Chapter 1 Lecture 1

What is Investments? Why study Investments? What is the terminology of investments? What is the investment environment? What is the Investment decision process? What are important considerations in Investment decisions?

Investment Commitment of funds to assets which will be held over a future period. Field of investments Management of an investors wealth Investments deals with 2 major areas Analysis Management

4 BASIC AREAS IN FINANCE Corporate Finance Investments Financial Institutions International Finance

Answers 3 main questions?

Answers 3 main questions? What long-term projects are appropriate to invest in? e.g. What line of business to be in & which assets should be chosen? What is the best way to finance these projects? e.g. Borrow money OR dilute ownership How projects financial activities will be managed? e.g. collecting from customers OR paying suppliers

Answers 3 main questions?

Answers 3 main questions? What determines price of a financial asset? e.g. What is the value of a share of stock or Bond? What are the risks & rewards of a financial asset? e.g. is the return on investment reasonable given its risk? What combination of different assets should be held? e.g. what to buy or sell, how much & when?

Investments - Deals with Financial Assets

Covers 3 main profession areas
Financial Advisors/Stockbrokers
e.g.

helping with buy & sell decisions

Portfolio Managers
e.g.

professional money managers for individuals or corps researches & evaluates individual investments in depth

Security Analyst
e.g.

Covers a wide range of financial activities Banks e.g. deals with loans, customer deposits, etc Insurance Companies e.g. receives premiums & invests money

Deals with same areas from an international perspective

Corp finance Investments Financial Institutions

What are major types of Financial Assets?

DIRECT INVESTING
Non-Marketable

INDIRECT

INVESTING
Investment

securities Money Markets Capital Markets Derivatives Markets

Companies Mutual Funds Stock, Bond Funds

 Fixed Income (Bonds) Treasuries Agencies Municipals Corporate Equities Preferred Stock Common Stock

The following are some reasons: Make better financial decisions Be a finance professional Make money???!

What is the investment terminology?

Financial Assets (Securities) Real Assets Marketable Securities Portfolio Portfolio Management Efficient Market Hypothesis

More basic terms Risk Expected Return Realized return Security Analysis Passive Investment Strategy Active investment Strategy

Two Most important elements of investment decisions :

Two Most important elements of investment decisions : Return The % change in wealth from beginning till end of period. Return = (End period wealth Begin period wealth)/Begin period wealth Risk Main constraint for investors chance of loss The probability actual outcome will be different (less) than expected outcome

What is the investment decision process?

Investors manage

(ER) Any level of Expected Return and Risk can be attained

The Tradeoff Between ER ER Bonds risk at a cost - lower and Risk expected returns
Risk-free Rate Risk

Stocks

There are 2 main Types: Fundamental Analysis Technical Analysis

There are 2 main Types: Fundamental Analysis Valuing a company based on company specific information (dividends etc) Technical Analysis Studying securities historical market prices to predict future prices.

Determinants of Portfolio Performance

Approx 94% of variability of a fund's investment return is due to asset allocation!!

There are 2 main areas: Financial Markets & the economy a) Consumption Timing b) Allocation of Risk c) Separation of ownership Clients of the Financial System a) Household Sector b) Business Sector c) Government Sector

What are Financial Markets?

Financial Market

Purpose of Financial Markets

What are Financial Markets?

Financial Market Mechanism to bring Buyers & Sellers together dealing in Debt, Equity & other financial products. Composed of all institutions and procedures for bringing buyers and sellers of financial instruments together. Purpose of Financial Markets The purpose of financial markets is to efficiently allocate flow of funds from savings to ultimate users.

What are Financial Markets? Basic Types Primary Markets (underwriters)

Secondary Markets (create

liquidity)
Dealer Vs Auction markets

Cash Flows between the Firm and the Financial Markets Total Value of
Firms Assets
B. Firm invests in assets Current Assets Fixed Assets

Total Value of the Firm to Investors in the Financial Markets

Financial Markets Short-term debt Long-term debt Equity shares

A. Firm issues securities

E. Retained cash flows

F. Dividends and debt payments

C. Cash flow from firms assets

D. Government

Some important aspects: The Great Unknown Global Aspect Institutional Investors

Thank You for your time & patience