Learning Objectives What is investment & what is security. Investment & Speculation - Difference. What is security analysis. Risk & Return in Investment. Need for tradability.
What is Investment? Investment is parting with one s funds, to be used by another party, user of funds, for productive activity. Investment means conversion of cash or money into a monetary asset or a claim on future money for a return. This return is for saving- abstaining from consumption, parting with savings and liquidity, for risk of uncertainty about actual return, its timing, safety of funds etc.
What is Security Analysis? The process of analyzing the individual securities and the market as a whole and estimating the risk & return expected from each of the investments with a view to identifying undervalued securities for buying and overvalued securities for selling is both an art and science and this is what is called security analysis.
What is a Security? All financial instruments in the capital market which are all claims on money, are securities. Securities Contracts Regulation Act, 1956 includes as securities shares & scrips, stocks, bonds, debentures of corporate / government bodies, derivatives of securities or their index, and rights & interests in all above.
What is a Portfolio? A combination of securities, each with varying degree of risk and return, constitutes a portfolio. The combination has its own pattern of risk & returns, independent of risk & return of each component of the portfolio. The portfolio analysis is analysis of the risk-return characteristics of individual securities in the portfolio plus analysis of changes that take place due to interaction among themselves and impact of each one of them on others.
Investment and Speculation Investment and speculation are next door neighbors. Speculation involves investment and vice versa. Both are claims on money and aim at maximization of returns consistent with risks taken. Motive is a determining factor, distinguishing between investment and speculation.
Investment and Speculation In investment, the investor has a long or medium term objective, takes delivery of securities and books profits as and when returns are higher than his expectations. In speculation perspective is short term and aim is to maximize returns through buying & selling with least regard to delivery. Speculation forms a major portion of activity on stock markets. It imparts liquidity and continuing trade and quotation.
Security Analysis Projection of future dividend or earnings flows, forecast of the share price and estimating the intrinsic value of security based on expected earnings or dividends is traditionally the heart of security analysis. Modern security analysis relies on > fundamental analysis of security > risk return analysis depending on variability of returns, > covariance, > safety of funds & projections of returns.
Security Analysis Security analysis is a tool for efficient portfolio management; both of them go together and cannot be dissociated. As per traditional portfolio theory selection of appropriate securities that fit with the asset preferences, needs and choices of the investor was the scope of portfolio management.
Security Analysis Modern portfolio management theory postulates that maximization of returns & minimization of risk will yield optimal results and the choice and attitudes of investors are only starting point for investment decisions and that vigorous risk return analysis is necessary for optimization of returns.
Portfolio Analysis Portfolio analysis includes portfolio construction, selection of securities, revision of portfolio, evaluation & monitoring of the performance of portfolio. Portfolio management is a dynamic concept, subject to daily & hourly changes based on the information flows, money flows and host of other economic or uneconomic forces operating in the country on the markets & securities.
Modes of Investments Security Form : Corporate Bonds / Debentures Public Sector Bonds Preference & Equity Shares. Non-security Forms : not marketable Post Office savings Instruments Life Insurance Corporation Policies Unit Trust & Other Mutual Funds bank Deposits etc
Features of Investments 1. Risk : $ Longer the maturity period greater is the risk. $ Greater the creditworthiness of borrower, lesser is the risk. $ The risk is less in case of debt instruments like debentures, more so if they are secured. $ The risk is higher on ownership instruments like equity due to their unsecured nature & variability of returns.
Features of Investments 2. Return : $ Return is in the form of yield and capital appreciation. In case of debt instruments rate of return is low but certain. In case of equity, rate can be higher but uncertain. Tax benefits or concessions available on certain investments, increase the effective rate of return to investors.
Features of Investments 3. Safety : $ The safety of capital is the certainty of return on capital without loss of money or time involved. Risk free instruments offer maximum safety but low returns. 4. Liquidity : If the capital asset is easily realizable, saleable or marketable, then it is said to be liquid.
Need for tradability Tradability offers marketability & liquidity to investments. Equity shares of listed companies, debentures, Government securities, Mutual Funds are tradable and possess liquidity. Bank & Company Fixed deposits, Post Office Deposits, LIC Policies, PF & pension funds are not tradable & hence not liquid.
Classes of Instruments Ownership or Debt nature of instruments. Equity and all other type of shares are ownership, while debentures, bonds, deposits belong to debt category. Term period to maturity. Equity shares have no maturity period, others- debentures- have a long term [ 7 to 12 years], mid term or short term- bank deposits- [ 1 to 5 years] maturity period. Issuer s credit worthiness. Government and public sector instruments are less risky and carry more creditworthiness. Private instruments are risky & less creditworthy.
Classes of Instruments There are non-corporate investments where amounts can be invested in Real Estate, Banks, Post Offices, Insurance Companies, Central Government Schemes etc. These can be marketable like real estate or gold or non-marketable like Post Office certificates. Interest can be payable regularly, or reinvested or paid only on maturity. In case of insurance, amounts are payable linked to an event [ death, theft]. Investment can be made in a lump sum or spread over several installments.
Classes of Instruments There are corporate investments in the form of debt [ debentures, bonds, deposits] or ownership [ equity shares ]. Former carry a fixed rate of return, while equity shares earn income that is variable. Our study concentrates on marketable investments. Next Chapter Two, Markets for Securities & Taxes