UNIT – I Syllabus

 Introduction and scope of the subject

 Economic meaning and significance of savings,

investments, speculation, gambling, and arbitrage
mechanisms.

 Comparison between investment and speculation and its

significance in Indian financial system.
Wealth Management
 “Wealth management is the systematic process of selecting an investment
plan so as to optimize return with minimum possible risk”

 Money makes money.

 If it is properly channelised in a right investment avenue at right time.

 Knowledge on fundamentals and technicals of each investment avenue

plays a vital role.

 It is said that with out money also wealth can be created at a cost of risk -
speculation

 “Wealth is the value of assest held by an investor at a given period of time.”

 Investment
 What is needed
 Income
 Savings
 Availability Financial assets
 Knowledge on investment analysis
 Investment procedure
 Follow up.
Scope of investment
 Investment is a broader concept which involves many
economic aspects
 Economic condition of the country
 Financial policy
 Interest rates
 Foreign investment policy
 Regulatory bodies like RBI,SEBI,Ministry of Finance etc,
 Rupee value
 Political stability
 Industrial policies etc.
 Investments
 What is an investment?

 Giving up consumption today and putting money into assets that

will bring greater wealth and consumption in the future

 Compared to savings, investment involves higher risks, and thus,

one will want higher returns from investment

 Where to Invest?
 Financial Assets: claims on the income generated by real assets
(EX) Stocks, Bonds, insurance, post office instruments,Options,
Futures, etc.
 Real Assets: used to produce goods and services
(EX) Real estate, Auto plant, Cars, etc.
Investment and
 Long term framework
beyond at least 12 month
 Limited risk
 Return is Consistent over
long period.
 Generally own Funds are
invested
 Information required is
performance of
companies, safety, liquity,
profitability and stability.
speculation
 Short term holding some
time with in a day.
 High risk - subject to
market fluctuations
 High returns or loss
 Own and borrowed funds.
 Market behavior
information - technical
analysis.
Financial Assets
 Fixed-income securities or bonds
 Provides a stream of income (interest or/and principal) fixed or
determined by a formula
 Corporate bond, Treasury bond, Municipal bond, etc.
 Fixed or Floating rate note
 Money market securities: T-Bills, CDs, CPs, etc.
 Stocks or Equity
 Represents an ownership share of a company, and provides
dividends and capital gains (or losses)
 Value of equity is tied directly to the success of the firm, and thus,
is riskier than investments in bonds
 Common stocks vs. preferred stocks
 Derivatives
 Income streams are dependent on the value of underlying assets
 Call options vs. put options
 Futures
Financial Markets & Firm
Financial markets facilitate allocation of risk of a firm, and
help separate ownership and management of a firm.

Capital Capital
Budgeting Structure
Decision: Decision:
Invest the Raise equity or
proceeds Firm bond
Financial
Real Cost of Firm value
capital max, or, Retained Markets
Assets earnings
SH wealth Risk-Return
NPV>0 (Reinvest) tradeoff
max

Operating Dividends,
Cash Flows Interests

Corporate
taxes

Govern-
ment
Financial Market Participants

 Firms are net borrowers, and raise capital (bond or equity)

to finance investments in plant and equipment
 Households are net savers, and purchase securities
issued by firms
 Government can be borrowers or lenders, depending on
tax revenue and government expenditures
 Financial intermediaries
 Banks take deposits and lend money to borrowers
 Investment companies pool and manage funds for many investors
 Investment banks specialize in selling (underwriting) securities to
the public
 Insurance companies, credit unions, mutual funds, pension funds,
venture capital firms, etc.
Investment process
 Typical investors faces two steps of decisions:
 Asset allocation
 Choice among broad asset classes
(Ex) stocks, bonds, real estate, commodities, etc.
 This requires “economic analysis” (boom or bust) or “industry
analysis”
 Security selection
 Choice of particular securities within each asset class
(Ex) GM, IBM, etc.
 This requires the valuation process of particular securities, so
called, “security analysis”
 Therefore, investors face the following problems:
 Forecasting future returns (or cash flows)
 Identifying sources of risk and measuring risk
 Evaluating whether the expected return compensates for the risk
 Investment decisions
Investment process
Investment process involves

 Investment Policy – Define investment objective

 Investment Analysis – assest allocation and analysis

 Valuation of securities

 Portfolio construction
Investment and Gambling
 Gambling is an unsystematic action of a person
expecting an outcome with high state of risk.

