Introduction Of Investment-Investment Managment And Portfolio-Lecture Notes, Study notes of Investment Management and Portfolio Theory

Download Introduction Of Investment-Investment Managment And Portfolio-Lecture Notes and more Study notes Investment Management and Portfolio Theory in PDF only on Docsity! y g ( ) Lesson # 1 INTRODUCTION OF INVESTMENT Investment is a topic in which virtually everyone has some native interest. At a college campus, a number of students from astronomy to zoology seek to gain admission to an elective investments class in the College of Business Administration. Evening adult education classes with titles such as “Fundamentals of Stock Market” are common. Most readers of this book are enrolled in a college-level investment course. For many students, this course will be the only time they ever formally study investments in a classroom sitting. The success of an individual investment program has lifelong ramifications, so soaking up as much of this material as possible can be advantageous. Aristotle said, “The educated differ from the uneducated as much as the living from the dead”. This idea is especially true with regards to investment education. INVESTING DEFINED: An economist says when people earn a dollar; they do one of two things with it: they either consume it or save it. A person consumes a dollar by spending it on something like a car, clothing, or food. People also consume some of their money involuntarily because they must pay tax; a person saves a dollar by somehow putting it aside for consumption at a later time. A distinction can be made between saving and investing. Saving involves putting money away with little, if any, risk saving dollars. Putting money in a bank certificate of deposit or a passbook account is saving. A saver knows the future return, and the account is probably insured by the Federal deposit Insurance Corporation (FDIC), a government agency that protects depositors against bank failure. In the short-run, saving involves few worries. Investing also involves putting money away, but in a risky endeavor. Buying shares of stock in a New York Stock Exchange listed company is investing. If an investor choose to let a broker hold the shares and just send an account statement each month, his or her investment is protected against theft, loss, or brokerage firm failure by the Securities Investor Protection Corporation (SIPC), but not against a decline in value. Depending on the particular stock purchased and other holdings, an investor may have plenty to worry about. Both saving and investing amount to consumption shifting through time. By not spending a dollar today, a person is able to spend more lately, assuming of course, the person saved or invested wisely. Investing is risky but saving is not. INVESTMENT ALTERNATIVES: Assets: Assets are things that people own. The two kinds of assets are financial assets and real assets. The distinction between these terms is easiest to see from an accounting viewpoint. A financial asset carries a corresponding liability somewhere. If an investor buys shares of stock, they are an asset to the investor but show up on the right side of the corporation’s balance sheet. A financial asset, therefore, is on the left-hand side of the owner’s balance sheet and the right-hand side of the issuer’s balance sheet. docsity.com y g ( ) A real asset does not have a corresponding liability associated with it, although one might be created to finance the real asset. Financial assets have a corresponding liability but real assets do not. Securities: A security is a legal document that shows an ownership interest. Securities have historically been associated with financial assets such as stocks and bonds, but in recent years have also been used with real assets. Securitization is the process of converting an asset or collection of assets into a more marketable forum. Security Groupings: Securities are placed in one of three categories: equity securities, fixed income securities, or derivative assets. 1) Equity Securities: The most important equity security is common stock. Stock represents ownership interest in a corporation. Equity securities may pay dividends from the company’s earnings, although the company has no legal obligation to do so. Most companies do pay dividends, and most companies try to increase these dividends on a regular basis. 2) Fixed Income Securities: A fixed income security usually provides a known cash flow with no growth in the income stream. Bonds are the most important fixed income securities. A bond is a legal obligation to repay a loan’s principal and interest, but carries no obligation to pay more than this. Interest is the cost of borrowing money. Although accountants classify preferred stock as an equity security, the investment characteristics of preferred stock are more like those of a fixed income security. Most preferred stocks pay a fixed annual dividend that does not change overtime consequently. An investment manager will usually lump preferred shares with bonds rather than with common stocks. Conversely, a convertible bond is a debt security paying a fixed interest rate. It has the added feature of being convertible into shares of common stocks by the bond holders. If the terms of the conversion feature are not particularly attractive at a given moment, the bonds behave like a bond and are classified as fixed income securities. On the other hand, rising stock prices make the bond act more like the underlying stock, in which case the bond might be classified as an equity security. The point is that one cannot generalize and group all stock issues as equity securities and all bonds as fixed income securities. Their investment characteristics determine how they are treated. For investment purposes, preferred stock is considered a fixed income security. 3) Derivative Assets: Derivative assets have received a great deal of attention in the 1990s. A derivative asset is probably impossible to define universally. In general, the value of such an asset derives from the value of some other asset or the relationship between several other assets. docsity.com