Portfolio Management

Anand K S

Module 1 Savings, Investments, Speculation, Gambling and Arbitrage Mechanisms

Investment:
Introduction Investment is sacrifice of present consumption for future benefits. Investment is commitment of money in order to earn a financial return or to make use of money for future benefits. When you postpone the consumption, sacrifice takes place in the present and is certain, whereas the benefits occur in future and are uncertain. Anything not consumed today saved for future use can be considered as an investment. Investment involves two aspects: Waiting for returns. Element of Risk of not getting what is expected of the Investment.

Financial investment: The purchase of assets such as securities or deposits with a primary view to their financial return, either as income or capital gain is called financial investment. Capital investment: The purchase of capital goods such as plant and machinery in a factory in order to produce goods for future consumption is called capital investment.

Investment

Financial

Capital

Features of Investments: It is a commitment of a persons funds to derive future income. It requires to be analyzed within a framework of risk and return. When a single investment security is analyzed it is called Security Analysis. The risk in investment relates to variability of Returns. An Investment which is easily saleable or marketable is said to be processing Liquidity. Some Investments provide tax benefits such as Tax Rebate, Dividend form a domestic company is exempted from tax and Terminal tax benefit such as Public Provident Fund.

Portfolio Management

Anand K S

Objectives of Investment:

Investment

Income

Capital Appreciation

Liquidity

Safety

Returns

Hedge against Inflation

Investment Process:

Investment Process

Investment objectives

Security Analysis

Portfolio Construction

Review portfolio

portfolio performance evaluation

Investment Policy:
The first stage determines financial affairs and objectives before making investments. It is also called preparation of the investment policy stage. This stage is appropriate for identifying investments assets. It involves: Determination of investible wealth. Identification of investors objectives, constraints and preference. Identification of potential Investment assets. Formulation of Investment Policy and strategy. Execution of strategy. Monitoring of Investments Portfolios.

Portfolio Management

Anand K S

Security Analysis:
After arranging various types of investments by an investor on his portfolio the next step is to analyze the securities for investment. When a single investment security is analyzed it is called Security Analysis. This stage analyzes the future behavior and the expected return and risk associated with it. Technical analysis Fundamental analysis

Review the portfolio

An appropriate set of weights have to be applied with the use of forecasted benefits to estimate the value of the investment assets. Comparison of the value with the current market price of the asset, allows the determination of the relative attractiveness of the asset. Each asset must be valued of its individual merit. Valuation of bonds Valuation of Equity share Valuation of other assets

Portfolio Construction:
Portfolio is a combination of securities/assets which is designed by the investors in order to maximize the returns and minimize risk. Determination of diversification level Consideration of investment timing Selection of investment timing Allocation of investible wealth to investment assets Acquisition of securities/assets

Portfolio Management

Anand K S

Savings
Savings is the money set aside for some special purpose or to provide an income at some time in the future is called savings. Savings are a part of personal earnings. These earnings are used for making investments for future use. Savings are excess of income over expenditure. Savings could be with the objective of earning interest income or additional income. All savers may not be able to invest well. Savings encourage investments through financial intermediation and flow of funds in the capital markets. The amount left over when the cost of a person's consumer expenditure is subtracted from the amount of disposable income that he or she earns in a given period of time.

Speculation
Speculation is the purchase or sale of something for the sole purpose of making a capital gain. Speculator is a person who anticipates price changes through frequent buying and selling of securities with an aim to make profit. Speculation means you assume a business risk in hope of gain; especially: to buy
or sell in expectation of profiting from market fluctuations.

Jobber: - Jobber is a professional speculator who has complete information regarding the particular shares he deals. He transacts the shares of profit. He conducts the securities in his own name. He is the member of the stock exchange and he deals only with the members. Broker: - Broker is a person who transacts business in securities on behalf of his clients and receives commission for his services. He deals between the jobbers and members our side the house. He is an experienced agent of the public. Bull: - He is a speculator who purchases various types of shares. He purchases to sell them on higher prices in future. He may sell the shares and securities before coming in possession. If the price falls then he suffers a loss. Bear: - He is always in a position to dispose of securities which he does not possess. He makes profit on each transaction. He sells the various securities for the objective of taking advantages of an expected fall in prices. Lame Duck: - When bear fails to meet his obligations he struggles to meet finance like the Lame Duck. This may happen when he has been concerned. Generally a bear agrees to dispose of certain shares on specific date. But sometimes he fails to deliver due to non-

Portfolio Management

Anand K S

availability of shares in the market. If the other party refuses to postpone the delivery those lame duck suffers heavy losses Stag: - He is also a speculator. He purchases the shares of newly floated company and shown himself a genuine investor. He is not willing to become an actual shareholder of the company. He purchases the shares to sell them above the par value to earn premium. A stag also suffer a loss. Contango: - Contango means to come over dealing to the settlement. The broker is paid a reward to carry the settlement, it is also known as Contango. It is paid the buyers, to the brokers. In some cases buyers in unable make the payment of securities on any particular date. So he requests the broker to carry on the dealing to the next settlement. Backwardation: - It is an interest which is paid by the sellers of securities to the buyers who wants to postpone transaction to the next account

Gambling
Gambling is the wagering of money or something of material value (referred to as "the stakes") on an event with an uncertain outcome with the primary intent of winning additional money and/or material goods. To play at any game of chance for stakes. To stake or risk money, or anything of value, on the outcome of something involving chance; bet; wager.

Portfolio Management

Anand K S

Portfolio Management

Anand K S