Description
Investment involves making of a sacrifice in the present with the hope of deriving future benefits. Two most important features of an investment are current sacrifice and future benefit
Fundamentals of Investment
? Investment involves making of a sacrifice in
the present with the hope of deriving future
benefits.
? Two most important features of an
investment are current sacrifice and future
benefit.
? Investment is the sacrifice of certain present
values for the uncertain future reward.
? The expectation brings with it a
probability that the quantum of return
may vary from a minimum to a
maximum.
? This possibility of variation in the actual
return is known as investment risk.
? Thus every investment involves a return
and risk.
DIFFERENCE BETWEEN THE
INVESTOR AND THE SPECULATOR
? Time horizon
? Investor – Plans for a longer time horizon. His
holding period may be from one year to few
years.
? Speculator – Plans for a very short period.
Holding period varies from few days to
months.
RISK
Investor – Assumes moderate risk.
Speculator – Willing to undertake high risk.
Return
? Investor – Likes to have moderate rate
of return associated with limited risk.
? Speculator – Like to have high return
assuming high risk.
Decision
? Investor – Considers fundamental
factors and evaluates the performance
of the company regularly.
? Speculator – Considers inside
information and market behaviour.
Funds
? Investor - uses his own funds and avoids
borrowed funds.
? Speculator - Speculator uses borrowed funds
to supplement his personal resources.
INVESTMENT PROCESS
? Investment process is governed by the
two important facets of investment they
are risk and return.
? Therefore, we first consider these two
basic parameters that are of critical
importance to all investors and the
trade off that exists between expected
return and risk.
? Given the foundation for making investment
decisions the trade off between expected
return and risk- we next consider the decision
process in investments as it is typically
practiced today.
? Although numerous separate decisions must
be made, for organizational purposes, this
decision process has traditionally been
divided into a two step process: security
analysis and portfolio management.
? Security analysis involves the valuation
of securities.
? Portfolio management involves the
management of an investor’s
investment selections as a portfolio
(package of assets), with its own
unique characteristics.
Investment categories:
? Investment generally involves
commitment of funds in two types of
assets:
? Real assets
? Financial assets
Investment avenues
? 1.Corporate securities
? Equity shares ,Preference shares
? Debentures/Bonds , GDRs /ADRs
? Warrants , Derivatives
? 2.Deposits in banks and non banking
companies
? 3.Post office deposits and certificates
? 4.Life insurance policies
? 5.Provident fund schemes
? 6.Government and semi government
securities
? 7.Mutual fund schemes
? 8.Real assets
Equity Shares
? Equity shares, also known as ordinary
shares or common shares, represent
the owners, capital in a company .
Characteristics of Equity Share
? Permanent capital
? Residual claim to asset & income
? Right to control or voting rights
Limited liability .
Sweat equity
? The definition of sweat equity has two
different dimensions:
? Shares issued for consideration other
than cash for providing know-how,
intellectual property or value additions.
? Shares issued at a discount to
employees and directors.
Sweat equity is for
? Computer hardware and software
development.
? Management consultancy where a standard
strategy is issued to earn a fee, like
Enterprise Resource Planning (ERP) solution.
? In the life insurance segment, commission –
based business can be converted into sweat
equity.
Non-voting shares
? Non voting shares carry no voting rights.
They carry additional dividends instead of the
voting rights.
? They have right to participate in the bonus
issue.
? The non-voting shares also can be listed and
traded in the stock exchange.
? If non-voting shares are not paid dividend for
two years, the shares would automatically get
voting rights.
? The company can issue this to a
maximum of 25% of the voting stock.
? The dividend on non voting shares
would have to be 20% higher than the
dividend on the voting shares.
Right shares
? A right issue (pre-emptive right) is an
issue of share to the existing
shareholders on a pro rata basis.
? New share issue offered to existing
shareholders in proportion to their
current shareholding, for a specified
period and at a specified (usually
discounted) price. Its objective is to
afford them the opportunity to maintain
their percentage of ownership of the
firm.
Stock Dividend (Bonus
Shares)
? Stock dividend is the payment of additional
shares of common stocks to the ordinary
shareholders instead of cash dividend.
? Stock dividend or bonus shares are issued
by firm to existing shareholders by
conversion of reserves into capitalisation.
? Bonus shares can be issued only out of the
reserve build out from the profits or share
premium collected on cash only.
Preference Shares:
? Preference shares refer to a form of shares
that lie in between pure equity and debt.
They have the characteristic of ownership
rights while retaining the privilege of a
consistent return on investment.
