Investments

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Concept & Meaning:
Investments
 Sacrificing your current consumption & part of
your current income to get a positive return in
future.
 Investment is the employing your money on
assets with an aim to earn extra income or capital
appreciation to meet your financial goals
 Any individual whose current income is more
than his/her current consumption is called a
Potential investor
 The individual who makes an investment is
known as the investor.

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Types of Investors
 Individuals:
 The Individual Investors are the single
largest group in most of the markets
 Size of Investments is very small
 They invest their capital for themselves
 Institutions:
 They are the most active groups in the
market
 Size of investments is very large
 They invest money on behalf of others

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Key Attributes of
Investment
1. Time: The fund & consumption sacrificed
and to be invested is certain and definite in
nature.

2. Risk: The return expected from the security

or investment alternative is uncertain and
indefinite. Uncertainty in return from
investments constitutes risk

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Need for an Investment
 Earn income on Idle Money or Resource

 To accumulate lump some wealth for

meeting future financial commitments

 To beat the rate of inflation

 To cover for future uncertainties

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Speculation: Meaning, Concept
,Features
 Speculation refers to taking higher risk in the
hope getting abnormal returns in short time
 Speculation involves frequent buying & selling
of securities to make profits from favorable
price fluctuations.
 Speculator invests money for a short time
 Speculator takes higher risk for higher returns.
 Speculator often use borrowed money for his
investments
 Speculator uses Technical Analysis for his
investments
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Diff b/w Investor &
Speculator
Investor Speculator
 Investor invests for long  Speculator invests for short
term. term
 Investor takes moderate  Speculator takes higher
Risk & expects moderate risk & expects abnormal
return. returns
 Speculator often makes
 Investor often makes
investments using
investment by using his borrowed funds.
own savings fund  Speculator uses technical
 Investor uses analysis
fundamental analysis  Speculator evaluates the
 Investor evaluates worth price movement
of security

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Gambling: Concept
 Gambling is done for extremely short time.
 The result of gambling is known in few
minutes to some hours.
 It is often done for entertainment & fun,
Income earning is secondary factor.
 It is without risk & return trade off.

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Investment Objectives
 Return
 Risk
 Liquidity
 Hedge against Inflation
 Safety
 Tax benefits
 Convenience

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Primary Objectives:
Return & Risk
 Return is total income the investor receives
expressed as a percentage of the purchase price.
 Risk: Risk of security is linked with probability
of actual return becoming less than expected
return.
 The variability of return refers to risk of a
security
 Higher the variations in the return of a security
higher is the risk

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 Calculation of Return
 Suppose the purchase price of Tata Steel is Rs 560/- and the yearly
dividend paid is Rs 50/- and selling price is Rs 630/- Calculate its Total
Return
 Return= [630-560] + 50
560
= 70+50
560

= 70 + 50
560 560
=12.5+8.92
Total Return = 21.42%

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 Calculation of Return
 Return= [Selling Price-Purchase Price] + Annual Income
Purchase Price
 Return= [Selling Price-Purchase Price] + [Annual Income]
Purchase Price Purchase Price

Capital Appreciation Current Yield

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Other Investment
Objectives
 Liquidity: It refers to the investment which can
be transacted quickly, whose transaction cost is
low.
 The ease with which the investment is
converted into cash.
 Hedge against Inflation: Rate of return from a
security should ensure a cover from inflation
 Rate of return given from a security should be
higher than the rate of inflation to ensure
investor does not lose in real terms

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Other Investment
Objectives
 Tax Benefits: Investors often look one, two
or all the 3 below tax benefits
1. Initial Tax Benefits: It refers to tax relief
enjoyed at the time of investment
2. Continuing Tax Benefits: It refers to the
tax benefits associated with periodic returns
from an investment
3. Terminal Tax Benefits: It refers to tax
benefit at the time liquidation of the
investment value.

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Other Investment
Objectives
 Convenience: It refers to the ease with
which investment can be made & looked
after.
 Safety: The selected investment should be
under legal & regulatory frame work

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 SAPM

Security Analysis Portfolio Management

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Meaning: Security &
Portfolio
 Security: Itis negotiable financial
instrument that represents certain
financial value

 Portfolio: A combination of various

securities with different risk-return
characteristics will constitute the
portfolio of the investor.

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Security Analysis &
Portfolio Management
 Security Analysis: It concentrates on the process
of analyzing the individual securities and the market as
a whole and estimating the risk and return expected
from each of the investments with a view to identifying
undervalued securities for buying and overvalued
securities for selling.
 Portfolio Management: It is the activity of
allocating your investible funds in different securities
such that you are able to achieve the maximum returns
at minimum risk. The underlying objective of portfolio
management to create a balance between risk and return
for different assets or securities.

