INVESTMENT TECHNIQUES: AN INTRODUCTION

NKESI KEVIN K.
Department of Accounting & Finance
Fotabe University, Cameroon
[email protected] / [email protected]
+971555721759 / +237672743050
Fotabe University - Corporate finance - Nkesi Kevin K. - 2021 1
 INVESTMENT TECHNIQUES: AN INTRODUCTION

Course Description
The module instils the notion of capital budgeting in participants; namely, the analysis of cash flows, risk, and the
financial aspects involved in project evaluations.

Other important topics covered are debt vs. equity financing and corporate valuation models.

Objectives of the Course

The course introduces the importance of financial managers and the formulas related to valuing bonds and
stocks. The introduction to risk, risk and return and portfolio theory.

The principles of corporate financing including issuing securities, types of debt, dividend policy and debt policies
have been covered in this comprehensive financing course
 INVESTMENT TECHNIQUES: AN INTRODUCTION

Learning Outcomes

Upon the successful completion of the module, students will be able to:

 Understand the role of the finance manager within the firm

 Understand core concepts such as present values, objectives of the firm
 Explain the process of investment decision making
 Calculate the value of stocks and bonds
 Understand the concept of risk, and its relationship with expected return
 Measure risk and demonstrate that knowledge through problem solving
 Apply the theories of risk measurement to the capital budgeting decision process

 Understand various securities issued by a company,

 Determine the appropriate level of debt financing for a firm
 Set a suitable dividend policy
 INVESTMENT TECHNIQUES: AN INTRODUCTION

Recommended Resource Materials

INVESTMENT TECHNIQUES: AN INTRODUCTION
 INVESTMENT TECHNIQUES: AN INTRODUCTION

Introduction to Investing

Investing refers to things people, companies and governments do to

create more wealth, make money grow, boost production, and
improve people’s standard of living.

The term may also refer to allocating time for something in the hope of
future benefit, as in “He’s investing four years of his life studying at
university.”
 Examples of investing are the purchase of property, bonds, stocks
and other financial assets in order to make a profit.
 It also includes saving money in an interest-paying bank account or
buying an insurance policy that pays bonuses.
 If you own a business, and spend money on things that will make it
more successful and profitable, you are investing.
 If you own a duplex in Mile 4 Limbe, and decide to spend
1,000,000frs making it look nicer before you rent it out, you are
investing that money in order to secure a future income.
 INVESTMENT TECHNIQUES: AN INTRODUCTION

What is investing?

When you think about investing as a whole, what comes to

your mind?

Some popular answers could include stocks, bonds, mutual

funds, real estate, or even a small business.

Or, maybe other things came to your mind not mentioned in

this list.

In a nutshell, investing is one of the most misused and

misunderstood terms.

Definition
Investing is “the act of committing money or capital to an
endeavor (a business, project, real estate, etc.) with the
expectation of obtaining an additional income or profit.”
 INVESTMENT TECHNIQUES: AN INTRODUCTION
Practical Questions To answer Before Investing

Before you choose an investment, understand how it works and the risks involved.

Here are some few selected questions you should ask yourself when deciding to invest

1. How does the investment work? Do you understand the investment well enough to
explain it to someone else?

2. What are your goals? Are you looking for safety, income or growth from this
investment? Or both growth and income?

3. What are the risks of this investment? Are you comfortable taking these risks?

4. How much do you expect to earn on this investment? Is this realistic?

5. How long do you plan to invest? Is this a short-, medium- or long-term

investment?

6. What are the costs to buy, hold and sell the investment? And will you pay taxes
on the money you earn?

7. How liquid is this investment? How easy would it be to sell if I needed my money right
 INVESTMENT TECHNIQUES: AN INTRODUCTION
Common myths about investing

1. There is Such a Thing as “Riskless Investment” or “Guaranteed Returns”

If someone offers you a “Riskless Investment” - run for the hills.

2. You’re Too Young/Old to Start Investing

If you think that “I’m 40, I’m too old to start investing”, or “I’m only 20, I have
time” - you’re wrong. You can start investing at any age, as long as you have
capital.

3. Analysis and Research are the Most Important Things

OK, they’re really important, but you know what’s more important than them? Risk
Management!

4. You Need A Lot of Money to Invest

You don’t. Compounding interest over 40 years can make anyone rich! If you
invested $225 in 10 McDonalds share back in 1965, you’d have $1.36 million
worth of shares today.

