+ 0 ) 6 -
INVESTMENT
Learning Objectives
L
What is investment, speculation
and gambling.
L
Explain the different modes of
investment for investor.
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Discuss the financial investments,
physical investments, maketable investments and non marketable investments.
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What are the factors influencing
the investment?
L
Who is investor? What are the
qualities of investor? Discuss the different types of investor.
INTRODUCTION
“An investment operation is one which, upon thorough
analysis promises safety of principal and an adequate return. Operations not
meeting these requirements are speculative.”
- By Graham and Qadd’s Security Analysis
“Investment Management is the process
of managing money, including investments, budgeting, banking and taxes, also
called as money management.”
We shall discuss
about the following factors:
•
Firstly: Meaning,
concept, characteristics, need and importance, avenues, classification and
modes of investment.
•
Secondly:
Influencing factors, process, feature, source of risk, recent trends and
problems of investment.
•
Thirdly: Meaning,
characteristics, difference in speculation, investment and gambling.
2 Investment Management
MEANING AND CONCEPT OF INVESTMENT
Investment is a term for several closely related meanings
in finance and economics.
Investment according to Theoretical Economics
Investment means the production of capital goods - goods
which are not consumed but instead used in future production.
Examples include
•
Building
•
A rail road
•
A Factory clearing land
•
Putting oneself through college
Investment according to Finance Term
Investment means buying of Assets. For Examples
•
Buying stocks and bonds
•
Investing in real estate
•
Mortgages
These investments
may then provide a future income and increase in value (i.e., investing in real
estate).
Investment according to Oxford Dictionary
Investment means the investing of money.
Investment from an Individual Point of View
Investment refers
to a money commitment of some sort. For example
l. A commitment of
money to buy a new car is certainly an “investment”.
CHARACTERISTICS OF INVESTMENT
Investment refers to invest money in
Financial physical assets and Marketable assets. Major investments features
such as risk, return, safety, liquidity, marketability concealability, capital
growth, purchasing power, stability and the benefits.
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Tax Benifits
Stability of Income
Return
Marketability
Liquidity
Investment
Safety
Concealability
Capital Growth
Risk
Purchasing Power
Stability
Fig. 1.1 Characteristics of Investment
Figure 1.1 indicates that an important characteristics of
investments is outlined as:
•
Risk
•
Return
•
Safety
•
Liquidity
•
Marketability
•
Concealability
•
Capital growth
•
Purchasing power stability
•
Stability of income
•
Tax benefits.
Risk
Risk refers to the loss of principal amount of an investment. It
is one of the major characteristics of an investment.
The risk depends on
the following factors:
•
The investment
maturity period is longer, in this case, investor will take larger risk.
•
Government or Semi
Government bodies are issuing securities which have less risk.
•
In the case of the
debt instrument or fixed deposit, the risk of above investment is less due to
their secured and fixed interest payable on them. For instance Debentures.
•
In the case of
ownership instrument like equity or preference shares, the risk is more due to
their unsecured nature and variability of their return and ownership character.
•
The risk of degree
of variability of returns is more in the case of ownership capital compare to
debt capital.
•
The tax provisions would influence
the return of risk.
4 Investment Management
Return
Return refers to expected rate of return from an investment
•
Return is an
important characteristics of investment. Return is the major factor which
influences the pattern of investment that is made by the investor. Investor
always prefers to high rate of return for his investment.
Safety
Safety refers to the protection of investor principal amount
and expected rate of return.
•
Safety is also one of the essential
and crucial elements of investment. Investor prefers safety about his capital.
Capital is the certainty of return without loss of money or it will take time
to retain it. If investor prefers less risk securities, he chooses Government
bonds. In the case, investor prefers high rate of return investor will choose
private Securities and Safety of these securities is low.
Liquidity
Liquidity refers to an investment
ready to convert into cash position. In other words, it is available
immediately in cash form. Liquidity means that investment is easily realisable,
saleable or marketable. When the liquidity is high, then the return may be low.
For example, UTI units.
An investor
generally prefers liquidity for his investments, safety of funds through a
minimum risk and maximisation of return from an investment.
Marketability
Marketability refers to buying and
selling of Securities in market. Marketability means transferability or
saleability of an asset. Securities are listed in a stock market which are more
easily marketable than which are not listed. Public Limited Companies shares
are more easily transferable than those of private limited companies.
Concealability
Concealability is another essential
characteristic of the investment. Concealability means investment to be safe
from social disorders, government confiscations or unacceptable levels of
taxation, property must be concealable and leave no record of income received
from its use or sale. Gold and precious stones have long been esteemed for
these purposes, because they combine high value with small bulk and are readily
transferable.
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Capital
Growth
Capital Growth refers to appreciation
of investment. Capital growth has today become an important character of
investment. It is recognising in connection between corporation and industry
growth and very large capital growth. Investors and their advisers are
constantly seeking ‘growth stock’ in the right industry and bought at the right
time.
