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evidence of debt or equity. The official definition, from the Securities Exchange Act of 1934, is: "Any note, stock, treasury stock, bond, debenture,certificate of interest or participation in any profitsharingagreement or in any oil, gas, or other mineral royalty orlease, any collateral trust certificate, preorganization certificate or subscription, transferable share, investmentcontract, voting-trust certificate, certificate of deposit, for asecurity, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities(including any interest therein or based on the valuethereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating toforeign currency, or in general, any instrument commonly known as a 'security'; or any certificate of interest or participation in, temporary or interim certificate for, receiptfor, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note,draft, bill of exchange, or banker's acceptance which has amaturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited."
Definition: Securities are any form of ownership that can be easily traded on a secondary market, such as stocks and bonds. It also includes their derivatives, such as futures contracts,options, or mutual funds. Securities are traded on a secondary market. This includes the stock market, bond market, and U.S. Treasuries market. Traders must be licensed to buy and sell securities to assure they are trained to follow the laws set by the Securities and Exchange Commission (SEC). Securities traders are always trying to find ways to make a higher return with less risk. Therefore, innovative derivatives of basic stocks and bonds are often developed. These include futures contracts, and call and put options. Even mortgages have been packaged to sell on the secondary market - these are known as mortgage-backed securities. Securities help the economy by making it easier for those with money to find those who need investment capital. By making trading easy and available to many investors, securities make markets more efficient. It is easy for investors to see which companies are doing well, and which ones are not. Money can swiftly go to those companies that are growing, thus rewarding performance and providing an incentive for further growth. Also Known As: stocks, bonds, futures contracts, options
When you consider the different kinds of people out there, you will find that not everyone is a great investor. There are some who have not even started to invest, others who are new to the investing trade, and those who are well advanced along the path of successful investor.
You will discover basically six different types of investors in America and the capitalist world. In the subsequent paragraphs, you will figure out what investor level best describes you.
will only serve to make you a better investor. This is a good level to find yourself at, but there are higher and better stages of investors that you can become.
effective strategy. Henry Ford and Thomas Edison were such great successful capitalists in the past. Steve Jobs and Richard Branson are present day examples of them. So where do you fit in this line up of different investors, and what can you do to move through the different stages now?
here are different styles and types of investors that exist in the stock market. Investors use the stock market to build their investment portfolio so that they can see a long term profit that takes place over a long period of time. Someone who is just using the stock market to make money quickly for a short period of time is called a trader. Members of an investment group fall into the first category: they are in the investment market for the long haul. There are different types of investors that use different methods to analyze the market and the market conditions. These three methods of analyzing the market are: Technical analysis. This method of analysis is used by a momentum investor. Technical analysis looks at the price fluctuations that occur in the stock market. The investor bases the decision to buy or sell on what he feels the price will do next. Fundamental analysis #1. Fundamental analysis is used by the growth investor. This type of analysis decides if a certain company is a good investment based on the earnings of the company, growth sales, and margins of profit. Fundamental analysis #2. A value investor uses this type of analysis. This method of analysis is similar to the analysis that a growth investor uses but is slightly different. A value investor takes a close look at those companies in the stock market that have a low value. The investor looks at stocks that are currently cheap and low but that have the potential to make a good comeback. Most investment clubs use the fundamental method of analysis to make most of their investing decisions.
They find companies that are listed on the stock market that show good growth, profit, and earnings but that are still cheap to buy and haven't yet reached their potential. Members of the investment club buy this stock and hold on to it for several years so long as the fundamentals, as listed previously, continue to hold strong. This type of investment strategy is called buy and hold.
To enable the evaluation and a reasonable comparison of various investment avenues, the investor should study the following attributes: 1. Rate of return 2. Risk 3. Marketability 4. Taxes 5. Convenience Each of these attributes of investment avenues is briefly described and explained below. 1. Rate of return: The rate of return on any investment comprises of 2 parts, namely the annual income and the capital gain or loss. To simplify it further look below: Rate of return = Annual income + (Ending price - Beginning price) / Beginning price
The rate of return on various investment avenues would vary widely. 2. Risk: The risk of an investment refers to the variability of the rate of return. To explain further, it is the deviation of the outcome of an investment from its expected value. A further study can be done with the help of variance, standard deviation and beta. 3. Marketability: It is desirable that an investment instrument be marketable, the higher the marketability the better it is for the investor. An investment instrument is considered to be highly marketable when: It can be transacted quickly. The transaction cost (including brokerage and other charges) is low. The price change between 2 transactions is negligible. Shares of large, well-established companies in the equity market are highly marketable. While shares of small and unknown companies have low marketability. To gauge the marketability of other financial instruments like provident fund (which in itself is nonmarketable). Then we would consider other factors like, can we make a substantial withdrawal without much penalty, or can we take a loan against the accumulated balance at an interest rate not much higher than our earning rate of interest on the provident fund account. 4. Taxes: Some of our investments would provide us with tax benefits while other would not. This would also be kept in mind when choosing the investment avenue. Tax benefits are mainly of 3 types: Initial tax benefits. This is the tax gain at the time of making the investment, like life insurance. Continuing tax benefit. Is the tax benefit gained on the periodic return from the investment, such as dividends. Terminal tax benefit. This is the tax relief the investor gains when he liquidates the investment. For example, a withdrawal from a provident fund account is not taxable. 5. Convenience: Here we are talking about the ease with which an investment can be made and managed. The degree of convenience would vary from one investment instrument to the other.
