ex e2e eR "ntroduction to investment and Securtios [invesmen Paces] eas Investment = = [| — Fain] [Poko] cinantin | [Esai | + Investible fund + Market * Intrinsic val i | : i i i int ‘value + Diver af | Bee || omy ||: imeane |: sree | are | oo ; Soe | Figure 1.1 Stages of the investment process be extra careful in the selection of investment alternatives, He must make sure ‘ s that the returns are higher than the interest he pays. Mutual funds invest their stockholders’ money in securities i Objectives The objectives are framed on the premises of the required rate of return, need for regular income, risk perception and the need for liquidity. The risk taker’s objective isto earn a high rate of return in the form of capital appreciation, whereas the primary objective of the risk-averse is the safety of principal. Knowledge Knowledge about investment alternatives and markets plays a key role in policy formulation Investment alternatives range from security to real estate. The risk and return associated with investment alternatives differ from each other. Investment in equity is high-yielding but faces more risk than fixed income securities. Tax sheltered schemes offer tax benefits to the investors. ‘The investor should be aware of the stock market structure and functions of the brokers. The modes of, ions are different in the Bombay Stock Exchange (BSE), National Stock Exchange (NSE), and Over-the-Counter Exchange of India (OTCEI). Brokerage charges are also different. Knowledge about stock exchanges enables an investor to trade the stock intelligently. Security Analysis Securities to be bought are scrutinized through market, industry and company analyses after the formulation of investment policy. Market analysis The stock market mirrors the gene product and inflation is reflected in stock prices. Recession in the economy results in a bear market. Stock prices may fluctuate in the short-run but in the long-run, they move in trends, i,e., either upwards or ownwande. ‘The investor can fix his entry and exit points through technical analysis. Industry analysis Industries that contribute to the output of major segments of the apes growth rates’ overall contribution to economic activity. ‘Some industries grow faster than expected to continue in their growth. the information technology industry bas Ce a higher growth rate than the GDP in c significance and the growth potent industry have to be analysed. is is to help the invest management ave 10 De Company analysis The purpose of company analysis 5 The company's Ee es profitability, operating efficiency, capital structure : 2 ral economic scenario. The growth in gross domesticsoo ens ereuny management Sree th These factors have a direct bearing on stock prices and investors’ returns. The appreciation y Hock value is a function of the performance of the company. A company with a high product market shat is able to create wealth for investors in the form of capital appreciation. Valuation i : Valuation helps the investor determine the return and risk expected from an investment in common stog, The intrinsic value of the share is measured through the book value of the share and price earning ratig Simple discounting models also can be adopted to value the shares. Stock market analysts have develope, many advanced models to value shares. The real worth of the share is compared with the market price, ay investment decisions are then made. Future value The future value of securities can be estimated by using a simple statistical technique lik trend analysis. The analysis of the historical behaviour of price enables the investor to predict the futu, value, eee errr BAB STAe Construction of a Portfolio i A portfolio is a combination of securities. It is constructed in a manner so as to meet the investor's goa) jecti i i a it lable. Th, and objectives. The investor should decide how best to reach the goals with the securities avail ten arate racine pina okie as ead be Giessen Porttoly, and allocates funds among the securities. Diversification The main objective of diversification is the reduction of risk in the form of loss of capital and income. 4 diversified portfolio is comparatively less risky than holding a single portfolio. Several modes are availabe to diversify a portfolio. Debt and equity diversification Debt instruments provide assured returns with limited capital appreciation Common stocks provide income and capital gain but with a flavour of uncertainty, Both debt instrument and equity are combined to complement each other. Industry diversification Industries’ growth and their reaction to government policies differ from ead other: Banking industry shares may provide regular returns but with limited capital appreciation. Informatix technology stocks yield higher returns and capital appreciation, but their growth potential in the post-gobi crisis years was unpredictable, Thus, industry