PRELIM EXAMINATION Flashcards
is the employment of funds on
assets with the aim of earning income or capital appreciation Investment
has two attributes namely time and risk.
Investment
is the change in price of
an asset, investment, or
project over time, which may be represented in terms
of price change or percentage change.
return
refers to the degree of
uncertainty and/or potential
financial loss inherent in an
investment decision
Risk
on investment implies the
certainty of return of capital
without loss of many or time.
The safety
is the degree to which
a security can be
quickly purchased or
sold in the market at a price
reflecting its current value.
Liquidity
Risk is inherent in any investment. The risk of investment depends on the following factors.
The longer the maturity period, the larger the risk.
The lower the credit worthiness of the borrower, the higher is
the risk (5Cs: Character, Capacity, Capital, Collateral, Condition).
The risk varies with the nature of investment. Investment in
ownership securities like equity shares carry higher risk
compared to investments in debt instruments like
debentures..
Risk and return of an investment are related. Normally,
“the higher the risk,
the higher the return”.
Risk in Investment
Objectives of Investments
Maximization of
Profit
Minimization of Risk
Hedge against
inflation
Investment vs. Speculation
Investment is distinguished
from speculation with
respect to three factors,
(1) risk,
(2) capital gain
and
(3) time period.
It refers to the possibility of incurring a loss in a financial transaction. It arises from the possibility of variation in returns from an investment.
Risk
READ AND UNDERSTAND
Investment vs. Speculation
No investment is completely risk free. An investor generally
commits his funds to low risk investment, whereas a
speculator commits his funds to higher risk
investments. A speculator is prepared to take higher
risks in order to achieve higher returns.
The speculator’s motive is to achieve profits through price charges, i.e. he is interested in capital gains rather than the income from the investment. If purchase of securities ispreceded by proper investigation and analysis to receive
a stable return and capital appreciation over a period of time, it is investment.
Thus, speculation is associated with buying low and selling high with the hope of making large capital gains.
A speculator consequently engages in frequent buying and selling transactions.
Capital Gain
Investment is long-term in nature, whereas speculation is short-term. An investor commits his funds for a longer
period and waits for his return. But a speculator is interested
in short-term trade gains through buying and selling of
investment instruments.
Basically, both investment and speculation aim at good
returns. The difference is in
motives and methods. As a result, the distinction between
investment and speculation is not very wide. Investment is
sometimes described as a well grounded and carefully
planned speculation.
Time Period
consists in taking high risks not only for high returns, but also for thrill and excitement.
is unplanned and non scientific, without knowledge of the nature
of the risk involved. It is surrounded by uncertainty and is
based on tips and rumors.
Gambling
is an attempt to carefully plan, evaluate and allocate funds to various investment outlets which offer safety
of principal and moderate and continuous return over a long
period of time.
Investment
are large in number but their investable
resources are comparatively smaller. They generally lack the skill to
carry out extensive evaluation and analysis before investing.
Moreover, they do not have the time and resources to engage in
such an analysis.
Individual investors
are the organizations
with surplus funds who engage in investment activities. Mutual
funds, investment companies, banking and non-banking companies,
insurance corporations, etc. are the organizations with large
amounts of surplus funds to be invested in various profitable
avenues.
Institutional investors,
This refers to the concept of deferred consumption, which
involves purchasing an asset, giving a loan or keeping funds
in a bank account with the aim of generating future returns.
INVESTMENT
A concept of investment which
means addition to the capital stock
of the society such as increase in
building, equipment and inventory
for the used in the production of
other goods.
Economic Investment
An allocation of monetary
resources to assets that are
expected to yield some gain or
return over a period of time.
People invest funds in share,
debentures, fixed deposits,
national savings certificate, life
insurance policies, etc.
Financial Investment
These are goals that a business
sets to measure this financial
performance and progress such
as safety, profitability, and
liquidity.
Financial Objectives
These are actions that individuals
set for themselves to achieve their
goals such as family commitments,
status, dependents, educational
requirements, income,
consumption and provision for
retirements.
Personal or Individual
Objectives
Investors have a high priority towards achieving certain objectives in a
short time. For example, a young couple will give high priority to buy a
house. Thus, investors will go for high priority objectives and invest their
money accordingly.
Short term high priority objectives:
Some investors look forward and invest on the basis of objectives of long
term needs. They want to achieve financial independence in long period.
For example, investing for post retirement period or education of a child
etc. investors, usually prefer a diversified approach while selecting
different types of investments.
Long term high priority objectives:
These objectives have low priority in investing. These objectives are not
painful. After investing in high priority assets, investors can invest in
these low priority assets. For example, provision for tour, domestic
appliances etc.
Low priority objectives:
Investors put their surplus money in these kinds of investment. Their
objective is to maximize wealth. Usually, the investors invest in shares
of companies which provide capital appreciation apart from regular
income from dividend.
Money making objectives:
Investors want to ensure that their assets can meet their
financial needs over their lifetimes.
Lifestyle
Investors want to protect their financial needs
against financial risks at all times
Financial security
Investors want a balance of risk and return that is suitable to
their personal risk preferences.
Return:
Investors want to minimize the costs of managing
their assets and their financial needs.
Value for money:
Investors do not want to worry about the day to day
movements of markets and their present and future financial security.
Peace of mind:
To meet such objectives,
investment avenues that carry minimum or no risk are suitable.
Short Term (up to one year)
Investment avenues
that offers better returns and may carry slightly more risk can
be considered
Medium Term (1 year to 3 years)
As the time horizon is
adequate, investor can look at investment that offers best
returns and are considered more risky
Long Term (3 years and above)
are paper (or electronic)
claim on some issuer
such as the government
or corporate body.
Financial assets
refers to the unit of ownership in a
company/corporati
is the unit of measurement for that
asset
Shares
is the actual asset in which you
invest
A stock
There are two ways in which investment in equities can be made:
Through the primary market
(by applying for shares that are offered to the public)
Through the secondary market
(by buying shares that are listed on the stock exchanges)
have voting rights
dividends payments fluctuate
Common stock
No voting rights
Dividend payments are fixed
Preffered Stock
allow for the repayment of
the principal share capital to shareholders.
Redeemable Preference Shares
