Investment Flashcards
Application of money to earn more money
Investment
Refers to utilization of resources in order to increase income or production output in the future
Investment in Economics
Refers to any physical or tangible asset
Investment for economists
Money utilized for buying financial assets
Investment for Finance professionals
Most important feature of investment
High Market Liquidity
Method used for evaluating the value of a financial investment
Valuation
Types of Investments
- Economic
- Financial
Undertaken with the expectation of increasing the current economy’s capital stock which consists of goods and services desired by the society
Economic Investment
Money invested in financial investments is ultimately converted into physical assets
Financial Investments
Reflect the progress pattern of the real market, financial market exist only as a support to the real market.
Perfect Financial Market
Putting money into something with an expectation of gain without thorough analysis, without security of principal and without security of return.
Speculation/ Gambling
Nature of Investment
- Return
- Risk
- Safety
- Liquidity
Money made or lost on an investment over some period of time.
Return
Primary Objective of an investment
Return
Return may be received in what form?
Yield (Dividend/Interest) + Capital Appreciation (Sale Price– Purchase Price)
Return depends on what?
- Nature of Investment
- Maturity Period
- Host of other factors
Refers to the loss of the principal amount of an investment
Risk
Factors affecting Risk
- Longer maturity period, higher risk
- Government/ Semi- government, less risk
- Debt instrument/ fixed deposit, low risk
- Ownership instrument, more risk
- Risk of degree of variability of return: Ownership > Debt
- Tax Provisions
Protection of the investor’s principal amount and expected rate of return
Safety
Investment ready to convert into a cash available immediately in cash form.
Liquidity
Characteristics of Investment
- Safety
- Income
- Capital Growth
Safety investment
Treasury Bills, CD, Commercial Paper, Banker’s Acceptance Slips, Fixed Income (Bond) Market
Slightly riskier offer higher income return than AAA
A or Aa
Medium risk less income than junk bonds
BBB
Highest Potential bond yields available but at highest possible risk
Junk Bonds
Offer low yield but a considerable opportunity for an increase in value
Growth Securities
offers potential tax advantage because of their lower tax rate
Capital gains
Objectives of Investment
- Capital Appreciation
- Current Income
- Capital Preservation
- Speculation
- Tax Minimization
- Marketability/ Liquidity
It is the uncertainty associated with the returns from an investment that introduces a risk
Concept of Risk
Elements of Risk
- Systematic Risk
- Unsystematic Risk
Impact of these changes in system-wide
Systematic Risk
Variability in returns occurs due to such Firm-specific factors
Unsystematic Risk
Actual income from a project as well as appreciation in the value of capital
Return
Components of Return
- Periodic cash flows from the investment
- change in price of the asset
Total Return Formula
TR= (Cash Payment received + Price change in assets over the period)/ Purchase price of the asset
Allows investors to reduce the overall risk associated with their portfolio but may limit potential returns
Diversification
Kinds of investors
- Retail/ Individual
- Institutional
Invests in securities and assets on their own, in smaller quantities
Retail/Individual investor
Company/organization that invests money to buy securities or assets
Institutional investor
The money you have now is worth more than the identical sum in the future due to its potential earning capacity
Time Value of Money
Potential gain on interests where that money is received today and held in savings account
Opportunity costs
Formula for future value
FV= Present Value x [1+ (interest rate/number of compounding periods per year)] (n + number of years)