Rate of Return = 10% + 15% = 25% Here, current yield is 10% and capital gain is 15%. Current yield is more stable compared to capital gains. Capital appreciation may not always be there. In bad markets, it is quite possible to have capital loss as well. Risk: Rate of return from different investment options vary a lot. Remember the famous quote, More the risk and more the profits. It is a general phenomenon that more return is expected from a high risk investment. Risk means uncertainty of returns. Statistically, the risk is judged based on parameters like variance, standard deviation and beta. More a security deviate from its expected outcomes, risk is considered to be high. Challenge for a finance manager while investing funds is to achieve high returns on investments while keeping the risk at lowest possible levels. Liquidity: Liquidity means marketability of an investment. For example, equity shares of a big company can be easily liquidated in the stock markets. On the other hand, money invested in an asset (machinery) cannot be liquidated as easily as the equity share. An investment is considered highly marketable or liquid it can be easily transacted with low transaction cost and low price variation. A finance manager looks for more liquid investments when the funds are available for short period. Liquidity is always given a preference because it helps the managers remain flexible. Tax Benefits: It is true for some investments and not for all. Most of the countries have tax incentives for particular investments except tax free countries. So, for investments which have tax benefits, it is an important consideration because taxes form major part of their expenses. Convenience: Convenience means ease of investment. When an investment can be made and looked after easily, we consider it as convenient investing. For example, it is easy to invest in equity shares compared to real estate because real estate involves lot of documentation and legal requirements. So, the analysis of investments attributes viz. Return, Risk, Liquidity, Tax Benefits and Convenience answers to the central question Which investment alternative should be opted? Investments are an integral part of any business. Every company has investments in many forms whether they are in projects or assets. Income from investments has a direct impact on profitability of the company
and it is one of the primary responsibilities of a finance manager to effectively invest the companys funds to optimize its profits. Funds are invested for short term or long term depending on the availability or idleness of funds. To explain further, sometimes companys concern is to do expansion and therefore it looks out for both acquisition and investment of funds in profitable projects or else it uses its idle cash to invest in other assets or other companies through equity shareholding etc. On the contrary, sometimes in seasonal businesses, the excess of working capital is invested in short term investment options mostly consists of money market instruments. In essence, for effective investment, investment alternatives need to be analyzed or evaluated. Following attributes of investments can be taken into consideration for evaluating the investments. Return: A good rate of return from an investment is the first and the foremost condition for effective investment. The rate of return is the ratio of sum of annual income and price appreciation to purchase price of the asset or investment. Rate of Return = Annual Income + (Ending Price Purchasing Price) Purchasing Price Let us illustrate it with an example. Suppose a person has invested in equity shares of a company A at the price of Rs. 100. During the year, company A pays a dividend to its shareholders of Rs. 10 and price of the share at the end of the year is Rs. 115. Rate of Return = 10 + (115 100) 100 = .25 or 25%. For more in-depth analysis, the rate of return can be broken into two parts: Current Yield and Capital Gain/Loss. In the current example,
Speculative scrip
Debentures or Bonds: Debentures or bonds are long term investment options with a fixed stream of cash flows depending on the quoted rate of interest. They are considered relatively less risky. Amount of risk involved in debentures or bonds is dependent upon who the issuer is. For example, if the issuer is government, the risk is assumed to be zero. Following alternatives are available under debentures or bonds: Government securities Savings bonds Public Sector Units bonds Debentures of private sector companies Preference shares Money Market Instruments: Money market instruments are just like the debentures but the time period is very less. It is generally less than 1 year. Corporate entities can utilize their idle working capital by investing in money market instruments. Some of the money market instruments are Treasury Bills Commercial Paper Certificate of Deposits Mutual Funds: Mutual funds are an easy and tension free way of investment and it automatically diversifies the investments. Mutual fund is an investment mix of debts and equity and ratio depending on the scheme. They provide with benefits such as professional approach, benefits of scale and convenience. In mutual funds also, we can select among the following types of portfolios: Equity Schemes Debt Schemes Balanced Schemes Sector Specific Schemes etc. Life Insurance: Life insurances are one of the important parts of investment portfolios. Life insurance is an investment for