If you bought $1,700 worth of Starbucks stock in 1992, you’d have around
$429,000 in shares today.
 INVESTMENT TECHNIQUES: AN INTRODUCTION

Common myths about investing

5. Savings Will Secure Your Future
Saving is crucial to secure your future financially. But it is only the first step.
If you do not invest your savings in products that can beat inflation, you will
end up witnessing the erosion of your wealth.

For instance, if the annual inflation rate remains around 5-6% and your
savings remain in a saving bank account that offers 3-4% annual returns, you
are effectively eroding your wealth.
 INVESTMENT TECHNIQUES: AN INTRODUCTION

Types Of Investments

When you think about investing as a whole, what comes to

your mind?

Some popular answers could include stocks, bonds, mutual

funds, real estate, or even a small business.

Or, maybe other things came to your mind not mentioned in

this list.

In a nutshell, investing is one of the most misused and

misunderstood terms.

Definition
Investing is “the act of committing money or capital to an
endeavor (a business, project, real estate, etc.) with the
expectation of obtaining an additional income or profit.”
 INVESTMENT TECHNIQUES: AN INTRODUCTION
Types Of Investments

Think of the various types of investments as tools that can help you achieve your financial goals. Each broad investment type —
from bank products to stocks and bonds — has its own general set of features, risk factors and ways in which they can be used
by investors.

Learn more about the various types of investments below.

1. Start-ups
2. Stocks
3. Bonds
4. Mutual Funds and ETFs
5. Bank Products
6. Options
7. Annuities
8. Retirement
9. Saving for Education
10. Alternative and Complex Products
11. Initial Coin Offerings and Cryptocurrencies
12. Commodity Futures
13. Security Futures
14. Insurance
 INVESTMENT TECHNIQUES: AN INTRODUCTION
Who is an Investor?

An investor is an individual that puts money into an entity such as a

business for a financial return.

The main goal of any investor is to minimize risk and maximize

return.

It is in contrast with a speculator who is willing to invest in a risky

asset with the hopes of getting a higher profit.

So, an investor is any person who commits Capital with the expectation
of financial returns.

Investors utilize investments in order to grow their money and/or

provide an income during retirement, such as with an annuity.

Investors typically perform technical and/or fundamental analysis to

determine favorable investment opportunities, and generally prefer to
minimize risk while maximizing returns
 The Concept of Investment

Investment Objectives (Why people invest)

Before you decide to invest, it’s essential to understand the reasons behind it and the investment
meaning.

While the individual objectives of investment may vary from one investor to another, the overall goals of
investing money may be any one of the following reasons...

1. To Keep Money Safe

Capital preservation is one of the primary objectives of investment for people. Some investments help
keep hard-earned money safe from being eroded with time. By parking your funds in these instruments
or schemes, you can ensure that you do not outlive your savings.

2. To Help Money Grow

Another one of the common objectives of investing money is to ensure that it grows into a sizable corpus
over time. Capital appreciation is generally a long-term goal that helps people secure their financial
future. Some of the best investments to achieve growth include real estate, mutual funds, commodities,
and equity.
 The Concept of Investment

Investment Objectives (Why people invest)

Safety, and capital gains are the big two objectives of investing. But there are others that should be kept in
mind when they choose investments.

3. To Earn a Steady Stream of Income

Investments can also help you earn a steady source of income. Examples of such investments include
fixed deposits that pay out regular interest or stocks of companies that pay investors dividends
consistently. Income-generating investments can help you pay for your everyday expenses after you have
retired.
4. To Save up for Retirement
Saving up for retirement is a necessity. It is essential to have a retirement fund you can fall back on in your
golden years, because you may not be able to continue working forever. By investing the money you earn
during your working years in the right investment options, you can allow your funds to grow enough to
sustain you after you’ve retired.

5. To Meet your Financial Goals

Investing can also help you achieve your short-term and long-term financial goals without too much stress
or trouble. These investments are ideal instruments to park your funds in if you wish to save up for short-
 The Concept of Investment

Investment Objectives - Summary

The objectives of investment depend upon several factors such as your investment goals, lifestyle, age,
financial security, risk appetite, and the returns you desire.

Any investment, especially those with higher risks, will see some ups and downs.

As an investor, you must brace for volatility and market fluctuations and not let your emotions affect your
investment decisions.

The importance of each objective varies from investor to investor and depends upon the age and the amount of capital
they have.

Achieving the sum of these objectives depends very much on the investor having all their assets and needs managed
centrally, with portfolios planned to meet lifetime needs, with one overall investment strategy ensuring that the disposition
of assets will match individual needs and risk preferences.
 INVESTMENT TECHNIQUES: AN INTRODUCTION

Common Challenges Faced by Investors

If you want to become an investor then you must learn

about investments in detail.