? The claims of these holders carry higher
priority than that of ordinary shareholders but
lower than that of debt holders.
Types of Preference shares
? Cumulative preference shares
? Non-cumulative preference share
? Redeemable Preference share
? Irredeemable Preference Share
? Participating Preference share
? Non-participating preference share
? Convertible preference share
? Non-convertible preference shares.
Debentures and Bonds
? A debenture is an acknowledgement of debt.
? These are essentially long-term debt instruments.
? Many types of debentures and bonds have been
structured to suit investors with different time needs.
Though having a higher risk as compared to bank
fixed deposits, bonds, and debentures do offer higher
returns.
? Debenture investment requires scanning the market
and choosing specific securities that will cater to the
investment objectives of the investors.
Types of debenture :
Simple or unsecured debentures
? Secured or mortgaged debentures
? Bearer debentures
? Registered debentures
? Redeemable debentures
? Irredeemable debentures
? Convertible debentures
? Non-Convertible debentures
? Guaranteed debentures .
Zero coupon bonds/Deep
discount bonds
? There is no interest payment in these
bonds. These bonds sell at a discount
and the face value is repaid at the time
of maturity.
Depository Receipts
(GDRs/ADRs):
? American Depository Receipts (ADRs)
and Global Depository Receipts (GDRs)
are shares of Indian companies listed
and traded in foreign stock exchanges.
Warrants:
? A warrant is a certificate giving its holder the
right to purchase equity shares at a stipulated
price within a specified time limit or
perpetually.
? Sometimes a warrant is offered with debt
securities as an inducement to buy the shares
at a latter date.
? The warrant acts as a value addition because
the holder of the warrant has the right but
not the obligation of investing in the equity at
the indicated rate.
? The life periods of warrants are long.
? Warrants can be detachable. The
investor can sell the warrants
separately and they are traded in the
market.
Derivatives:
? It is a financial instrument which is derived
from some other financial assets. It is
designed to minimize risk for the investors on
their investment.
? Financial futures are contracts or obligations
that help to lock-in the price at which one
wishes to buy or sell an asset in the future, to
protect against price changes.
DEPOSITS:
? Among non-corporate investments, the most
popular are deposits with banks such as
savings accounts and fixed deposits.
? Savings deposits carry low interest rates
whereas fixed deposits carry higher interest
rates, varying with the period of maturity,
interest is payable quarterly or half-yearly or
annually.
Company Fixed Deposits:
? Many companies have come up with fixed deposit
schemes to mobilize money for their needs. The
company fixed deposit market is a risky market and
ought to be looked at with caution.
? RBI has issued various regulations to monitor the
company fixed deposit market. However, credit rating
services are available to rate the risk of company
fixed deposit schemes.
? The maturity period varies from three to five years.
Fixed deposits in companies have a high risk since
they are unsecured, but they promise higher returns
than bank deposits.
Post Office Deposits and
Certificates:
? The investment avenues provided by post
offices are non-marketable. However, most of
the savings schemes in post offices enjoy tax
concessions.
? Post offices accept savings deposits as well as
fixed deposits from the public.
? There is also a recurring deposit scheme that
is an instrument of regular monthly savings.
Life Insurance Policies:
? Insurance companies offer many
investment schemes to investors. These
schemes promote savings and additionally
provide insurance cover.
? LIC is the largest life insurance company in
India. Some of its schemes include life
policies, Jeevan Saathi, Money Back Plan,
Jeevan Dhara etc.
Equity Linked Savings
Schemes (ELSSs):
? Investing in ELSSs gets investors a tax
rebate of the amount invested.
? ELSSs are basically growth mutual
funds with a lock-in period of three
years.
Pension Plan:
? Certain notified retirement/pension
funds entitle investors to a tax rebate.
? UTI, LIC, and ICICI are some financial
institutions that offer retirement plans
to investors.
Pension Plan
? Certain notified retirement/pension
funds entitle investors to a tax rebate.
? UTI, LIC, and ICICI are some financial
institutions that offer retirement plans
to investors.
Mutual Fund Schemes:
? The Unit Trust of India is the first mutual
fund in the country. A number of commercial
banks and financial institutions have also set
up mutual funds.
? Mutual funds have been set up in the private
sector also. These mutual funds offer various
investment schemes to investors.
REAL ASSETS
? Investments in real assets are also made
when the expected returns are very
attractive.