Purchasing
Power Stability
It refers to the buying capacity of
investment in market. Purchasing power stability has become one of the import
traits of investment. Investment always involves the commitment of current
funds with the objective of receiving greater amounts of future funds.
Stability of
Income
It refers to constant return from an
investment. Another major characteristic feature of the Investment is the
stability of income. Stability of income must look for different path just as
security of principal. Every investor always considers stability of monetary
income and stability of purchasing power of income.
Tax Benefits
Tax benefits is the last
characteristic feature of the investment. Tax benefits refer to plan an investment
programme without regard to one’s status may be costly to the investor. There
are actually two problems:
•
One concerned with the amount of
income paid by the investment.
•
Another is the burden of income tax
upon that income.
NEED AND IMPORTANCE OF INVESTMENTS
An investment is an important and
useful factor in the context of present day conditions. Some factors are
important. They are as outlined below:
•
Longer life expectancy or planning
for retirement
•
Increasing rates of taxation
•
High interest rates
•
High rate of inflation
•
Larger incomes
•
Availability of a complex number of
investment outlets.
6 Investment Management
Longer Life Expectancy
Investment decisions have become more
significant as most people in India retire between the ages of 56 to 60. So
that, they are planned to save their money. Saving by themselves do not
increase wealth, saving must be invested in such a way that the principal and
income will be adequate for a greater number of retirement years.
Longer life
expectancy is one reason for effective saving and further investment activity
that help for investment decisions.
Increasing Rates of Taxation
When tax rate is increased, it will
focus for generating saving by tax payer. When the tax payer invest their
income into provident fund, pension fund, Unit Trust of India, Life Insurance,
Unit Linked Insurance Plan, National Saving Certificates, Development Bonds,
Post Office Cumulative Deposit Schemes etc. It affects the taxable income.
Interest Rates
Interest rate is one of the most
important aspects of a sound investment plan. The interest rate differs from
one investment to another. There may be changes between degree of risk and safe
investments. They may also differ due to different benefit schemes offered by
the institutions.
A high rate of
interest may not be the only factor favouring the outlet for investment.
Stability of interest is an important aspect of receiving a high rate of
interest.
Inflation
Inflation has become a continuous
problem. It affects in terms of rising prices. Several problems are associated
and coupled with a falling standard of living. Therefore, investor careful
scrutiny of the inflation will make further investment process delayed.
Investor ensures to check up safety of the principal amount, security of the
investment. Both are crucial from the point of view of the interest gained from
the investments.
Income
Income is another important element
of the investment. When government provides jobs to the unemployed persons in
the country, the ultimate result is ensuring of income than saving the extra
income. More incomes and more avenues of investment have led to the ability and
willingness of working people to save and invest their funds.
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Investment
Channels
The growth and development of the
country leading to greater economic prosperity has led to the introduction of a
vast areas of investment outlets. Investment channels means an investor is
willing to invest in several instruments like corporate stock, provident fund,
life insurance, fixed deposits in the corporate sector and unit trust schemes.
INVESTMENT ACTIVITY
Investment activity includes buying
and selling of the financial assets, physical assets and marketable assets in
primary and secondary markets. Investment activity involves the use of funds or
savings for further creation of assets or acquisition of existing assets.
Figure 1.2
indicates the investments activity. Accordingly investment activity refers to
acquisition of assets like:
•
Financial Assets
•
Physical Assets
•
Marketable Assets from the Primary
and Secondary Market
I Financial Assets
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Saver
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• Cash
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Becomes
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By Acquiring
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• Bank Deposits
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the Assets
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• PF, LIC Schemes
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Investor
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• Pension Scheme
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• PO Certificates and
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III Marketable
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Assets
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Deposits
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Shares, Bonds, Govt.
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Securities etc.
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Stock and Capital
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Markets
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II Physical Assets
•House, Land, Buildings,
Flats
•
Gold, Silver and other Metals
•
Consumer Durables
New Issues Stock Market
Fig. 1.2 Investment Activity
Financial Assets
are:
•
Cash
•
Bank Deposits
8 Investment Management
•
P.F.
•
LIC Schemes
•
Pension Scheme
•
Post Office Certificates and Deposits
Physical Assets are:
•
House, Land, Building and Flats
•
Gold, Silver and other Metals
•
Consumer Durables
Marketable Assets are:
•
Shares
•
Bonds
•
Government Securities
•
M.F. Schemes
•
UTI Units etc.
Investment activity involves the use of funds or savings
for further creation of assets or acquisition of existing assets.
CLASSIFICATION OF INVESTMENT
On the Basis of Physical Investments
Physical investments are:
•
House
•
Land
•
Building
•
Gold and Silver
•
Precious stones
On the Basis of Financial Investment
Financial investments further classified on the basis of:
•
Marketable and Transferable
investments
•
Non-Marketable Investments
Marketable and Transferable Investments
Marketable investments are:
•
Shares
•
Debentures of
Public Limited Companies, particularly the listed company in Stock Exchange
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Bonds of Public Sector Units
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Government Securities, etc.