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Investment Process

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Investment Securities:
Equities
 Equity Shares
 Sweat Equity
Equity
 Right Shares
 Bonus Shares
 Preference Shares
 Cumulative preference shares
Preference
 Non-Cumulative Preference Shares
 Convertible Preference Shares

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Types of Equity Shares
 Equity Share: Total equity capital of a
company is divided into equal units of small
denominations, each called a share.
 For example, In a company the total equity
capital of Rs 2,00,00,000 is divided into
20,00,000 units of Rs 10 each. Each such unit
of Rs 10 is called a Share. Thus, the company
then is said to have 20,00,000 equity shares of
Rs 10 each. The holders of such shares are
members of the company and have voting
rights.

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Advantages of Equity
Shares
 Capital Appreciation
 Limited Liability
 Free tradability
 Tax Advantages
 Hedge against Inflation

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Sweat Equity
 Sweat equity shares are issued only to
company employees and directors
 They are usually issued at discount in
recognition of the work and performance of
the employees
 These are not issued to general public

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For whom it is issued?
 It is usually issued for employees &
directors for contributing towards the
growth of the company by providing the
technical know how by way of research
 By developing a software or hardware or a
strategy helping the company in the long run
 Employees helping the company to capture
higher market share

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Types of Shares: Non
Voting Shares
 Non Voting Shares: These are equity shares
which do not have any voting rights, instead
they carry additional dividends.
 They have the right to participate in Bonus
issue.
 If non voting shares are not paid dividend
for 2 years they get the normal equity shares
with voting rights

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Types of Shares
 Right Shares: Shares offered to existing
shareholders at a price by the company are
Right shares also called Rights issue.
 Bonus Shares: Extra Shares issued by the
companies to their shareholders free of cost
based on the number of shares the
shareholder owns.

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Types of Shares
 Preference Shares: Preference Share holders
have preferential rights on dividend payment
and repayment of capital in the event of
winding up of company .These shareholders do
not have voting rights.
 Cumulative Preference Shares: A type of
preference shares on which dividend
accumulates if remained unpaid.
 All arrears of preference dividend have to be
paid out before paying dividend on equity
shares.

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Types of Shares

 Non-Cumulative Preference Shares: A type

of Preference shares where dividend does
not accumulate.

 Convertible Preference Shares: These

shares get converted to equity shares after a
specified period of time.

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Debenture & its Types
 A debenture is a document or a certificate
issued by a company under its seal as an
acknowledgement of its debt.
 Types of Debentures
1. Secured and Unsecured
2. Fully convertible
3. Partly convertible
4. Non-Convertible

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Features of Debentures
 Form: Issued in the form of certificate
 Interest: It has fixed interest rate
compulsorily paid periodically
 Redemption: Redemption varies from 5 - 10
years.
 No Voting Rights
 Appointment of Trustee

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Types of Debentures
 Secured Debenture: It refers to those
debentures where charge is created on specific
company assets for the purpose of payment in
case of default.
 Charge can be fixed or floating
 The fixed charge is created on assets that are
used for operations and floating charge involve
all assets other than used fixed charge
 Unsecured Debenture: These do not have any
charge on the specific company assets. These
are generally not issues

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Types of Debentures
 Fully Convertible Debenture: This type of
debenture can be converted into equity share
after the expiry of specific period.
 It carries lower rate of interest rate
compared to normal debentures

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Types of Debentures
 Non-Convertible Debenture: These do not
offer any option to holders to convert
debentures into equity shares
 Partly Convertible debenture: This
debenture consists of 2 parts convertible and
non convertible. Only convertible portion of
debenture has option to convert into equity
share after expiry of specific period.

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Bond and Its features
 Bond: It is a long term debt instrument that
promises to pay fixed interest rate for specified
period of time.
 Its Features
 Bands have face value. Face value is called per
value. Bonds can be issued at par or at discount.
 The interest rate is fixed
 The maturity date is fixed
 The redemption value is fixed

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Warrants
 A warrant is a detachable instrument,
which gives the right to purchase or sell
equity shares at a specified price and
period.
 It is traded in the securities market where
the investor can sell it separately.

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Types of Warrants
 Detachable warrants: If a warrant can be sold
separately from the security to which it was
originally attached to is Detachable Warrant
 Puttable warrants: Represent a certain amount of
equity shares 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 high degree of flexibility.
 They can be traded in the securities market.

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Characteristics of
Warrants
 Detachability
 Exercise Price
 Exercise Ratio
 Exercise Date
 Right

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Difference b/w Warrants &
Share Certificate
Warrants Share Certificate
 Issue by Public Ltd  Issued by Public & Pvt
Company Ltd Company
 Need for Provision in  No need for Provision in
Company's Articles of Company's Articles of
Association Association.
 Transfer of Share  Transfer of Share
warrant requires no warrant requires
registration registration.
 It is negotiable  It is non negotiable
instrument instrument

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