The presentation covers topics like Investment and Speculation, Investment and Gambling, Investment Management Process, Types of Speculators, Technical Analysis and Fundamental Analysis, Concept of Risk and Return

1. THE INVESTMENT
ENVIRONMENT
INVESTMENT MANAGEMENT PROCESS
module
ONE

2. The Investment Decision Process - Types of Investments - Commodities, Real Estate and Financial
Assets - Security Market Indices - Sources of Financial Information - Concept of Return and Risk
CONTENTS
Investment and Speculation
Investment and Gambling
Investment Management Process
Types of Speculators
Technical Analysis and Fundamental Analysis
Concept of Risk and Return

3. INVESTMENT AND SPECULATION
Both investment and speculation involve purchase of assets with an
expectation of return.
Investment is different from speculation in terms of:
Expectation of Return
Risk Bearing Capacity
Duration of Trade
The speculator’s motive is to achieve profits through price change,
that is, capital gains are more important than the direct income from an
investment. Investors expect an income in addition to the capital gains
that may accrue when the securities are traded in the market.

4. INVESTMENT AND SPECULATION
…continued
An investor prefers low level of risk, whereas a speculator is prepared
to take higher level of risks.
Investment is long term in nature. However, a speculator trades
frequently; hence, the holding period of securities is very short.
 Speculation focuses more on return than safety, thereby encouraging frequent
trading without any intention of owning the investment.
 The investor can be said to be interested in a good rate of return on a consistent
basis over a relatively longer duration.
 For this purpose, the investor computes the real worth of the security before
investing in it.
 For a speculator, market expectations and price movements are the main factors
influencing a buy or sell decision.

5. TYPES OF SPECULATORS
In any stock exchange, there are two main categories of speculators
called the bulls and bears.
BULL
A bull buys shares in the
expectation of selling them at a
higher price.
When there is a bullish tendency
in the market, share prices tend
to go up since the demand for the
shares is high.
BEAR
A bear sells shares in the
expectation of a fall in price with
the intention of buying the shares
at a lower price at a future date.
These bearish tendencies result
in a fall in the price of shares.

6. INVESTMENT AND GAMBLING
Investment can also to be distinguished from gambling.
Gambling is unplanned and unscientific, without the knowledge of the
nature of the risk involved.
For example, horse race, card games, lotteries, etc.
FEATURES OF GAMBLING
Gambling involves high risk not only for high return but also for
the associated excitement
It is surrounded by uncertainty and a gambling decision is taken on
unfounded market tips and rumours
In gambling, artificial and unnecessary risks are created for
increasing the returns

7. INVESTMENT AND GAMBLING
…continued
Investment is an attempt to carefully plan, evaluate, and allocate
funds to various investment outlets that offer safety of principal and
expected returns over a long period of time
Hence, gambling is quite the opposite of investment even though the
stock market has been euphemistically referred to as a “gambling
den”.

8. INVESTMENT MANAGEMENT PROCESS
It is the process of managing money or funds.
It describes how an investor should go about making decisions.
A typical investment decision can be disclosed by a five-step
procedure. They are:
Setting Investment Objective
Analysing Securities
Construct a Portfolio
Performance Evaluation of Portfolio
Review of Portfolio

9. INVESTMENT MANAGEMENT PROCESS
…continued
Setting Investment Objective
 Investment objective may vary from person to person.
 The objectives of investor may be to accumulate funds to purchase a dream home, to
have sufficient funds to ensure the safety of retirement life, or to accumulate funds to pay
for college tuition fee for children.
 An investor may engage the services of a financial advisor or consultant in establishing
investment objectives
Analysing securities
 It enables the investor to distinguish between under-priced and over-priced stocks.
 Return can be maximized by investing in stocks which are currently under-priced but
have the potential to increase.
 In other words, it helps the investor to buy low and sell high.
 The two approaches used for analysing securities are technical analysis and fundamental
analysis.

10. Fundamental analysis involves comparison of the intrinsic value
and market value of the financial assets those which are under-
priced or over-priced can be identified. Intrinsic value is the
present value of future flows from particular investment
Technical analysis is the process of examining the trends of
historical prices and is based on the assumption that these trends or
patterns repeat themselves in the future.