Non-Marketable
Investments
Non-marketable
investments are:
•
Bank Deposits
•
Provident and Pension Funds
•
Insurance Certificates
•
Post office Deposits
•
National Saving Certificates
•
Company Deposits
•
Private Companies Shares etc.
MODES OF INVESTMENT
Modes of investment
consist of:
•
Security Forms of Investment
•
Non-Security Forms of
Investment/Non-Marketable Investment
Security
Forms of Investment
Security forms of
investment includes the following:
•
Corporate Bonds/Debenture
(a)
Convertible
(b)
Non-Convertible
•
Public Sector Bonds
(a)
Taxable
(b)
Tax Free
•
Preference Shares
•
Equity Shares
(a)
New Issue
(b)
Rights Issue
(c)
Bonus Issue
Non-Security
Forms of Investment (non transferable)
Non-security forms
of investment as outlined below:
•
National Savings Scheme
•
National Savings Certificates
10 Investment Management
•
Provident Funds
(a)
Statutory Provident Fund
(b)
Recognised Provident Fund
(c)
Unrecognised Provident Fund
(d)
Public Provident Fund
•
Corporate fixed deposits
(a)
Public Sector
(b)
Private Sector
•
Life insurance policies
(a)
Whole Life Policies
(b)
Limited-payment Life Policy
(c)
Convertible Whole Life Assurance
Policy
(d)
Endowment Assurance Policy
(e)
Jeevan Mitra
(f)
The Special Endowment Plan with
Profits
(g)
Jeevan Saathi
(h)
The New Money Back Plan
(i)
Marriage Endowment/Educational
Annuity Plan with Profits
(j)
Bima Sandesh Premium Back Term
Insurance Plan
(k)
New Children’s Deferred Assurance
Plan
(l)
Jeevan Dhara
(m)
New Jana Raksha Plan with Profits
(n)
Jeevan Akshay Plan
(o)
Jeevan Balya Plan
(p)
Jeevan Kishor
(q)
Jeevan Griha
(r)
Jeevan Sarita and Others
•
Unit schemes of
Unit Trust of India (Some are marketable among these)
(a)
Unit Scheme, 1964
(b)
Reinvestment Plan, 1966
(c)
Unit Linked Insurance Plan, 1971
(d)
Capital Gains Unit Scheme, 1983
(e)
Children’s Gift Growth Funds, 1986
(f)
Parent’s Gift Growth Funds, 1987
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(g)
Monthly Income Unit Scheme with Extra
Bonus Plus Growth
(h)
Master Shares
(i)
Master Gains
(j)
Equity Linked Savings Scheme
(k)
Growing Monthly Income Unit Scheme
(l)
Mastershare Plus etc.
•
Post Office Savings Bank Account
(a)
Recurring Deposits
(b)
Time Deposits
(c)
Monthly Income Scheme
(d)
Social Security Certificates
•
Others
(a)
Rahat Patras or Relief Bonds
(b)
Kisan Vikas Patra
(c)
Deposits in Co-operative Banks
(i)
Recurring deposits
(ii)
Time deposits, etc.
INVESTMENT FOR CONSUMPTION AND BUSINESS
The income is
divided into two components, namely:
•
Consumption
•
Investment
The income which is
not consumed is saved and invested. Investments are also useful for present and
future consumption in the case of consumer durables, cars, gold and silver etc.
But investment generally promote larger consumption in future as they lead to
more income and larger capital appreciation in the years to come.
Some investments in
business are used in trade and transport and other services. Thus, doctors,
lawyers, traders etc. spend money for making investments for their business,
which lead to further consumption of income.
Importance of
Financial and Physical Investment
Many savers will have their first
preference for physical investments which are less productive and rarely income
earning. Such investments are in consumer goods like, non-durables or durables,
gold, silver, cars and antiques and ‘curios’. These are satisfying the
immediate consumer
12 Investment Management
needs, for comfort, luxuries, social
status, ego buildings etc. Some of them if rented out to others give income and
sometimes capital appreciation also, if the location is at the good places or
commercial areas. Similarly, gold, silver and other metals, diamonds and
antiques may present capital appreciation, without giving any regular income.
Some investments are for social status and prestige as gold, diamonds, jewelry
etc.
FACTORS INFLUENCING INVESTMENT
Investment refers to investment of
physical assets, financial assets and marketable assets. Legal safe guards,
stable currency, existence of financial institutions to encourage savings and
forms of business organization factors are influenced to investor to invest
money in different investment avenues.
Legal
Safe
Guards
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Forms of
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Factors
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Stable
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Business
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Influencing
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Currency
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Organisation
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Investment
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Existence of
Financial
Institutions to
Encourage Savings
Fig.1.3 Factors Influencing Investment
Figure 1.3 shows the influencing factors of investment, as
outlined:
•
Legal safeguards
•
Stable currency
•
Existence of financial institutions
to encourage savings
•
Form of business organisation
Legal Safeguards
A stable government brings adequate
legal safeguards that encourages accumulation of savings and investments.