Many people are scared of investing due to the volatile

nature of businesses.

They don’t want to take the risk of losing their money.

But with calculative decisions, you can get good returns
from the investment.

However, you will face many challenges on your journey

to becoming a successful investor.

Here are some the most common challenges faced by

investors
 INVESTMENT TECHNIQUES: AN INTRODUCTION
Common Challenges Faced by Investors

1. Limited Capital

One of the biggest challenges that new investors face is

having limited capital available to invest, and this is only
compounded when certain financial instruments are too
expensive.

However, these issues can often be solved by looking

into “partial shares.”

A partial share or fractional share is when you own less

than one whole share of a company. It is a portion of an
equity stock that is less than one full share.

Fractional shares allow you to purchase stocks based on

the dollar amount you want to invest, so you may end up
with a fraction of a share, a whole share, or more than
one share.
 INVESTMENT TECHNIQUES: AN INTRODUCTION

Common Challenges Faced by Investors

2. Uncertain climate

Today’s investor needs to know about changes in value

minute by minute, as well as keeping up with relevant
economic and political news.

The world today seems more uncertain than ever before.

The economies of major nations seem a lot more

precarious than they used to, and a multitude of issues,
from Brexit to climate change, to political instability, can
have a significant impact on investments.

Anyone trading on the financial markets has to stay

informed about world news and factor this into their
buying and selling decisions.
 INVESTMENT TECHNIQUES: AN INTRODUCTION

Common Challenges Faced by Investors

3. Constant Market Fluctuations

Timing is very important for investors. If you are a new

investor you may not understand the right timing of
investment.

Sometimes you will enter the market just before a

financial downfall and lose your money even before your
start your journey.

You can use the dollar-cost averaging technique to invest

in the market little by little over a long period. This will
prevent any large fluctuations in the financial portfolio.

The dollar-cost averaging technique is a strategy where

you invest into the market bit by bit and mitigate more
significant fluctuations in the value in your portfolio over
a long period.
 INVESTMENT TECHNIQUES: AN INTRODUCTION
Common Challenges Faced by Investors

4. Rise in scams

Unfortunately, investment scams and fraud are also more common

now than ever. In the modern age, they are also becoming
increasingly sophisticated and harder to detect.

This is largely an unfortunate side effect of improving technology.

In 2017, roughly two million incidents of online fraud were reported in

the UK alone, and authorities claim that this probably represents
around 20% of the total.

The use of malware, ransomware and the like is joined by the more
subtle use of fake news and social media bots to affect trends that
can, in turn, persuade even the smartest of us to make unwise
investment decisions.

Email hacking is also on the rise, while the rise in new investment
forms such as CFDs and Bitcoin opens up new possibilities for
 INVESTMENT TECHNIQUES: AN INTRODUCTION

Common Challenges Faced by Investors

5. Unknown Risks

New investors may not know about the hidden risks in many
seemingly simple investment strategies, which can cause their
portfolios to take significant hits early on in the process.

There are hidden risks in investment and many investors don’t know
about it.

To combat this pitfall, it’s essential to be as informed as possible -

you need to be informed. You should learn about the risks that are
associated with margin, leverage, and other things.

Before considering them as an investment option, make sure to be

familiar with the risks involved with margin, leverage, options,
futures, etc.
 INVESTMENT TECHNIQUES: AN INTRODUCTION
Types Of Investors

1. PERSONAL INVESTORS

A personal lor individual investor is a person who makes investments on their own account, thus creating their own
portfolio with the aim of obtaining a return on their savings.

Most business owners usually depend on their close acquaintances, friends or family to help them by investing in their
business, normally during the initial stages.

These types of investors are called personal investors, and even though they can assist with funding, there is a limit to
how much they can invest in your company.

It is often easier to convince a loved one to help you out, but there is heavy documentation that is required for which they
can be taxed for helping as well.

So, if you are going to take a personal investor’s help, ensure that you consult a lawyer to help you avoid any
complications.
 INVESTMENT TECHNIQUES: AN INTRODUCTION
Types Of Investors

2. ANGEL INVESTORS
Angel investors are those who put their money in small startups or new entrepreneurs.

This is the most famous type of investors that most people may have heard about before.

An angel investor might even be close to the startup owner, like friends or family.

Angel investors are usually wealthy entrepreneurs who want to leverage their wealth by investing in projects they are
passionate about, especially startups that may have difficulty accessing more traditional forms of financing.