security of life. The main objective of other investment avenues is to earn return but the primary objective of life insurance is to secure our families against unfortunate event of our death. It is popular in individuals. Other kinds of general insurances are useful for corporates. There are different types of insurances which are as follows: Endowment Insurance Policy Money Back Policy Whole Life Policy Term Insurance Policy Real Estate: Every investor has some part of their portfolio invested in real assets. Almost every individual and corporate investor invests in residential and office buildings respectively. Apart from these, others include: Agricultural Land Semi-Urban Land Commercial Property Raw House Farm House etc Precious Objects: Precious objects include gold, silver and other precious stones like diamond. Some artistic people invest in art objects like paintings, ancient coins etc. Derivatives: Derivatives means indirect investments in the assets. Derivatives market is growing at a tremendous speed. The important benefit of investing through derivatives is that it leverages the investment, manages the risk and helps in doing speculation. Derivatives include:
Non Marketable Securities: Non marketable securities are those securities which cannot be liquidated in the financial markets. Such securities include: Bank Deposits Post Office Deposits Company Deposits Provident Fund Deposits
Investment Management Can Lead to Better Return / Portfolio Management- Key for Enhancing Returns
he complex world of investments needs meticulous decision making. This can only be assured with the help of investment management. Making investment, calls for decision making, which in turns call for planning and controlling. Let us have a look how investment management works. The investment alternatives for any person are divided into real asset and financial asset. Real assets deals with property, precious objects etc. Though, real asset takes a large pie of money when it comes to investment, major efforts for making investment decision are dedicated to financial assets. Any investment has two aspect time and risk. An investment in asset is a sacrifice of current consumption to get some return in future. Assets are expected to generate cash flows and the probabilities of variation in the expected cash flow in future give rise to risk. The riskiness of the asset can be measured alone as well as a part of portfolio. The magic of diversification can be seen when assets are assessed in a portfolio. A portfolio is a group of assets. If compared, generally it is found that the risk attached to an asset is more than the risk of a portfolio. This is because portfolio gives an opportunity to diversify risk. Diversification of risk does not mean that risk will be eliminated. With every asset, two types of risk are attached, diversifiable risk and market risk. Even an optimum portfolio cannot eliminate market risk, but can only reduce or eliminate the diversifiable risk. As soon as risk reduces, the variability of return reduces leading to better returns. So, portfolio theory emphasizes that instead of investing your money into one asset, spread it between different investment alternatives. However, what amount should be allocated to what asset class or alternative depends on individuals investment objective and constraint. Within the parameter of ones objective, a better return can be achieved with the help of proper investment management. As soon the money is divided into different assets, the attributes of all these assets form base for assessing portfolio, for e.g. risk & return of individual investment avenue. The expected return of a portfolio is the weighted average of the expected returns on the individual asset with weights being the percentage of portfolio or the amount of investment in individual asset. Please note that the portfolio risk is not the weighted average of the risks of individual securities. Rather risk is measured by taking into consideration the covariance of securities. Therefore, mixing asset classes can help moderate the risk. Broadly, the investment in financial asset can be divided into equity, debt and cash or cash equivalent. These alternatives play an important role in building a portfolio. Since, one helps in offsetting the weakness of other. But, even within these broad financial assets, there are many alternatives available. So, now the question arises, where to invest? or which asset to select? Just building portfolio will not ensure better return. So, before deciding the specific securities among different asset class proper analysis should be carried on. In case of stocks, generally fundamental or technical analysis is adopted.
Whereas, in case of debt, factors like yields, rating, tax shelter and liquidity are taken into consideration. A part of portfolio is also allocated to cash and cash equivalent for liquidity and contingencies or any time being opportunity. Investment management does not just end with building the portfolio, but the work starts here. Now, one needs to regularly review and revise it. Also, performance evaluation of the same is crucial because feedback of results can only ensure you whether you have made right investment decisions or not. No time is too late to build a portfolio because it can be tailored as per the needs and objectives of individual. However, a better return can be achieved, if one believes and follow the process of investment management.