Investors will be willing to invest their funds. They want the assurance and
protection of their property rights from the government.
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In India, the
investors have the dual advantage.
•
Free enterprise
•
Government control
India is a mixed
economy. It encourages the combination of the public sector which is controlled
by the government and private sector left free to operate with a hope to
achieve the benefits of both socialistic and capitalist forms of government
without any disadvantages.
A Stable
Currency
A well organised monetary system with
definite planning and proper policies is a necessary pre-requisite to an
investment market. Most of investments in terms of bank deposits, life
insurance and shares are payable in a fixed amount of the currency of the
country. A proper and well organised monetary policy will give direction to the
investment outlets. Therefore, the monetary policy should neither promote acute
inflationary pressures nor prepare for a deflation model. Neither of them is
desirable. It affects as:
•
Price inflation destroys the
purchasing power of investments.
•
Deflation is
equally disastrous because the nominal values of inventories, plant and
machinery and land and building tend to shrink.
The wise and
planned monetary and fiscal management contributes towards proper control, good
governance, economic well being and a well disciplined growth-oriented
investment market along with the protection to the investor.
Existence of
Financial Institutions to Encourage Savings
Existence of Financial Institutions
which encourage savings and directing them effective utilisation of investment
through growth of investment market. The financial institutions are generally
in existence in most countries in terms of
•
Commercial Banks
•
Life Insurance Companies
•
Investment Companies.
In India, the
presence of large number of financial institutions under Central Government and
local bodies have encouraged the growth of savings and investment. Life
Insurance Corporation and Unit Trust of India offer a wide variety of schemes
for savings and give tax benefits also.
14 Investment Management
•
Industrial Development Bank of India
(IDBI)
•
Industrial Credit Investment
Corporation of India (ICICI)
•
Industrial Finance Corporation of
India (IFCI)
•
State Financial Corporations
•
National Bank of
Agriculture and Rural Development (NABARD)
•
Commercial Banks
•
Co-operative Banks
•
Life Insurance Corporation
•
Unit Trust of India
•
Development Banks
These financial institutions offer wide variety of
policies for encouraging savings and investment.
FORMS OF BUSINESS ORGANISATION
•
Company
•
Sole Trading Concern
•
Partnership Firms
•
HUF
These are different
forms of business organisation. The form of business organisation which is
permanently in existence aides saving and investment. The public limited
companies is the best form of business organisation for investment.
The public limited
companies are very useful to investors because of the following reasons:
•
Limited Liability of Shareholders
•
Perpetual Life and Transferability
•
Divisibility of Stock and Shares
•
The Ability to
Continue its Business Irrespective of Members Comprising it
•
It gives longevity and soundness to
business activity.
In the case of sole
trading concern, partnership and Hindu undivided family systems are not useful
to investors because of the following reasons:
•
Unlimited liability of the owners,
partners and members.
•
It suffers short life of the
organisation.
In such conditions investors are not ready for investment
because there is no safety and security of their investment.
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The public limited
company is popular form for investment. The following reasons are attracted to
investors to invest in public limited Companies. They are:
•
Liquidity
•
Convenience
•
Longevity
•
Stable return.
THE INVESTMENT PROCESS/STAGES
Investment process refers to
investment policy, investment analysis, valuation of securities and proper
portfolio construction in this way achieve to investment process.
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Stage - I
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Investment Policy
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Stage - II Investment Analysis
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Valuation of
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Stage - III
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Securities
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Stage - IV
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Portfolio Construction
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Fig. 1.4 The Investment Process/Stages
Figure 1.4 indicates the investment
process/stages. The investment process/stages are outlined below:
•
Investment Policy
•
Investment Analysis
•
Valuation of Securities
•
Portfolio Construction
Investment
Policy
Investment policy is the first stage
of the investment process. It determines the following aspects of the investor:
16 Investment Management
•
Determination of Investable Wealth
•
Determination of Portfolio Objectives
•
Identification of Potential
Investment Assets
•
Consideration of Attributes of
Investment Assets
•
Allocation of Wealth to Asset
Categories.
