INVESTMENT AND PORTFOLIO

MANAGEMENT(ACFN - 4051)

ACCOUNTING AND
FINANCE

06/19/2024
 CHAPTER ONE

INTRODUCTION TO
INVESTMENT

06/19/2024
 INVESTMENT IN GENERAL
 Investment is the current commitment of money or
financial resources in any financial or physical form for a
period of time with an expectation of receiving additional
return in the future.
 Investments may be classified as financial investments or
economic investments.
Financial investment is the commitment of funds to derive
future income in the form of interest, dividend, premium,
pension benefits, or appreciation in the value of the initial
investment.
Economic/Physical/investments are undertaken with an
expectation of increasing the current economy’s capital
stock
06/19/2024that consists of goods and services.
 Cont’d
 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.

 The main objective of an investment process is to

minimize risk while simultaneously maximizing the
expected returns from the investment and assuring
safety and liquidity of the invested assets.

06/19/2024
 Investment Vs. Speculation
 An investor prefers low risk investments, whereas a
speculator is prepared to take higher risks for higher
returns.
 Speculation is associated with buying low and selling high
with the hope of making large capital gains. Investors are
careful while selecting securities for trading. Investments
expect an income in addition to the capital gains that
may accrue when the securities are traded in the market.

 Investment is long term in nature. However, a speculator

trades frequently; hence, the holding period of securities
is very short.
06/19/2024
 Classification of Investors
 Investors can be classified in to two broad categories;
A. Individual/Retail/ investors: are individuals who are
investing on their own. Individual investors invest to
earn a return from savings due to their deferred
consumption. They want a rate of return that
compensates them for the time, the expected rate of
inflation, and the uncertainty of the return.
B. Institutional investors: are entities such as investment
companies, commercial banks, insurance companies,
pension funds and other financial institutions.

06/19/2024
 Direct versus indirect investing
 Direct investing involves the purchase of
securities from financial markets. In this case, the
investor controls the purchase and sale of each
security in their portfolio.
 Indirect investing can be undertaken by
purchasing the shares of an investment company.
In this case, the investor does not control the
composition of the fund’s investment; the
investor only controls whether to buy or sell the
shares of the fund.
06/19/2024
 Investment environment
 Investment environment is the existing investment vehicles in
the market available for investor and the places for transactions
with these investment vehicles.
Investment vehicles
 Investment Vehicles can be Financial asset or Physical assets
 Investment in financial assets differs from investment in physical
assets in the following important aspects:
1. Financial assets are divisible, whereas most physical assets are
not
2. Marketability (liquidity) is a characteristic of financial assets that
is not shared by physical assets, which usually have low
liquidity.
3. The planned holding period of financial assets can be much
shorter than the holding period of most physical assets.
06/19/2024
 The main types of financial investment vehicles are:
1. Short term investment vehicles
2. Fixed-income securities
3. Common stock
4. Speculative investment vehicles
5. Other investment tools..
1. Short - term investment vehicles are all those which have
a maturity of one year or less.
 Short term investment vehicles are money-market
instruments, because they are traded in the money markets.
 The risk as well as the return on investments of short-term
investment vehicles usually is lower than for other types of
investments.
06/19/2024
 Cont’d
 The main short term investment vehicles are:
A. Treasury bills
B. Commercial paper
C. Certificates of deposit
D. Bankers’ acceptances etc.

06/19/2024
 2. Fixed-income securities
 Fixed-income securities are those which return is fixed, up to
some redemption date or indefinitely.
 This type of financial investments is presented by two different
groups of securities:
a. Long-term debt securities
b. Preferred stocks.
a. Long-term debt securities: it represents the issuer’s contractual
obligation.
 Long term securities have maturity longer than 1 year.
 The issuer has an obligation to pay periodically interest on this
loan and repay the principal at a stated maturity date.
 Long-term debt securities are traded in the capital markets.
 06/19/2024
The major representatives of long-term debt securities are bonds
 b. Preferred stocks/ hybrid security/
 Preferred stocks are equity security, which has infinitive
life and pay dividends.
 But preferred stock is attributed to the type of fixed-
income securities, because the dividend for preferred
stock is fixed in amount and known in advance.
3. The common stock
 Common stock represents the ownership interest of
corporations or the equity of the stock holders.
 Holders of common stock are entitled to attend and vote
at a general meeting of shareholders, to receive declared
dividends and to receive their share of the residual
assets, if any, if the corporation is bankrupt.
06/19/2024
 4. Speculative investment vehicles

 Investments with a high risk and high investment return.

Using these investment vehicles speculators try to buy low
and to sell high, their primary concern is with anticipating
and profiting from the expected market fluctuations.
 The only gain from such investments is the positive
difference between selling and purchasing prices.

06/19/2024
 5. Other investment tools:
 Various types of investment funds
 Investment life insurance
 Pension funds etc.

06/19/2024
 Characteristics of Investment
 The features of economic and financial investments can be
summarized as፡
1. Return: dividend yield plus capital appreciation.
 The expectation of return from an investment depends upon
the nature of investment, maturity period, market demand,
and so on.
2. Risk: chance that the value of an investment will decrease.
 Risk of an investment depends upon maturity period, credit
worthiness of the borrower and nature of investment.
3. Safety: certainty of return with out of the loss of money or
time.
4. Liquidity: easily marketable without loss of money and time

06/19/2024
 Risk and Return Relationship

06/19/2024
 Security/Financial/ Markets
 Financial market is a market where funds are
transferred from people who have an excess of
available funds to people who have a shortage.
 It is a mechanism that allows people to easily buy
and sell (trade) financial securities (such as stocks
and bonds).

06/19/2024
 Classifications of Financial markets
 FMs are classified under different bases to trade FAs:
1. Classification on the bases of origin or issuance of
an asset as:
 Primary market
 Secondary market (e.g., NYSE and Nasdaq)
2. Classification on the bases of maturity or term of
claims as:
 Money market (e.g., CDs and Government Treasury bills
 Capital market

06/19/2024
 Cont’d
3. Classification on the bases of type or ownership of
financial claims as:
 Equity market
 Debt market
4. Classification on the bases of organizational structure of
the market as:
 Organized exchange market (auction) – e.g., New York
and American stock exchange
 Over the counter market (OTC)
5. Classification on the bases of timing of delivery as:
 Spot/cash market
 Futures/forward market
06/19/2024
 End of Chapter One

06/19/2024