11. INVESTMENT MANAGEMENT PROCESS
…continued
Construct a Portfolio
 Investment portfolio is the set of investment vehicles, formed by the
investor seeking to realize its’ defined investment objectives.
 In the stage of portfolio construction, the issues of selectivity1, timing 2
and diversification3 need to be addressed by the investor.
 Selectivity refers to micro forecasting and focuses on forecasting price
movements of individual assets.
 Timing involves macro forecasting of price movements of particular type
of financial asset relative to fixed-income securities in general.
 Diversification involves forming the investor’s portfolio for decreasing or
limiting risk of investment.

12. INVESTMENT MANAGEMENT PROCESS
…continued
Performance Evaluation of Portfolio
Performance evaluation of portfolio involves determining periodically how the
portfolio performed in terms of risk and return.
For this, appropriate measures of return and risk and benchmarks are needed.
A benchmark is the performance of predetermined set of assets, obtained for
comparison purposes.
Review of Portfolio
It involves the periodic repetition of the above steps.
The investment objective of an investor may change overtime and the current
portfolio may no longer be optimal for him.
So, the investor makes changes in his investment objectives and then on the
portfolio.

13. THE CONCEPT OF RISK AND RETURN
 Risk means the possibility of incurring
loss in a financial transaction.
 In investment, risk is the difference
between expected return and actual
return.
 The risk of an investment depends on:
 The longer the maturity period, the
larger is the risk.
 The lower the credit worthiness of the
borrower, the higher is the risk.
 The risk varies with the nature of
investment.

14. TYPES OF RISK
Systematic risk is
caused by factors
external to the
particular company
and uncontrollable
by the company
It affects the market
as a whole
Systematic
Risk
Risk caused by the
specific and unique
factors is called
unsystematic risk
It is related to the
particular industry
or company
Unsystematic
Risk

15. INTEREST RATE RISK
 It refers to the chance that the investments
will suffer as a result of unexpected interest
rate changes
 It is the probability of decline in the value of
an asset resulting from unexpected
fluctuations in interest rate
 It is most commonly associated with fixed
income bearing securities like bonds,
debentures, etc.
 Interest rate risk can be mitigated through:
 Diversification, and
 Hedging

16. MARKET RISK
 It is the possibility of occurring losses due to
the factors that affects the overall
performance of the financial markets
 It cannot be eliminated through
diversification, but can be hedged against in
other ways
 Sources of market risk includes:
 Recession
 Political turmoil
 Natural disaster
 Terrorist attacks, etc.

17. INFLATION RISK
 It is also called purchasing power risk
 It is the probability of loss resulting from
erosion of an income or in the value of assets
due to the rising cost of goods and services
 In other words, it refers to the variation in
return caused by inflationary conditions
 For example, consider an investor with Rs.
1,000,000 bond investment with a 10
percent coupon. This might generate enough
interest payments for a retiree to live on, but
with an annual 3 percent inflation rate, every
Rs. 1,000 produced by the portfolio will only
be worth Rs. 970 next year and about Rs. 940
the year after that.

18. BUSINESS RISK
 Anything that threatens a company’s ability
to meet its financial goals is called business
risk
 It is the variability in operating income
caused by the operating conditions in
external and internal environment of a
company
 Once a business risk has been identified, an
organisation has four options:
 Transfer it
 Avoid it
 Reduce it, or
 Accept it

19. FINANCIAL RISK
 It refers to the variability of the income to the
equity capital due to the debt capital
 It is associated with the capital structure of
the company
 The debt in the capital structure creates fixed
payments in the form of interest this creates
more variability in the earning per share
available to equity shareholders. This
variability of return is called financial risk

20. LIQUIDITY RISK
 Liquidity risk stems from the lack of
marketability of an investment that can't be
bought or sold quickly enough to prevent or
minimize a loss
 It occurs when the investor is unable to meet
its short-term debt obligations

21. RETURN
Return is the reward earned by the investor as a result of his investment.
return arises in the form of income, capital appreciation or a positive hedge
against inflation.
The return may be received in the form of yield plus capital appreciation.
The difference between the sale price and the purchase price is capital
appreciation. The dividend or interest received from the investment is the
yield.