Investment Analysis
Investment analysis is the second stage of the investment
process. Investor analysis of the investment is made on the following grounds:
•
Equity Stock Analysis
•
Screening of Industries
•
Analysis of Industries
•
Quantitative Analysis of Stocks
•
Analysis of the Economy
•
Debentures and Bond Analysis
•
Analysis of Yield Structure
•
Consideration of Debentures
•
Quantitative Analysis of Debentures
•
Other Asset Analysis
•
Qualitative Analysis
•
Quantitative Analysis
Valuation of Securities
Valuation of the securities is the third stages of the
investment process. This stage involves
•
Valuation of Stocks
•
Valuation of Debentures and Bonds
•
Valuation of Other Assets
Portfolio Construction
Portfolio construction is the last stage of the investment
process. It involves the following areas as outlined below that:
•
Determination of Diversification
Level
•
Consideration of Investment Timing
•
Selection of Investment Assets
•
Allocation of Investable Wealth to
Investment Assets
•
Evaluation of Portfolio for Feedback
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Features of
an Investment Programme
Exhibit 1.1 
Features of an
Investment Programme
Features of an
Investment Programme
Features of an investment programme consist of the following
factors:
•
Safety of principal amount
•
Liquidity of the investment
•
Income stability of the investment
•
Appreciation and purchasing power
stability of the investor investment
•
Legality and freedom from care
about the investment
•
Tangibility of the investment
SOURCES OF INVESTMENT RISK
According to the Oxford dictionary
definition of risk includes the following meanings: “The possibility of meeting
danger or of suffering harm or loss.” This conforms to the connotations put on
the term by most investors. An investor commonly identifies five kinds of
investment risks. They are:
•
Business and Financial Risk
•
Interest Rate Risk
•
Purchasing Power Risk
•
Social/Regulatory Risk
•
Other Risk
Business and
Financial Risk
Business risk and
financial risk are actually two separate types of risks. Of course, they are
interrelated. Business risk is also known as operating risk. Operating risk is
associated with day to day operations of the business firm. Financial risk is
created by debt and preference shares (Fixed cost securities). Business and
financial risk may be caused by a variety of factors as mention below:
•
Heightened Competition
•
Emergence of New Technologies
•
Development of Substitute Products
•
Shifts in Consumer Preferences
•
Inadequate Supply of Essential Inputs
•
Changes in Government Policies
•
Poor Business Performance.
18 Investment Management
Interest Rate Risk
Interest rate risk is another source
of investment risk. Changes of the interest rates on the securities is created
risk for investors. If the interest rate goes up, the marketing price of
existing fixed income securities falls, and vice versa. This happens because
the buyer of a fixed income security would not buy if its par value or face
value if its fixed interest rate is lower than the prevailing interest rate on
a similar security.
Market Risk
Even in the case of earning power of
the corporate sector and the interest rate structure remain more or less
changed, prices of securities, equity shares in particular, tend to fluctuate.
There are several reasons for this fluctuation.
The main reasons are listed below:
•
The changing psychology of the
investors.
•
There are periods
when investors become bullish and their investment horizons lengthen.
•
An unexpected war,
the election year, political activity, illness or death of an important person,
speculative activity in the market, the outflow of business-all are tremendous
psychologic factors in the market.
These reasons
result in that the prices of almost all equity shares register decline as fear
and uncertainty spread in the market.
Purchasing Power Risk
Purchasing power risk is the major
source of risk faced by investors. The investor select investments whose market
values change with consumer prices which compensates them for increase in cost
of living. If they do not, they will find that their total wealth has been
diminished. Inflation which destroys the economic power of investors over goods
and services. In essence, all investors have to be concerned with the command
that their invested money has over goods and services on a continuing basis.
Other Risks
Other types of risks are particularly
associated with investment in foreign securities. It involves monetary value
risk and political environment risk. The investors who invest in foreign
securities, have faced several risks. They are outlined as below:
•
A change in the
foreign government and repudiation of outstanding debt
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Nationalisation of business, firms,
that is, seizure by government
•
The desire but inability
of the foreign government or corporation to handle its indebtedness.
RECENT TRENDS OF INVESTMENTS
Exhibit 1.2 Recent Trends of
Investments
Recent Trends of
Investments
Recent trends of investments are
•
In India, increase in working
population, larger family income and consequent higher savings
•
Provision of tax incentives in
respect of investments in specified channels provided by government
•
Increasing tendency of people to
hedge against inflation that protected by government
•
Availability of large and
attractive investment alternatives developed in India
•
Increase in investment related
publicity in India
•
Ability to invest to get income
and capital gains etc.
PROBLEMS IN INVESTMENT
Exhibit 1.3 
Problems in
Investment
Problems in
Investment
•
Inadequate comprehension of return
and risk
•
Investment policy is not clearly
formulated
•
Careless decision making in
investment process
•
Simultaneously switching of
investment activity
•
Traditional trends affected to the
investment
•
Inadequate planning to buy cheap
stocks
•
Either over diversification or
underdiversification of stock
•
Investors are ready to buying
shares of familiar companies that problem for investment in future
•
Wrong attitude towards losses and
profits
•
Tendency and difficult to
speculate to investments
SPECULATION
According to the Oxford Dictionary, definition of
speculation includes the following meanings:
“A message expressing an opinion based on incomplete evidence.”
Speculation is the buying, holding
and selling of stocks commodities, collectibles real estate or any valuable
thing to profit from fluctuations
20 Investment Management
in its price as opposed to buying it to use. Sometimes
speculative purchasing can cause particular prices to rise above their “real
value” simply because the speculative purchasing is artificially increasing the
demand. Speculative selling can also cause prices to fall below “true value” in
a similar fashion. In some situations price rises due to speculative purchasing
cause further speculative purchasing in the hope that the price will continue
to rise.
