively longer planning

horizon. His holding period is

usually of one or more than oneyear.

Has a very short planning

horizon. His holding period

may be few days to months.

Risk return His risk is less. His risk is high.

Decision Attaches greater significance to

fundamental factors and

carefully evaluates theperformance of the company.

Attaches greater significance

to market behaviour and

inside information.

Funds Uses his own funds. Uses borrowed funds along

with his personal funds.


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Return Income: The total income, the investorreceives during his holding period.

Risk: Variability in the return.

Liquidity: The ease with which the investment isconverted into cash.

Safety: It refers to the legal and regulatoryprotection to the investment.

Hedge against inflation: The returns should behigher than the rate of inflation.

End period value Purchase period value+ Dividends

Return = 100Purchase period value


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Securities

They are instruments which represent a claimover 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


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The process of investment includes five stages:1. Investment Policy: The policy is formulated on the basis

of investible funds, objectives and knowledge aboutinvestment sources.

2. Security Analyses: Economic, industry and companyanalyses are carried out for the purchase of securities.

3. Valuation: Intrinsic value of the share is measuredthrough book value of the share and P/E ratio.

4. Portfolio Construction: Portfolio is diversified tomaximise return and minimise risk.

5. Portfolio Evaluation: The performance of the portfoliois appraised and revised.


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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


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Common stock or ordinary shares aremost commonly known as equity shares.

Stock is a set of shares put together in abundle.

A share is a portion of the share capital ofa company divided into small units ofequal value.

The advantages of equity shares are: Capital appreciation

Limited liability

Hedge against inflation


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It is a new equity instrument introduced inthe Companies (Amendment) Ordinance,1998.

It forms a part of the equity share capital as

its provisions, limitations and restrictions aresame as that of equity shares.

Sweat Equity is for:

The directors or employees involved in the processof designing strategic alliances.

The directors or employees who have helped thecompany to achieve a significant market share.


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The shares that carry no voting rights are

known as non-voting shares.

They provide additional dividends in the

place of voting rights. They can be listed and traded on the stock

exchanges.


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Distribution of shares, in addition to the cashdividends, to the existing shareholders areknown 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.


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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 surplusprofits.


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It is a debt instrument issued by a company,which carries a fixed rate of interest.

It is generally issued by private sector companiesin order to acquire loan.

The various features of a debenture are: Interest Redemption Indenture

A company can issue various types ofdebentures, which are: Secured bonds or unsecured debenture

Fully convertible debenture

Partly convertible debenture

Non-convertible debenture


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A warrant is a detachable instrument, which gives theright to purchase or sell equity shares at a specifiedprice and period.

It is traded in the securities market where theinvestor can sell it separately.

Two types of warrants are: Detachable warrants: When the warrants are issued along

with host securities and detachable, then they are knownas detachable warrants.

Puttable warrants:Represent a certain amount of equityshares that can be sold back to the issuer at a specified

price, before a stated date. Some of the advantages of warrants are: They have limited risk.

They offer potential for unlimited profits.

They can be traded in the securities market.


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An investor must have adequate knowledgeabout the investment alternatives and marketsbefore making any kind of investment.

The various sources from which an investor cangather 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


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By now, you should have:

Understood the concept of investment and

speculation

Learnt about the various types of shares anddebentures

Understood the various sources of investment

information


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Investment Alternatives

Chapter 2


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To understand the concept of investment

alternatives

To distinguish between negotiable and

non-negotiable securities To know the various types of real assets


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Investment alternatives mean investment in

assets other than the shares or debentures of

a company.

The alternatives range from financialsecurities to traditional non-security

investments.

The financial securities may be negotiable or

non-negotiable securities.


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The financial securities that are transferable

are known as negotiable securities.

Negotiable securities can be of two types:

Variable income securitiesFixed income securities

Equity shares comes under the category of variable

income securities

Debentures, Bonds, Kisan Vikas Patras, Indira Vikas

Patras and Government securities all come underthe category of fixed income securities.


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Fixed income securities are the financial claimswith promised cash flows of fixed amounts, paidat fixed dates.

Fixed income securities are classified as: Preference shares: Refer to the shares that provide a

fixed rate of dividend to the preference shareholders. Debentures: Refer to a long term debt instrument issued

by corporate entities to acquire finance.

Bonds: Refer to a debt security issued by thegovernment,quasi-government, public enterprises and financial

institutions. Government securities: Refer to the securities that are

issued by the Central, State and quasi-governmentagencies.

Money market securities: Refer to the securities thathave a very short term maturity period.


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The financial securities that are not

transferable are known as non-negotiable

securities.

They are also known as non-securitizedfinancial investments.

The deposit schemes that are offered by the

post offices, companies, banks, etc. form a

part ofthe non-negotiable securities.

Deposit facility is offered by banks and post

offices.


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The various types of tax sheltered savingsschemes are:

Public Provident Fund Scheme: It providesyearly interest which is exempted from incometax underSection 88.

National Savings Scheme: It provides 100 percent tax rebate to the depositors.

National Savings Certificate: It is a schemeprovided by the post offices for a period of sixyears. Once money is deposited, nowithdrawals are permitted, but loans can betaken.


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It is an agreement made between the

insurance company and the insured

person. The insurance company has to pay

a certain amount of money on theoccurrence of the event insured against.

The advantages of life insurance are:

Protection

Liquidity

Easy payments

Tax relief on specified schemes


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These are professionally managed portfolios ofsecurities.

They can be classified into two forms:

Open-ended schemes: These offer their unit on a

continuous basis. Repurchase is also carried out on acontinuous basis. It is not traded in the stock exchange.

Close ended schemes: These are schemes in which the

number of units are fixed and are traded in the stock

exchange.

The factors to be considered in the selection of

mutual

funds are:

Net assets Income com osition


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Real assets are tangible assets, which

include:

Gold and silver

Real estate

Art

Antique items


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By now, you should have:

Understood the concept of investment

alternatives

Learnt to distinguish between negotiableand non-negotiable securities

Knowledge of the various types of real

assets

Basics of Investment Avenues

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