18472617 Introduction to Investment and Securities

8/8/2019 18472617 Introduction to Investment and Securities

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Introduction toIntroduction toInvestment and SecuritiesInvestment and Securities


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Chapter ObjectivesChapter Objectives To understand the concept of investmentTo understand the concept of investment

T

o explain process of investmentT

o explain process of investment To learn about various types of securitiesTo learn about various types of securities

To analyze various sources of investmentTo analyze various sources of investment

informationinformation


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InvestmentInvestment

Investment is the employment of funds on assets to earn income or capitalInvestment is the employment of funds on assets to earn income or capital

appreciation.appreciation.

The individual who makes an investment is known as the investor.The individual who makes an investment is known as the investor.

In economic terms, investment is defined as the net addition made to theIn economic terms, investment is defined as the net addition made to the

capital stock of the country.capital stock of the country.

In financial terms, investment is defined as allocating money to assets withIn financial terms, investment is defined as allocating money to assets with

a view to gain profit over a period of time.a view to gain profit over a period of time.

Investments in economic and financial terms are interInvestments in economic and financial terms are inter--related where anrelated where an

individual's savings flow into the capital market as financial investment,individual's savings flow into the capital market as financial investment,

which are further used as economic investment.which are further used as economic investment.


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SpeculationSpeculation

Speculation means taking business risks withSpeculation means taking business risks with

the anticipation of acquiring short term gain.the anticipation of acquiring short term gain.

It also involves the practice of buying andIt also involves the practice of buying andselling activities in order to profit from theselling activities in order to profit from the

price fluctuations.price fluctuations.

An individual who undertakes the activity ofAn individual who undertakes the activity of

speculation is known as speculator.speculation is known as speculator.


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Difference betweenDifference between

Investor andS

peculatorInvestor andS

peculatorBaseBase InvestorInvestor SpeculatorSpeculator

Time horizonTime horizon Has a relatively longer planningHas a relatively longer planning

horizon. His holding period ishorizon. His holding period is

usually of one or more than oneusually of one or more than oneyear.year.

Has a very short planningHas a very short planning

horizon. His holding periodhorizon. His holding period

may be few days to months.may be few days to months.

Risk returnRisk return His risk is less.His risk is less. His risk is high.His risk is high.

DecisionDecision Attaches greater significance toAttaches greater significance to

fundamental factors andfundamental factors and

carefully evaluates thecarefully evaluates the

performance of the company.performance of the company.

Attaches greater significanceAttaches greater significance

to market behaviour andto market behaviour and

inside information.inside information.

FundsFunds Uses his own funds.Uses his own funds. Uses borrowed funds alongUses borrowed funds along

with his personal funds.with his personal funds.


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Investment ObjectivesInvestment Objectives

ReturnIncomeReturnIncome:The total income, the investor receives:The total income, the investor receivesduring his holding period.during his holding period.

RiskRisk:: VariabilityVariability inin thethe returnreturn..

LiquidityLiquidity:: TheThe easeease withwith whichwhich thethe investmentinvestment isisconvertedconverted intointo cashcash..

SafetySafety: It refers to the legal and regulatory protection to: It refers to the legal and regulatory protection tothe investment.the investment.

Hedge against inflationHedge against inflation:The returns should be higher:The returns should be higherthan the rate of inflation.than the rate of inflation.

End period value Purchase period value+ Dividends

Return = 100

Purchase period value

v


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SecuritiesSecurities

They are instruments which represent a claim overThey are instruments which represent a claim overan asset or any future cash flows.an asset or any future cash flows.

Securities are classified on the basis of return andSecurities are classified on the basis of return and

source of issue.source of issue.Fixed income securitiesFixed income securities

ReturnReturn

Variable income securitiesVariable income securities

IssuersIssuers GovernmentGovernment

QuasiQuasi--GovernmentGovernment

Public Sector EnterprisesPublic Sector Enterprises

CorporatesCorporates


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The Investment ProcessThe Investment Process

The process of investment includes five stages:The process of investment includes five stages:

1.1. Investment PolicyInvestment Policy:The policy is formulated on the basis of:The policy is formulated on the basis ofinvestible funds, objectives and knowledge about investmentinvestible funds, objectives and knowledge about investmentsources.sources.

2.2. Security AnalysesSecurity Analyses: Economic, industry and company analyses: Economic, industry and company analysesare carried out for the purchase of securities.are carried out for the purchase of securities.

3.3. ValuationValuation: Intrinsic value of the share is measured through: Intrinsic value of the share is measured throughbook value of the share and P/E ratio.book value of the share and P/E ratio.

4.4. Portfolio ConstructionPortfolio Construction: Portfolio is diversified to maximise: Portfolio is diversified to maximisereturn and minimise risk.return and minimise risk.

5.5. Portfolio EvaluationPortfolio Evaluation:The performance of the portfolio is:The performance of the portfolio isappraised and revised.appraised and revised.


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Types of Preference StocksTypes of Preference Stocks

There are different types of preference stocks,There are different types of preference stocks,

which are:which are:

Cumulative preference sharesCumulative preference shares NonNon--cumulative preference sharescumulative preference shares

Convertible preference sharesConvertible preference shares

Redeemable preference sharesRedeemable preference shares Irredeemable preference sharesIrredeemable preference shares

Cumulative convertible preference sharesCumulative convertible preference shares


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Equity SharesEquity Shares

Common stock or ordinary shares are mostCommon stock or ordinary shares are most

commonly known as equity shares.commonly known as equity shares.

Stock is a set of shares put together in a bundle.Stock is a set of shares put together in a bundle.

A share is a portion of the share capital of a companyA share is a portion of the share capital of a company

divided into small units of equal value.divided into small units of equal value.