Speculation Functions
Exhibit 1.4 Speculation
Functions
Speculation
Functions
•
Smoothen operating of price
fluctuation process
• It maintains temporary equilibrium
between capital supply and demand
•
Consideration of future business
prospects in determining the business value of existing capital funds
•
Equating the risk to return in the
infinitely varied utilisations of the social capital fund
Difference between Speculation and Investment
|
Basis
|
|
Speculation
|
|
|
Investment
|
|
|
Meaning
|
• A message expressing an
|
• The investing of money
|
||||
|
|
|
opinion
|
based
|
on
|
|
|
|
|
|
incomplete evidence
|
|
• Investor is a creditor of
|
||
|
Types of contract
|
•
|
Speculator is a owner of
|
||||
|
|
|
the speculation
|
|
|
the Investment
|
|
|
|
|
|
• In the case of invest-
|
|||
|
Length commitment
|
•
|
In the case speculation
|
||||
|
|
|
the length of commitment
|
|
ment the length of
|
||
|
|
|
|
commitment is a long
|
|||
|
|
|
is a short term only
|
|
|
||
|
|
|
|
|
term
|
||
|
|
|
|
|
|
|
|
|
Source of Income
|
•
|
The source of income is
|
•
|
The source of income
|
||
|
|
|
fluctuated and changes in
|
|
is earning from the
|
||
|
|
|
|
enterprise
|
|||
|
|
|
market price
|
|
|
||
|
|
|
|
•
|
Quantity of risk is the
|
||
|
Quantity of Risk
|
• Quantity of risk is the high
|
|||||
|
|
|
|
|
|
|
low
|
|
Stability of Income
|
•
|
Income is uncertain and
|
•
|
Income is very stable
|
||
|
|
|
erratic
|
|
|
•
|
Investor psychological
|
|
Psychological attitude
|
•
|
Speculator psychological
|
||||
|
of Participants
|
|
attitude is a daring and
|
|
attitude is
a cautious
|
||
|
|
|
and conservative
|
||||
|
|
|
careless
|
|
|
|
|
|
|
|
|
|
•
|
It is scientific analysis
|
|
|
Reasons for Purchase
|
•
|
It is unscientific analysis
|
||||
|
|
|
of intrinsic worth
|
|
|
of intrinsic worth
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
|
21
|
||
|
|
|
|
|
|
|
||
|
Difference
between Investor and Speculator
|
|
|
|||||
|
|
|
|
|
|
|||
|
Exhibit 1.5
|
Differene between Investor and Speculator
|
|
|||||
|
|
|
|
|
|
|
|
|
|
Base
|
|
Investor
|
|
Speculator
|
|
||
|
• Planning Horizon
|
•
|
An investor has a relatively
|
•
|
A speculator
has a very short planning
|
|
||
|
|
|
|
longer planning horizon. His
|
|
horizon. His holding may be a few to a
|
|
|
|
|
|
|
holding period is usually at
|
|
days to a few months
|
|
|
|
|
|
|
least one year
|
|
|
|
|
|
• Risk Disposition
|
•
|
An investor risk is less
|
•
|
A speculator risk is high
|
|
||
|
• Return Expectation
|
•
|
An investor usually seeks
|
•
|
A speculator looks for a high
rate of
|
|
||
|
|
|
|
moderate rate of return
|
|
return
|
|
|
|
• Basis for Decisions
|
•
|
An investor attaches greater
|
• A speculator
relies more on hear say,
|
|
|||
|
|
|
|
significance to fundamental
|
|
technical
|
charts and market
|
|
|
|
|
|
factors and
attempts a careful
|
|
psychology
|
|
|
|
|
|
|
evaluation of
the growth of the
|
|
|
|
|
|
|
|
|
enterprise
|
|
|
|
|
|
• Leverage
|
•
|
An investor uses his own
|
•
|
A speculator
normally takes to
|
|
||
|
|
|
|
funds avoid borrowed funds
|
|
borrowings, which
can be very
|
|
|
|
|
|
|
|
|
substantial,
|
to supplement
his
|
|
|
|
|
|
|
|
personal resources.
|
|
|
|
|
|
|
|
|
|
|
|
GAMBLING
According to the
Oxford dictionary, gambling means:
“Taken risk in the
hope of a favourable outcome.” Gambling most often refers specifically to the
wagering of money on games of chance or more broadly to engaging in high risk
behaviour. Gambling refers to an act of involving an element of risk. A
gambling involves taking on risk without demanding compensation in the form of
increased expected return.
