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Introduction to
Investment and Securities
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To understand the concept of investment
To explain process of investment
To learn about various types of securities
To analyze various sources of investment
information
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Investing is the purchase of assets with
the goal of increasing future income.
Savings is the portion of current income
not spent on consumption.
Investments
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Risk
The chance that the value of an investment will
decrease.
Return
The profit or yield from an investment.
Liquidity
The ability of an investment to be converted
into cash quickly without loss of value.
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Savings
Low risk
Low return
High liquidity
Investments
High risk
High return
Low liquidity
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Today, a large soft drink at
your favorite fast-food place
costs 10.00. You buy the
soft drink but also decide to
save some money for the
future as well. So you put10 Rupee in your savings
account, where it earns
10%.
NEFE
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One year later, the Rupee in
your saving account is worth
11. You take the money outand visit your favorite
convenience store, hoping
to buy another delicious
beverage. Unfortunately,
drinks now cost 12.
NEFE
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The point? Inflation can
work against your money.You need to learn to invest
wisely, follow the rate of
inflation, and make sure your
investment rates are higherthan those of inflation.
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The time value of money refers to the fact
that a dollar in hand today is worth more
than a dollar promised at some future time.
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Refers to the amount of money to which an
investment will grow over a finite period of
time at a given interest rate.
Put another way, future value is the cashvalue of an investment at a particular time in
the future.
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Respond to this statement on
your guided notes and thendiscuss it with a partner.How does it relate to futurevalue?
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What is the relationship between risk and
return?
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Saving for a senior trip Saving for a down payment on a house
Saving for retirement
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Sample Student Work
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Sample Student Work
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Investment is the employment of funds on assets to earn income or
capital appreciation.
The individual who makes an investment is known as the investor.
In economic terms, investment is defined as the net addition made to
the capital stock of the country.
In financial terms, investment is defined as allocating money to
assets with a view to gain profit over a period of time.
Investments in economic and financial terms are inter-related where
an individual's savings flow into the capital market as financial
investment, which are further used as economic investment.
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Speculation means taking business risks with
the anticipation of acquiring short term gain.
It also involves the practice of buying and
selling activities in order to profit from theprice fluctuations.
An individual who undertakes the activity of
speculation is known as speculator.
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Base Investor Speculator
Time horizon Has a relatively longer planning
horizon. His holding period is
usually of one or more than oneyear.
Has a very short planning
horizon. His holding period
may be few days to months.
Risk return His risk is less. His risk is high.
Decision Attaches greater significance to
fundamental factors and
carefully evaluates theperformance of the company.
Attaches greater significance
to market behaviour and
inside information.
Funds Uses his own funds. Uses borrowed funds along
with his personal funds.
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Return Income: The total income, the investorreceives during his holding period.
Risk: Variability in the return.
Liquidity: The ease with which the investment isconverted into cash.
Safety: It refers to the legal and regulatoryprotection to the investment.
Hedge against inflation: The returns should behigher than the rate of inflation.
End period value Purchase period value+ Dividends
Return = 100Purchase period value
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Securities
They are instruments which represent a claimover an asset or any future cash flows.
Securities are classified on the basis of return
and source of issue.Fixed income securities Return
Variable income securities
Issuers Government
Quasi-Government
Public Sector Enterprises
Corporates
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The process of investment includes five stages:1. Investment Policy: The policy is formulated on the basis
of investible funds, objectives and knowledge aboutinvestment sources.
2. Security Analyses: Economic, industry and companyanalyses are carried out for the purchase of securities.
3. Valuation: Intrinsic value of the share is measuredthrough book value of the share and P/E ratio.
4. Portfolio Construction: Portfolio is diversified tomaximise return and minimise risk.
5. Portfolio Evaluation: The performance of the portfoliois appraised and revised.
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There are different types of preference
stocks, which are:
Cumulative preference shares
Non-cumulative preference shares
Convertible preference shares
Redeemable preference shares
Irredeemable preference shares
Cumulative convertible preference shares
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Common stock or ordinary shares aremost commonly known as equity shares.
Stock is a set of shares put together in abundle.
A share is a portion of the share capital ofa company divided into small units ofequal value.
The advantages of equity shares are: Capital appreciation
Limited liability
Hedge against inflation
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It is a new equity instrument introduced inthe Companies (Amendment) Ordinance,1998.
It forms a part of the equity share capital as
its provisions, limitations and restrictions aresame as that of equity shares.
Sweat Equity is for:
The directors or employees involved in the processof designing strategic alliances.
The directors or employees who have helped thecompany to achieve a significant market share.
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The shares that carry no voting rights are
known as non-voting shares.