The advantages of equity shares are:The advantages of equity shares are:

Capital appreciationCapital appreciation Limited liabilityLimited liability

Hedge against inflationHedge against inflation


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Sweat EquitySweat Equity

It is a new equity instrument introduced in theIt is a new equity instrument introduced in theCompanies (Amendment) Ordinance, 1998.Companies (Amendment) Ordinance, 1998.

It forms a part of the equity share capital as itsIt forms a part of the equity share capital as its

provisions, limitations and restrictions are same asprovisions, limitations and restrictions are same asthat of equity shares.that of equity shares.

Sweat Equity is for:Sweat Equity is for:

The directors or employees involved in the process ofThe directors or employees involved in the process ofdesigning strategic alliances.designing strategic alliances.

The directors or employees who have helped the companyThe directors or employees who have helped the companyto achieve a significant market share.to achieve a significant market share.


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NonNon--votingSharesvotingShares

The shares that carry no voting rights areThe shares that carry no voting rights are

known as nonknown as non--voting shares.voting shares.

They provide additional dividends in the placeThey provide additional dividends in the placeof voting rights.of voting rights.

They can be listed and traded on the stockThey can be listed and traded on the stock

exchanges.exchanges.


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Bonus SharesBonus Shares

Distribution of shares, in addition to the cashDistribution of shares, in addition to the cashdividends, to the existing shareholders aredividends, to the existing shareholders areknown asknown as bonus shares.bonus shares.

These are issued without any payment forThese are issued without any payment forcash.cash.

These are issued by cashing on the reserves ofThese are issued by cashing on the reserves of

the company.the company. A company builds up its reserves by retainingA company builds up its reserves by retaining

part of its profit over the years.part of its profit over the years.


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Preference StockPreference Stock

Preference stock provides fixed rate of return.Preference stock provides fixed rate of return.

Preference stockholders do not have anyPreference stockholders do not have any

voting rights.voting rights. Like the equity, it is a perpetual liability of theLike the equity, it is a perpetual liability of the

corporate.corporate.

Preference stockholders do not have any sharePreference stockholders do not have any sharein case the company has surplus profits.in case the company has surplus profits.


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DebentureDebenture

It is a debt instrument issued by a company, which carries aIt is a debt instrument issued by a company, which carries afixed rate of interest.fixed rate of interest.

It is generally issued by private sector companies in order toIt is generally issued by private sector companies in order toacquire loan.acquire loan.

The various features of a debenture are:The various features of a debenture are: InterestInterest RedemptionRedemption IndentureIndenture

A company can issue various types of debentures, which are:A company can issue various types of debentures, which are:

Secured bonds or unsecured debentureSecured bonds or unsecured debenture

Fully convertible debentureFully convertible debenture Partly convertible debenturePartly convertible debenture

NonNon--convertible debentureconvertible debenture


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BondBond

A bond is a debt security issued by the government, quasiA bond is a debt security issued by the government, quasi--government, public sector enterprises and financial institutions.government, public sector enterprises and financial institutions.

Various features of a bond are:Various features of a bond are:

The interest rate is generally fixedThe interest rate is generally fixed It is traded in the securities marketIt is traded in the securities market

At the time of issue of bonds, maturity date is specifiedAt the time of issue of bonds, maturity date is specified

Some of the types of bonds that a company can issue are:Some of the types of bonds that a company can issue are: Secured bonds and unsecured bondsSecured bonds and unsecured bonds

Perpetual bonds and redeemable bondsPerpetual bonds and redeemable bonds

Fixed interest rate bonds and floating interest rate bondsFixed interest rate bonds and floating interest rate bonds

Zero coupon bondsZero coupon bonds


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WarrantsWarrants

A warrant is a detachable instrument, which gives the right toA warrant is a detachable instrument, which gives the right topurchase or sell equity shares at a specified price and period.purchase or sell equity shares at a specified price and period.

It is traded in the securities market where the investor can sellIt is traded in the securities market where the investor can sellit separately.it separately.

Two types of warrants are:Two types of warrants are: Detachable warrants:Detachable warrants:When the warrants are issued along with hostWhen the warrants are issued along with host

securities and detachable, then they are known as detachable warrants.securities and detachable, then they are known as detachable warrants.

Puttable warrants:Puttable warrants: Represent a certain amount of equity shares thatRepresent a certain amount of equity shares thatcan be sold back to the issuer at a specified price, before a stated date.can be sold back to the issuer at a specified price, before a stated date.

Some of the advantages of warrants are:Some of the advantages of warrants are: They have limited risk.They have limited risk.

They offer potential for unlimited profits.They offer potential for unlimited profits.

They can be traded in the securities market.They can be traded in the securities market.


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Investment InformationInvestment Information

An investor must have adequate knowledge about theAn investor must have adequate knowledge about theinvestment alternatives and markets before makinginvestment alternatives and markets before makingany kind of investment.any kind of investment.

The various sources from which an investor canThe various sources from which an investor cangather the investment information are:gather the investment information are:

Newspapers, Investment dailiesNewspapers, Investment dailies

Magazines and JournalsMagazines and Journals

Industry ReportsIndustry Reports RBI BulletinRBI Bulletin

Websites of the SEBI, RBI and other private agenciesWebsites of the SEBI, RBI and other private agencies

Stock market informationStock market information


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Chapter SummaryChapter Summary

By now, you should have:By now, you should have:

Understood the concept of investment andUnderstood the concept of investment and

speculationspeculation Learnt about the various types of shares andLearnt about the various types of shares and

debenturesdebentures

Understood the various sources of investmentUnderstood the various sources of investmentinformationinformation

18472617 Introduction to Investment and Securities

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Transcript of 18472617 Introduction to Investment and Securities