? Real estate, gold, silver, currency, and other
investments such as art are also treated as
investments since the expectation from
holding of such assets is associated with
higher returns.
doc_589984389.ppt
Investment involves making of a sacrifice in the present with the hope of deriving future benefits. Two most important features of an investment are current sacrifice and future benefit
Fundamentals of Investment
? Investment involves making of a sacrifice in
the present with the hope of deriving future
benefits.
? Two most important features of an
investment are current sacrifice and future
benefit.
? Investment is the sacrifice of certain present
values for the uncertain future reward.
? The expectation brings with it a
probability that the quantum of return
may vary from a minimum to a
maximum.
? This possibility of variation in the actual
return is known as investment risk.
? Thus every investment involves a return
and risk.
DIFFERENCE BETWEEN THE
INVESTOR AND THE SPECULATOR
? Time horizon
? Investor – Plans for a longer time horizon. His
holding period may be from one year to few
years.
? Speculator – Plans for a very short period.
Holding period varies from few days to
months.
RISK
Investor – Assumes moderate risk.
Speculator – Willing to undertake high risk.
Return
? Investor – Likes to have moderate rate
of return associated with limited risk.
? Speculator – Like to have high return
assuming high risk.
Decision
? Investor – Considers fundamental
factors and evaluates the performance
of the company regularly.
? Speculator – Considers inside
information and market behaviour.
Funds
? Investor - uses his own funds and avoids
borrowed funds.
? Speculator - Speculator uses borrowed funds
to supplement his personal resources.
INVESTMENT PROCESS
? Investment process is governed by the
two important facets of investment they
are risk and return.
? Therefore, we first consider these two
basic parameters that are of critical
importance to all investors and the
trade off that exists between expected
return and risk.
? Given the foundation for making investment
decisions the trade off between expected
return and risk- we next consider the decision
process in investments as it is typically
practiced today.
? Although numerous separate decisions must
be made, for organizational purposes, this
decision process has traditionally been
divided into a two step process: security
analysis and portfolio management.
? Security analysis involves the valuation
of securities.
? Portfolio management involves the
management of an investor’s
investment selections as a portfolio
(package of assets), with its own
unique characteristics.
Investment categories:
? Investment generally involves
commitment of funds in two types of
assets:
? Real assets
? Financial assets
Investment avenues
? 1.Corporate securities
? Equity shares ,Preference shares
? Debentures/Bonds , GDRs /ADRs
? Warrants , Derivatives
? 2.Deposits in banks and non banking
companies
? 3.Post office deposits and certificates
? 4.Life insurance policies
? 5.Provident fund schemes
? 6.Government and semi government
securities
? 7.Mutual fund schemes
? 8.Real assets
Equity Shares
? Equity shares, also known as ordinary
shares or common shares, represent
the owners, capital in a company .
Characteristics of Equity Share
? Permanent capital
? Residual claim to asset & income
? Right to control or voting rights
Limited liability .
Sweat equity
? The definition of sweat equity has two
different dimensions:
? Shares issued for consideration other
than cash for providing know-how,
intellectual property or value additions.
? Shares issued at a discount to
employees and directors.
Sweat equity is for
? Computer hardware and software
development.
? Management consultancy where a standard
strategy is issued to earn a fee, like
Enterprise Resource Planning (ERP) solution.
? In the life insurance segment, commission –
based business can be converted into sweat
equity.
Non-voting shares
? Non voting shares carry no voting rights.
They carry additional dividends instead of the
voting rights.
? They have right to participate in the bonus
issue.
? The non-voting shares also can be listed and
traded in the stock exchange.
? If non-voting shares are not paid dividend for
two years, the shares would automatically get
voting rights.
? The company can issue this to a
maximum of 25% of the voting stock.
? The dividend on non voting shares
would have to be 20% higher than the
dividend on the voting shares.
Right shares
? A right issue (pre-emptive right) is an
issue of share to the existing
shareholders on a pro rata basis.
? New share issue offered to existing
shareholders in proportion to their
current shareholding, for a specified
period and at a specified (usually
discounted) price. Its objective is to
afford them the opportunity to maintain
their percentage of ownership of the
firm.
Stock Dividend (Bonus
Shares)
? Stock dividend is the payment of additional
shares of common stocks to the ordinary
shareholders instead of cash dividend.
? Stock dividend or bonus shares are issued
by firm to existing shareholders by
conversion of reserves into capitalisation.
? Bonus shares can be issued only out of the
reserve build out from the profits or share
premium collected on cash only.
Preference Shares:
? Preference shares refer to a form of shares
that lie in between pure equity and debt.
They have the characteristic of ownership
rights while retaining the privilege of a
consistent return on investment.