 An investment is not gambling because it is a systematic

action with risk return trade off.

 Eg. Of gambling is horse race, card games etc.,

Objectives of Investment
The prime objective of investment is

 A hedge against inflation

 Reducing risk to get a good return

 A better purchasing power in future

 Liquidity in the time of emergencies

 Safety of funds by selecting the right avenues of investment

Arbitrage
 Arbitrage is the mechanism of keeping ones risk to the
minimum through hedging and taking advantage of price
differences in different markets.
E.g.. Price Difference in BSE and NSE for a RCOM

 The simultaneous purchase of the same or similar

security in two different markets would be an arbitrage
transaction.

 Derivatives introduced in the Indian market has a great

potential for arbitrage transactions.
Principles of the markets
 No-free-lunch rule (or no arbitrage rule)
 Financial markets are competitive enough to rule out any profit
opportunity from investing in obviously under priced securities
 Risk-return trade-off
 Assets with higher expected returns have greater risk

 How to measure risk? Beta, variance analysis

 Market efficiency hypothesis

 All relevant information is quickly and efficiently reflected in prices

 In reality, however, we observe near-efficient markets where there

may exist profit opportunities for diligent and creative investors
 This provides an incentive for actively managing one’s investment
portfolios
Active vs. Passive Management
 Active Management
 Attempt to select undervalued securities and time the market

 Adjust the portfolio weights according to a forecast of the market

movements for next period
 Shift between stocks, bonds, etc.

 Passive Management
 No attempt to select undervalued securities or time the market

 Hold an efficient portfolio

 Balanced Management
 Active + Passive
FINANCIAL SYSTEM
An understanding of the financial system requires an
understanding of the following concepts:
 Financial Assets
 equity, debentures, bonds, insurances
 Financial Intermediaries
 Stock brokers, investments houses, SEBI, Exchanges etc.
 Financial markets
 Primary market, bullion market, commodity market, Foreign
exchange market e
 Financial rates of return
 It is the yield expected on investment like, dividend rate,
Interest rate, coupon rate.
 Financial instruments
 Like share certificate, FD Bond, Commercial Papers, NSC\IVP
FINANCIAL ASSETS:
 A financial asset is one, which is used for production or
consumption or for further creation of assets.

 The basic product of any financial system is the financial

asset.

 Financial asset includes shares, government securities,

Bonds, mutual funds, Debentures, Deposit certificates
commercial papers etc.,
Financial intermediaries
 Banks
 NBFCs
 Stock Exchanges
 Stock Brokers
 Investment Houses
 Consultants
 Private participants
 Clearing houses
FINANCIAL MARKETS:
 There is no specific place or location to indicate a
financial market.

 Wherever a financial transaction takes place, it is

deemed to have taken place in the financial market.

 Financial markets are pervasive in nature.

 Financial markets can be referred to as those center and

arrangements which facilitate buying and selling of
financial assets, claims and services. Eg : Stock
exchanges, Forex Markets.
FINANCIAL RATE OF RETURN:
 Financial rate of return basically means the
return earned on the investment through
financial assets.
 Most of the house hold in India still prefers to
invest on physical assets like, buildings, gold,
silver etc.,
 But studies have shown that investment in
financial assets like equities in capital market
fetches more return than investments on gold.
FINANCIAL INSTRUMENTS:
 A financial instrument refers to those documents which
represent financial claims on assets. Examples: Bills of
Exchange, promissory Note, Treasury Bill, Government
Bond, Deposit receipts, Debenture, etc.
Investments and Innovation
Technology
 Advancements in computing power and
internet technology
 More complete and timely information delivery

Globalization
 Domestic firms compete in global markets
 Performance in of Domestic Exchanges
depends on other other Globale markets
 Causes additional elements of risk
The Future

 Globalization continues and offers more

opportunities
 Securitization continues to develop
 Derivatives and exotics continue to develop

 Strong fundamental foundation is critical

 Integration of investments & corporate finance