They provide additional dividends in the
place of voting rights. They can be listed and traded on the stock
exchanges.
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Distribution of shares, in addition to the cashdividends, to the existing shareholders areknown as bonus shares.
These are issued without any payment for
cash. These are issued by cashing on the reserves
of the company.
A company builds up its reserves by retaining
part of its profit over the years.
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Preference stock provides fixed rate of
return.
Preference stockholders do not have any
voting rights. Like the equity, it is a perpetual liability of
the corporate.
Preference stockholders do not have any
share in case the company has surplusprofits.
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It is a debt instrument issued by a company,which carries a fixed rate of interest.
It is generally issued by private sector companiesin order to acquire loan.
The various features of a debenture are: Interest Redemption Indenture
A company can issue various types ofdebentures, which are: Secured bonds or unsecured debenture
Fully convertible debenture
Partly convertible debenture
Non-convertible debenture
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A warrant is a detachable instrument, which gives theright to purchase or sell equity shares at a specifiedprice and period.
It is traded in the securities market where theinvestor can sell it separately.
Two types of warrants are: Detachable warrants: When the warrants are issued along
with host securities and detachable, then they are knownas detachable warrants.
Puttable warrants:Represent a certain amount of equityshares that can be sold back to the issuer at a specified
price, before a stated date. Some of the advantages of warrants are: They have limited risk.
They offer potential for unlimited profits.
They can be traded in the securities market.
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An investor must have adequate knowledgeabout the investment alternatives and marketsbefore making any kind of investment.
The various sources from which an investor cangather the investment information are:Newspapers, Investment dailies
Magazines and Journals
Industry Reports
RBI Bulletin
Websites of the SEBI, RBI and other private agencies
Stock market information
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By now, you should have:
Understood the concept of investment and
speculation
Learnt about the various types of shares anddebentures
Understood the various sources of investment
information
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Investment Alternatives
Chapter 2
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To understand the concept of investment
alternatives
To distinguish between negotiable and
non-negotiable securities To know the various types of real assets
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Investment alternatives mean investment in
assets other than the shares or debentures of
a company.
The alternatives range from financialsecurities to traditional non-security
investments.
The financial securities may be negotiable or
non-negotiable securities.
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The financial securities that are transferable
are known as negotiable securities.
Negotiable securities can be of two types:
Variable income securitiesFixed income securities
Equity shares comes under the category of variable
income securities
Debentures, Bonds, Kisan Vikas Patras, Indira Vikas
Patras and Government securities all come underthe category of fixed income securities.
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Fixed income securities are the financial claimswith promised cash flows of fixed amounts, paidat fixed dates.
Fixed income securities are classified as: Preference shares: Refer to the shares that provide a
fixed rate of dividend to the preference shareholders. Debentures: Refer to a long term debt instrument issued
by corporate entities to acquire finance.
Bonds: Refer to a debt security issued by thegovernment,quasi-government, public enterprises and financial
institutions. Government securities: Refer to the securities that are
issued by the Central, State and quasi-governmentagencies.
Money market securities: Refer to the securities thathave a very short term maturity period.
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The financial securities that are not
transferable are known as non-negotiable
securities.
They are also known as non-securitizedfinancial investments.
The deposit schemes that are offered by the
post offices, companies, banks, etc. form a
part ofthe non-negotiable securities.
Deposit facility is offered by banks and post
offices.
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The various types of tax sheltered savingsschemes are:
Public Provident Fund Scheme: It providesyearly interest which is exempted from incometax underSection 88.
National Savings Scheme: It provides 100 percent tax rebate to the depositors.
National Savings Certificate: It is a schemeprovided by the post offices for a period of sixyears. Once money is deposited, nowithdrawals are permitted, but loans can betaken.
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It is an agreement made between the
insurance company and the insured
person. The insurance company has to pay
a certain amount of money on theoccurrence of the event insured against.
The advantages of life insurance are:
Protection
Liquidity
Easy payments
Tax relief on specified schemes
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These are professionally managed portfolios ofsecurities.
They can be classified into two forms:
Open-ended schemes: These offer their unit on a
continuous basis. Repurchase is also carried out on acontinuous basis. It is not traded in the stock exchange.
Close ended schemes: These are schemes in which the
number of units are fixed and are traded in the stock
exchange.
The factors to be considered in the selection of
mutual
funds are:
Net assets Income com osition
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Real assets are tangible assets, which
include:
Gold and silver
Real estate
Art
Antique items
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By now, you should have:
Understood the concept of investment
alternatives
Learnt to distinguish between negotiableand non-negotiable securities
Knowledge of the various types of real
assets
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