Investment

Investment is parting with ones fund, to be used by another party ,user of fund,for productive activity It can mean giving a loan or an advance or contributing to an equity or debt capital It means conversion of cash or money into a monetary asset or a claim on future money for a return

Investment is the process of sacrificing something now for the prospect of gaining something later An investment operation is one which upon through analysis promises safety of principal and a satisfactory return Safety means protection against losses under reasonable conditions of variations The term satisfactory return has a wider meaning than a adequate income,since it allows for capital appreciation besides current interest or dividend yields

There are basically three concepts of investments Economic Business Financial

Economic investment

The term investment refers to net additions to capital stock of the society The term capital stock includes goods which are used in the production of other goods (eg buildings,inventories,equipments) Thus investment means increase in buildings ,equipments etc

Business inveastment

It refers to the money to be put or held in a private business Eg if a man puts rs 10,000 in a grocery shops,it will be said that his investment in his business amounts to rs 10,000

Financial investment

This refers to putting money into securities i.e., shares or debentures ,real estates,mortgages However the term financial investment is generally used for investment in securities

Forms of investment

Security form of investment(marketable) Non Security form of investment(non marketable)

Security form of investment(marketable) Corporate bonds /debentures Public sector bonds Preference shares Equity shares

Non Security form of investment(non marketable) National savings schemes National savings certificate Provident funds Corporate fixed deposit Life insurance policies Post office savings bank account Relief bonds Kisan vikas patra Deposits in banks

Objective of investment

The objective of the investor is to minimise the risk and to maximise the return The characteristics of investments are Risk Return Safety Liquidity Marketability Amount of investment

Risk The longer the maturity period,the larger is the risk The more the creditworthiness of the borrower or agency issuing security ,the less is the risk The risk of loss is less in the case of debt instruments as these are secured and fixed income instruments as compared to ownership instruments wherein the risk of loss is more

Return a major factor influencing investment decision is the return , which is yield plus capital appreciation Yield is the interest or dividend divided by its purchase price Capital appreciation is the difference between purchase price and the sale price

Safety The safety of capital is the certainty of return on capital without loss of money or time involved

Liquidity If a capital asset is easily realisable ,saleable or marketable ,then it is said to be liquid If liquidity is high ,then the return may be low as in the case of bank savings deposits

Marketability This means easy and quick means of transferability of an asset Thus assets of listed companies and shares of public limited companies are more easily transferable than those of non listed companies and private limited companies

Amount of investment The amount of surplus funds available will determine the investment decision

Selection of investments

Type of securities Proportion between fixed and variable yield securities Selection of industries Selection of companies

Time of purchasing

The finance manager has to buy the right security at the right time It is ideal to buy when the prices are low and sell when the prices are high Usually investors hesitate to buy when the prices are low as they feel that the prices may fall further Similarly investors hesitate to sell when the prices are high as they fell that the price may still move high The golden rule of investment timing of purchase is BUY CHEAP AND SELL DEAR

Investment and speculation

Investment requires the ability and capacity to foresee the future events and these are the basic ingredients required for speculation Investment requires speculation while speculation also involves some investment

The investor puts money in certain investment channel with a prime objective of getting a steady flow of return,he is not much concerned with market fluctuation as he is buying solely for getting a steady income A speculator on the other hand tends to buy an asset with the expectation of earning a profit by a subsequent sale when the market rises Speculation involves higher level of risk and more uncertain expectations as compared to investment

Speculation & Gambling

Gambling represent creation of risk not previously existing ed betting at horse races Speculation is taking risk which appears justified after carefully studying the pros and cons Gambling is nothing but unintelligent speculation

Security

A security is an instrument of promissory note or a method of borrowing or lending or a source of contribution to a fund needed by a corporate body or a non corporate body Securities include shares,scrips,stocks,bonds,debenture of a company or body corporate,the govt etc

Security Analysis

The process of analysing the individual securities and the market as a whole and estimating the risk and return expected from each of the investments with a view to identifying the undervalued securities for buying and overvalued securities for selling is both an art and a science and that is called Security Analysis

It involves projection of future dividend,or earnings flows,forecast of the share prices in the future and estimating the intrinsic value of a security based on the forecast of earnings or dividends

Portfolio

A combination of securities with different risk return characteristics will constitute a portfolio They are combinations of assets held by the investors The combinations may be of various assets like equity and debt and of different issuers like govt and corporate or of various instruments like discount bonds ,warrants,debentures and blue chip equity or scrips of emerging blue chip cos

Portfolio management

Management means utilisation of resources in the best possible manner Portfolio management involves maintaining a proper combination of securities which comprise the investors portfolio in a manner that give maximum return with minimum risk

Sources of investment information

Types of information World affairs Domestic economic and political factors Industry information Company information Security market information Security price quotation Data on related markets Data on mutual funds Data on primary markets/new issues

Types of Information Internal External

Internal Financial statements Financial results Physical operations Inputs and their availability Sales/inventory

External information Economy Industry Government Political factors International factors

World affairs,national affairs Journals & business dailies Economic times Financial express Business line Wall street London economist Business india Business today Fortune india

Industry and co information,security market and price quotations Dallal street Capital market Business india Financial dalies Data on primary market Prime magazine

Investment instruments

Post office savings bank accounts Savings deposits of banks Public provident fund accounts Post office time deposit accounts Bank fixed deposits Post office recurring deposit accounts National savings schemes Post office monthly income schemes

Kisan vikas patra National savings certificate Units of mutual funds Equity shares of companies Convertible debentures Non Convertible debentures Fixed deposit of companies

Preference shares (redeemable or cumulative) Cumulative Convertible Preference Shares(ccp) Bonds of public sector companies

Review questions

State whether true or false Buying and selling of securities involves speculation False The security prices are affected by a number of economic political and social factors True

Select the most proper answer A finance manager is basically concerned with the concept of Economic investment Business investment Financial investment Gambling is Intelligent speculation Unintelligent speculation Successful speculation

Debentures form Aggressive component Defensive component Progressive component in a port folio