Many angel investors are successful entrepreneurs themselves, as well as corporate leaders and business professionals.
 INVESTMENT TECHNIQUES: AN INTRODUCTION

Types Of Investors

3. VENTURE CAPITALIST
A venture capitalist (VC) is an investor who offers capital to the startups that are believed to have long-term growth
potential.

Venture capitalists are normally investment banks, well-off investors, and any other financial institutions.

Even though this is a risky way for investors to put in their funds, a successful payoff is worth it.

A VC would put their resources into a company that they feel has the possibility to grow, and in return, they would
demand equity in the company and get an overall say in the company’s decisions.

Since entrepreneurs get both open funding as well as the advice of an experienced and knowledgeable person, many tend
to choose these type of investors.
 INVESTMENT TECHNIQUES: AN INTRODUCTION

Types Of Investors

4. PEER-TO-PEER LENDERS
Peer-to-peer can be individuals or groups. They help to fund small businesses.

Peer-to-peer lenders are groups or individuals who provide capital to small business owners.

But to obtain this capital from these type of investors, the owners would need to apply with companies that are experts in
peer-to-peer lending.

As soon as the owner’s application gets approved by the company, the lenders would then determine if the company is
right for their investment or not.
 INVESTMENT TECHNIQUES: AN INTRODUCTION

Types Of Investors

5. CORPORATE INVESTORS

An institutional or corporate investor is a company or organization that invests money to buy securities or assets such as
real estate.

Unlike individual investors who buy stocks in publicly traded companies on the stock exchange, institutional investors
purchase stock in hedge funds, pension funds, mutual funds, and insurance companies.

When big corporations put their resources into a budding business, they have various benefits.

This consists of supporting their development number, diversifying their assets, and distinguishing between talent and
innovation, which can assist them with battling off industry changes and fuel significant profits.

Some corporate investors have assets to put resources into outside new companies.
 INVESTMENT TECHNIQUES: AN INTRODUCTION

Key characteristics of a good investor

1. Goal setting

Failing to plan is planning to fail!

A good investor will always have clear goal. It is very important to have a plan to achieve the goals.

Variations most likely tend to divert an investor from the agenda.

Having a plan of action within a defined period of time for a particular return on investment is a sign of a good investor.

They are prepared for the uncertainty of the market while the plans are usually made considering both the sides
 INVESTMENT TECHNIQUES: AN INTRODUCTION

Key characteristics of a good investor

2. Knowledge

When you know better, you do better!

Besides utilizing time to the best, a good investor should possess knowledge of the market.

He/she understands the position of funds and has researched about the company investment strategy and philosophy.

You need to know where your money is being utilized.

A good investor analyses the growth pattern of the company over the years from genuine sources.

On the accounts of the anticipations and knowledge a good investor will have a defined plan for exit point as well.

An active learner who is open to make a right choice on the basic of genuinity of knowledge is a good investor.
 INVESTMENT TECHNIQUES: AN INTRODUCTION
Key characteristics of a good investor

3. Right Decision

A good investor knows the time. They keep an eye on current scenario in the market.

They update their knowledge about market activities and growth.

Having a sound understanding of trends enables the investors to overlook their plans and decide the term of investment.

Having an understanding of current trends and company market position makes one a good investor.

It’s not necessary that the good investor jumps into the trends; but he/she needs to just does what is right.

To know more about current trends that will enable you make informed decision, you can visit financial websites, read
financial self-help books, newspapers and magazines, research investment companies…and work hard to keep up with
current economic news and market analysis.

Or, you can seek help from professionals whose job it is to do all of that for you.
 INVESTMENT TECHNIQUES: AN INTRODUCTION
Key characteristics of a good investor

4. Patience

Keep calm and carry on!

Over the period of time a good investor creates wealth due to his patience.

It is probably the finest quality to have.

A good investor has faith in his plans.

They usually do not feel bad about the 10% downtick; they would rather sit tight to celebrate the 100% uptick.

They are persistent about sticking to the plans.

They usually do not get into the buy and sell trends.
 INVESTMENT TECHNIQUES: AN INTRODUCTION

Key characteristics of a good investor

5. Risk Aversion

A risk averse investor is an investor who prefers lower returns with known risks rather than higher returns with unknown
risks.

A risk averse investor is one who avoids risks.

he or she stays away from high-risk investments and prefers investments which provide a sure shot return.

Such investors like to invest in government bonds, debentures and index funds.

Good investors know the inherent risk in investing.

They understand their plans and analyze their expected returns.

Being risk averse is a quality shaped by experience, knowledge and confidence over the above mentioned key
characteristics.