4/12/2012

Prof.Nijumon K John, Christ University

Investment
Investment is the employment of funds on assets with

the aim of earning income or capital appreciation. Present consumption is sacrificed to get a return in the future.

4/12/2012

Prof.Nijumon K John, Christ University

Contd
The economic meaning of investment is the net

addition made to the nations capital stock that consists of goods and services that are used in the production process. A net addition to the capital stock means an increase in the buildings, equipments, etc. Financial investment is the allocation of money to assets that are expected to yield some gain over a period of time.

4/12/2012

Prof.Nijumon K John, Christ University

Speculation
Speculation means taking up the business risk in the

hope of getting short term gain. It involves buying and selling activities with the expectation of getting profit from the price fluctuations.

4/12/2012

Prof.Nijumon K John, Christ University

Difference between investor and speculator

Investor : Time; longer time horizon Speculator: very short period Risk : assumes moderate risk Willing to undertake high risk Return: moderate return High returns with high risk Decision: considers fundamental factors and performance of the company Considers insider information and market behaviour Funds: uses own funds and avoids borrowed funds Uses borrowed funds
4/12/2012 Prof.Nijumon K John, Christ University

Gambling and investment

A gamble is usually a very short term investment in a

game or chance. It is different from speculation and investment. The time horizon in gambling is shorter than speculation and investment.

4/12/2012

Prof.Nijumon K John, Christ University

Arbitrage
Arbitrage is a process of earning profit by taking

advantage of differential pricing for the same asset. The process generates riskless profit. In the security market, it is of selling security at a higher price in one market and the simultaneous purchase of the same security at a relatively lower price from another market.

4/12/2012

Prof.Nijumon K John, Christ University

Why are Investments important?

Longer life expectancy
Taxation Interest rates

Inflation
High income

4/12/2012

Prof.Nijumon K John, Christ University

Investment objectives
Return: rate of return is defined as the total income

the investor receives during the holding period stated as a percentage of the purchasing price.
Risk: risk of holding securities is related with the

probability of actual return becoming less than the expected return.

4/12/2012

Prof.Nijumon K John, Christ University

Contd
Liquidity: marketability of the investment provides

liquidity to the investment. Hedge against inflation: the rate of return should be higher than the rate of inflation. Safety: the selected investment avenue should be under the legal and regulatory frame work.

4/12/2012

Prof.Nijumon K John, Christ University

Real and Financial assets

Real assets: tangible assets which are in the form of

land, building, furniture, gold etc. These assets have a physical appearance. Financial assets: it is a claim represented by securities. This represent a claim on the income generated by real assets of some other parties.

4/12/2012

Prof.Nijumon K John, Christ University

Investment Process
Investment policy
Analysis Valuation

Portfolio construction
Portfolio evaluation

4/12/2012

Prof.Nijumon K John, Christ University

 Investment policy
- Investible funds: availability of funds - Objectives: based on required rate of return, risk

perception and need for liquidity - Knowledge: about investment alternatives and market.

4/12/2012

Prof.Nijumon K John, Christ University

 Analysis

- Market analysis: general economic scenario - Industry analysis: growth potential of industry - Company analysis: fundamentals

4/12/2012

Prof.Nijumon K John, Christ University

 Valuation
- Book value - Future value: using trend analysis

4/12/2012

Prof.Nijumon K John, Christ University

 Portfolio construction
- Diversification

(i)Debt and equity diversification (ii)Industry diversification (iii)Company diversification - Selection and allocation

4/12/2012

Prof.Nijumon K John, Christ University

 Evaluation
- Appraisal - Revision

4/12/2012

Prof.Nijumon K John, Christ University

What is security?
Securities Regulation Act, 1956, has defined the

security as inclusive of shares, scrips, stocks, bonds or any other marketable instruments of a like nature. The derivatives of securities and index are also included as securities in the definition in 1998. The word inclusive is used deliberately so as to give authority to the government to add or remove any instrument.

4/12/2012

Prof.Nijumon K John, Christ University

Security analysis
Security analysis involves the projection of future

dividend, or earnings flows, forecast of the share price in the future etc.

4/12/2012

Prof.Nijumon K John, Christ University

Need of security analysis

If the capital market is efficient and security prices reflect

perfectly all the market information, then all the investors get the same average returns and no one can get exceptional returns. But in India, the markets are not efficient enough and information is not free easily accessible. In this scenario, exceptional returns are possible. In an efficient market, superior returns are possible by proper security analysis.

4/12/2012

Prof.Nijumon K John, Christ University

Portfolio
A portfolio is a combination of various assets and/or

instruments of investments, with different risk-return characteristics. The return on portfolio is the weighted average of returns of the individual stocks. Security analysis is a tool for efficient portfolio management.

4/12/2012

Prof.Nijumon K John, Christ University

Legal framework for securities markets in India

Securities are issued by the Companies under the

Companies Act and by the Government under the Indian Public Debt Act which was replaced by Government Securities Act,2006. Trading in securities is governed by Securities Contract (Regulation) Act 1956 and SEBI Act 1992.

4/12/2012

Prof.Nijumon K John, Christ University

Provisions under Companies Act

Sec 55 to 68 issue of prospectus, registration of

prospectus, liabilities of directors for misstatements in prospectus etc. Sec 69 to 73 allotment of new shares, delivery of certificates, and listing on stock exchanges. Sec 82 marketing the shares as moveable property Sec 108 to 112 ensuring transferability of shares Sec 108 transfer deed

4/12/2012

Prof.Nijumon K John, Christ University

Acceptance of fixed deposits

A company cannot accept deposits in excess of 35% of the

paid up capital and free reserves. Of this, 25% can be accepted from the public and the rest 10% from shareholders. Minimum period of deposits is six months and maximum 5 years. The company has the obligation to maintain an amount not less than 15% of the deposit maturing during the year in liquid investments. The maximum interest rate cannot exceed 12.5% per annum Maximum brokerage K John, Christ University payable is 1%. 4/12/2012 Prof.Nijumon

Investors and stock exchanges

Investors can deal in any of the recognized stock

exchanges.

4/12/2012

Prof.Nijumon K John, Christ University

Guidelines for investors in stock market

Never buy on rumours Buy only on the basis of fundamental analysis of companies Buy a diversified list of companies A declaration of bonus or low P/E ratio, along with strong fundamentals shows a good buy. Investor should buy on declines Avoid both fear and greed in stock market Pick up the undervalued stocks Timing of purchase and sale is very important.

4/12/2012

Prof.Nijumon K John, Christ University

Risk perception and attitude

It is very important to assess individual differences in

attitude towards risk. In many situations people are selected based on their purported risk attitudes. Startup companies may look for risk-loving new employees when expanding their payroll. Investment advisors may be assigned to important clients based on a match in risk attitude.

4/12/2012

Prof.Nijumon K John, Christ University

 Investment risk tolerance can be separated into four

components: propensity (observed risk behavior in naturally occurring situations), attitude (willingness to incur monetary risk, for example as measured by responses to hypothetical investment scenarios), capacity (financial capability to incur risk), and knowledge (for example, of risk-return tradeoffs)

4/12/2012

Prof.Nijumon K John, Christ University

Demographic Differences in Risk Perception and Risk Propensity

Gender
Age Investment Experience

Marital Status

4/12/2012

Prof.Nijumon K John, Christ University