diversification is needed, and it reduces the risk. ae erat Securities from different companies are purchased to reduce the tisk. Technict sts Suggest that investors buy securities based on price movement. Fundamental anal te ‘election of financially sound and investor-friendly companies, os } Selection Securities have to be selected based on the level of Tsification, industry and compat analyses. Funds are allocated iti i a4 the consiction of pont, te Sues. Selection of securities and the allocation of unisIntroduction to inves of securities is measured and compan it red ‘y from Which stocks are bought have tte to avoid such losses. “pPraised. The appraisal a ath! Se) Revision It depends on the results of the app i N ith high-yielding securities with low ji, Qe. LOW-yielding securities with high risk ae replaced sn it al in ae aa ee . The investor periodically revises the components of the INVESTMENT PLANNING Investment planning has the ‘rate of return’ in, le i igredient at its core, thus making the approach a little @ tesnen mig meas committe 8 Bs ming he sph ie planning process involves several steps such as the following: i ee Setting investment goals ‘© Understanding the risk appetite ‘+ Designing an investment portfolio igi! * Evaluating the markets and investment avenues 'ij,, Investment planning helps to: © Identify the financial goals of the investor * Derive the maximum benefit from investments * Choose the right investment options ‘* Decide upon the optimal investment strategy © Maintain a balance between risk and returns I is possible to arrive at an optimal combination of risk and return to suit the requirements of an investor through prudent planning. a Aspects of Investment Planning Investment planning mainly involves the following aspects: * Identification of financial needs and goals * Choice of investment options a © Investment approaches # Identification of financial needs and goals , Sound investment planning requires a clear understanding of financial needs and goals. A good investment for a long-term retirement plan may not be a suitable investment for higher education expenses of Sonar w Financial need or goal determines the tenure of the investment or investment porta Al ene ee en ified into short-term (less than 1 year), medium-term (more than 1 y fj fata Rees is earinle in Table 1.2 gives the financial goals of an ordinary investor. of an ordinary investor Deo ‘i Table 1.2 Typical financial goals —=2-Byears _ Medium-term 1-12 years Longterm Buying amedium-sized car 8 lakh = Longer ! _ sat a Long-ter Retirement Z Mis % ee } ! Choice of investment options , To a large extent, the anhiay y right investment option depends upon financial goals. For exam if the investor wants to invest for funding the purchase of a laptop in three months, he cannot choose, investment vehicle that has a three-year lock-in period. Similarly, if he wants to invest for his daughs marriage after 10 years, he cannot invest in one-year bonds for the next 10 years. A 10-year bond may, this case, match his goal. Thus, the right investment is a balance of three things: * Liquidity © Risk © Return Investment approaches The investor's ability to tolerate risk determines his investment strategy. The ability to manage risks depey largely on the level of income and responsibility, knowledge about investment, age, etc. Higher the ri, higher is the possibility of earning a fair return. Many people adopt the following approaches: * A conservative approach concentrates on secured debentures, bonds, etc., and has limited risk. * A moderate approach focuses on investing in mutual funds, bonds and selects a fundamentally stry companies’ equity, shares, etc. * Investors take major risks on investments to have high (above-average) returns. They like speculat ‘equity shares and follow the market movements. SECURITIES MARKET The securities market is broadly categorized into the money and capital market. The money market is wie short-term securities of less than one-year maturity are traded. It is a collection of markets for ‘the follow instruments—call money, notice money, repos, term money, treasury bills, commercial bills, certificas “posts, commercial papers, inter-bank participation certificates, inter-corporate deposits, swaps, etc. The capital market is where long-term securities such as equity shares, bonds and debentures are tae ‘The capital market is further divided into primary market and secondary market. In the primary mati SeeeNbes are issued for the frst time, and issued securities are traded in the secondary market. Participants of the Securities Market The participants of the Securities market are listed below: * The issuer . * Mra * The regulators PeGe Te flowing irs aren te secuites marke * Corporate entities issue equit i __merpries issue equity shares at wel ang bers, While financial institutions and public