? The claims of these holders carry higher
priority than that of ordinary shareholders but
lower than that of debt holders.
Types of Preference shares
? Cumulative preference shares
? Non-cumulative preference share
? Redeemable Preference share
? Irredeemable Preference Share
? Participating Preference share
? Non-participating preference share
? Convertible preference share
? Non-convertible preference shares.
Debentures and Bonds
? A debenture is an acknowledgement of debt.
? These are essentially long-term debt instruments.
? Many types of debentures and bonds have been
structured to suit investors with different time needs.
Though having a higher risk as compared to bank
fixed deposits, bonds, and debentures do offer higher
returns.
? Debenture investment requires scanning the market
and choosing specific securities that will cater to the
investment objectives of the investors.
Types of debenture :
Simple or unsecured debentures
? Secured or mortgaged debentures
? Bearer debentures
? Registered debentures
? Redeemable debentures
? Irredeemable debentures
? Convertible debentures
? Non-Convertible debentures
? Guaranteed debentures .
Zero coupon bonds/Deep
discount bonds
? There is no interest payment in these
bonds. These bonds sell at a discount
and the face value is repaid at the time
of maturity.
Depository Receipts
(GDRs/ADRs):
? American Depository Receipts (ADRs)
and Global Depository Receipts (GDRs)
are shares of Indian companies listed
and traded in foreign stock exchanges.
Warrants:
? A warrant is a certificate giving its holder the
right to purchase equity shares at a stipulated
price within a specified time limit or
perpetually.
? Sometimes a warrant is offered with debt
securities as an inducement to buy the shares
at a latter date.
? The warrant acts as a value addition because
the holder of the warrant has the right but
not the obligation of investing in the equity at
the indicated rate.
? The life periods of warrants are long.
? Warrants can be detachable. The
investor can sell the warrants
separately and they are traded in the
market.
Derivatives:
? It is a financial instrument which is derived
from some other financial assets. It is
designed to minimize risk for the investors on
their investment.
? Financial futures are contracts or obligations
that help to lock-in the price at which one
wishes to buy or sell an asset in the future, to
protect against price changes.
DEPOSITS:
? Among non-corporate investments, the most
popular are deposits with banks such as
savings accounts and fixed deposits.
? Savings deposits carry low interest rates
whereas fixed deposits carry higher interest
rates, varying with the period of maturity,
interest is payable quarterly or half-yearly or
annually.
Company Fixed Deposits:
? Many companies have come up with fixed deposit
schemes to mobilize money for their needs. The
company fixed deposit market is a risky market and
ought to be looked at with caution.
? RBI has issued various regulations to monitor the
company fixed deposit market. However, credit rating
services are available to rate the risk of company
fixed deposit schemes.
? The maturity period varies from three to five years.
Fixed deposits in companies have a high risk since
they are unsecured, but they promise higher returns
than bank deposits.
Post Office Deposits and
Certificates:
? The investment avenues provided by post
offices are non-marketable. However, most of
the savings schemes in post offices enjoy tax
concessions.
? Post offices accept savings deposits as well as
fixed deposits from the public.
? There is also a recurring deposit scheme that
is an instrument of regular monthly savings.
Life Insurance Policies:
? Insurance companies offer many
investment schemes to investors. These
schemes promote savings and additionally
provide insurance cover.
? LIC is the largest life insurance company in
India. Some of its schemes include life
policies, Jeevan Saathi, Money Back Plan,
Jeevan Dhara etc.
Equity Linked Savings
Schemes (ELSSs):
? Investing in ELSSs gets investors a tax
rebate of the amount invested.
? ELSSs are basically growth mutual
funds with a lock-in period of three
years.
Pension Plan:
? Certain notified retirement/pension
funds entitle investors to a tax rebate.
? UTI, LIC, and ICICI are some financial
institutions that offer retirement plans
to investors.
Pension Plan
? Certain notified retirement/pension
funds entitle investors to a tax rebate.
? UTI, LIC, and ICICI are some financial
institutions that offer retirement plans
to investors.
Mutual Fund Schemes:
? The Unit Trust of India is the first mutual
fund in the country. A number of commercial
banks and financial institutions have also set
up mutual funds.
? Mutual funds have been set up in the private
sector also. These mutual funds offer various
investment schemes to investors.
REAL ASSETS
? Investments in real assets are also made
when the expected returns are very
attractive.
? Real estate, gold, silver, currency, and other
investments such as art are also treated as
investments since the expectation from
holding of such assets is associated with
higher returns.
doc_589984389.ppt