Characteristics
of Gambling
Exhibit 1.6 Characteristics of
Gambling
Characteristics of
Gambling
An important characteristics of gambling
•
Gambling is a typical, chronic and
repetitive experience
•
Gambling absorbs all other
interests
•
The Gambler displays persistent
optimism without winning
•
The gambler never steps while
wining
•
The gambler eventually take more
risk
•
The gambler seeks and enjoys a
strange thrill from gambling
•
The gambler seeks pleasure and
pain from gambling
•
In gambling artificial and
unnecessary risks are created
22 Investment Management
The Position
Many investors are tax paying
individuals. The income tax rates vary from 10% to 30%. The tax rate on capital
gains of a long term lower at 20%. While the short term capital gains are
taxable at slab income tax rates. Long term capital gain and short term capital
gain depends on the nature of investments. In the case the investments in terms
of corporate shares and securities that holding for more than 12 months by the
investor will make them as long term nature. While other investments like as
house, land, gold etc. that holding for more than 36 months by the investor
will make them as long term nature. If shares and securities holding by the
investor less than 12 months. And house, land, gold which holding by the
investor less than 36 months will make them as short term capital gain.
Specialised Knowledge
In investment management, there is
need for a sort of expertise. Therefore, investment is both a science and an
art. If the return on investment is high, the degree of risk is also high with
expected returns and time frame investments. Time is an important element for
both tax purposes and for risk taken.
Specialised
knowledge, effective and proper management of investment involves:
•
Efficient use of
cash and proper distribution of money among different investments channels.
•
Proper analysis of risk and return
for each investments
•
Expertising
analysing information in terms of technical analysis and security analysis for
proper investment decisions that are based on a study of fundamentals,
expectations and mood of the markets.
Thus, the investment management involves various elements
for getting best returns in the form.
•
Study of tax implications
•
Time duration and
proper strategy for reducing taxes and increasing the after tax returns
•
Excellent knowledge for understanding
financial markets.
INVESTOR
“A person whose principal concern in the purchase of a security
is the minimizing of risk, compared to the speculator who is prepared to
|
Investment
|
23
|
|
|
|
accept calculated risk in the hope of
making better- than-average profits, or the ‘gambler’ who is prepared to take
even greater risks. More generally it refers to people who invest money in
investment products.”
“An individual who
makes investments. An investor can act on behalf of others, for example, stock
brokers or mutual fund managers make investments for others. Or else an
investor can make investments for ones own personal account.”
Qualities of
Investor
•
Safety Players
Safety Players who take the path of least resistance,
looking primarily for security and safety in their investments and doing what
has worked previously.
•
Entrepreneurs
Entrepreneurs are a particularly male-dominated profile driven
by a passion for excellence and commitment, and who are not motivated by money
in itself. Financial success is a scorecard and stock investment is a method of
implementing and demonstrating that success.
•
Optimists
Optimists are non-risk oriented, often near retirement,
seeking peace of mind, these are investors who don’t like to become too
involved with their own financial management as it would cause them stress and
reduce their enjoyment of life.
•
Hunters
Hunters are often educated, high-earning women with an
impulsive streak, a ‘live now attitude.’ They have a strong work ethic, much
like entrepreneurs, but lack the same confidence in themselves. They may
attribute their success to luck rather than ability.
•
Achievers
Achievers are conservative, risk-averse, these investors
like to feel in control of their money, with security and protection of their
assets a primary consideration. They are often, married, well educated,
high-earners who feel that hard work and diligence is more likely to bring financial
reward than investing.
•
Perfectionists
Perfectionists are afraid of making financial mistakes,
they tend to avoid investment decisions altogether. They lack confidence and
self-esteem, and have low pride in handling financial
24 Investment Management
matters, finding every conceivable excuse for not taking
action. For them no investment is without fault.
•
Producers
Producers are
highly committed to their work. They may earn less due to a lack of
self-confidence in money management. And with a lack of basic financial
knowledge they may have less available funds to invest. They do not appreciate
how to evaluate risk appropriately.
•
High Rollers
High Rollers are
thrill seekers, power seekers, creative and extroverted, they work hard and
play hard. They have to be involved in high risk investing with a large amount
of their assets. Financial security bores them - even though their actions may
have financially dangerous consequences.
•
Money Masters
Money Masters are
tending to have a balanced financial outlook that gives contentment and
security, these investors like to be involved with the management of their
money and their choice of investments, although they will take onboard good,
sound advice. They are determined individuals, not easily thrown of their
chosen course, and who don’t leave things to luck.
•
Adventurers
Adventurers are
confident ‘go for it’ types who are strong-willed and ready to take chances.
•
Celebrities
Celebrities are
those who need to be in the center of things and don’t like to be left out,
often constantly checking whether they should be in the latest fashionable
investment but may not really have any clue as to how to take control of their
finances.
•
Individualists
Individualists are
confident individuals who make their own decisions but who are methodical,
careful, balanced and analytical.
•
Guardians
Guardians are
investors, often older ones, who are cautious and intent on safeguarding their
wealth, shunning volatility or excitement.
•
Straight arrows
Straight arrows are
Mr. or Mrs. Average who do not fall into any of the extremes of the above
categories, who is somewhat
|
Investment
|
25
|
|
|
|
balanced in their investment approach and willing to take
on moderate risk.
Types of Investor
•
Cautious Investors
Cautious Investors are very conservative, this type of
investor has a need for financial security and will avoid high-risk ventures as
well as listening to professional advice, preferring to conduct their own
financial affairs. They don’t like to lose even small amounts of money and
never rush into investments, always giving financial opportunities a great deal
of thought.
•
Emotional Investors
Emotional Investors are easily attracted to fashionable
investments or ‘hot’ tips, these investors act with their heart and not their
head. A whim or a gut feeling leads their decisions, and they have great
difficulty disengaging from poor investments or cutting losses. They have an
unreasonable belief that things will come right in the end and often put their
trust in luck or ‘providence’ to safeguard their financial assets.
•
Technical Investors
Technical Investors are hard facts - numbers - lead this
type of investor to active trading based on price movements. They are
screen-watchers, sometimes obsessional, but their diligence can be rewarded if
they spot trends. They may also have a tendency to ‘need’ and buy the latest
technology as they are always looking for some edge.
•
Busy Investors
Busy Investors need to be involved with the markets, it
gives them a buzz when they check the
latest price movements, which may be several times a day. They have to keep
buying and selling - on rumours, on overheard gossip, from the mass of
newspapers and magazines they collect. Any tidbit of information they can glean
is imbued with significance and a cause to take financial action.
•
Casual Investors
Casual Investors are a laid-back attitude to investment,
these individuals are often hardworking and involved with work or family. They
tend to believe that once an investment is made it will take care of itself,
and that a good job or a profession is the way to make real money. They easily
forget that they own investment assets and rarely check on their financial
26 Investment Management
affairs. And, though they may leave
the running of their investments to professional advisors, they haven’t been in
contact with them for years.
•
Informed Investors
Informed Investors
use information from a variety of sources and keep an ongoing watch on their
investments, the markets and the economy. They listen carefully to financial
opinions and expert assessments, and will only go against market fashion, as a
contrarian, after weighing up all the pros and cons. They are financially
confident and have faith in their decisions, knowing that knowledge and experience
will always win out to give them long-term profits.
•
Passive Investors -
Passive Investors
are characterised as individuals who have become wealthy passively - by
inheriting, by a professional career or by risking the money of others rather
than their own money. To these investors security is more important than risk.
In addition, certain classes of occupation are more likely to contain passive
investors. For example, non-surgical doctors, corporate executives, lawyers and
accountants who work in companies. Reasons for this are that these individuals
are less likely to have high financial resources at an early stage in their
careers, having had to delay earning good salaries in order to study or having
to repay student loans. Once earning a decent wage, they are then more careful
with their money, having a greater need for security. Anyone, therefore, with
reduced financial recourses is likely to be more risk conscious and hence, a
passive investor. For these individuals it’s important to hang on to their
money.
Passive investors
make good clients because they tend to trust their financial advisor and are
more likely to delegate the running of their financial affairs. And because
they are risk averse, they tend to like diversified portfolios of investments
in quality companies or investment products. However, they can believe that an
investment is more risky than it is, which may keep them out of potentially
lucrative opportunities. Passive investors are also more likely to need the
approval of others and are unlikely to take a first step into unknown
investment territory by being a contrarian. Consequently, they are more likely
to follow the investment herd when it comes to stock market investment and
stick to following the trend.
|
Investment
|
27
|
|
|
|
•
Active Investors
According to Barnwell, Active Investors are those who have
achieved significant wealth, or earned well, during their own lifetime. They
are more likely to take risks in investing because they have previous
experience of taking risks in their previous wealth creation. These individuals
have a high-risk tolerance and less of a need for security. They also need to
feel in control of their own abilities. Once they feel they are losing control
of an investment situation, their risk tolerance reduces. By being actively
involved and in control, these investors feel
they are reducing risk. However, such involvement may actually be detrimental
as it is likely to be a source of irritation to their investment advisor who
cannot get on with the business of running their clients affairs due to
constant questioning and harassment. The classes of occupation that are likely
to be active investors include: small business owners who have developed their
own businesses rather than inherited, medical surgeons, independent
professionals, such as lawyers or accountants, who work for themselves rather
than a large firm, entrepreneurs, and self-employed consultants.
Active investors are more likely to get personally
involved with the running of their financial affairs, and may believe they know
more than their advisor does. They are less likely to delegate the maintenance
of those parts of their investment portfolio in which they believe they have
experience or have had personal success. However, these individuals are more
likely to be contrarian in their stock picking habits and have less need to be
completely diversified. Age tends to soften their need to be constantly in
control, so that older clients may be more malleable and open to their advisors
suggestions.
QUESTIONS FOR DISCUSSIONS
1.
Define term investments.
2.
Outline the reasons
for the emerging popularity of today’s investment world.
3.
Define the term speculation.
4.
Define the term gambling.
5.
Discuss the characteristics of
investment.
6.
Discuss the characteristics of
investors.
