Upload
suct-wadi
View
223
Download
0
Embed Size (px)
Citation preview
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 1/41
Introduction to Investment
1
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 2/41
2
� Investment can be viewed as sacrificeof present consumption in expectation
for a handsome return to be reaped inthe future.
� Definition : foregoing the presentconsumption in expectation of having a
greater consumption opportunities inthe future.
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 3/41
� Definition : claims that organizations sell in order to
finance their financial needs, usually evidenced by legal
documents.� Example:???
� Advantage: the existence of an efficient market resulting
high liquidity (easy to buy and sell).
� Disadvantage: need to have a full understanding on how
the markets works and must go through broker or remiser
in order to get access into market.
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 4/41
� Defi iti : t i l ass ts/ si al capitals t at generate
income.
� ample:
� dvantage: owning a real asset t at has both investment and
aesthetic val e.
� Disadvantage: lack of the existence of an efficient market to
sell real assets on short notice. Involve paperwork, middlemanand commission to be paid.
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 5/41
ISSUES INVESTOR SPECULATOR GAMBLER
Definition
Process of committing funds
into one or moreassets to obtain
return
Process of committing funds
into one or moreassets and betting
to obtain return
Betting on certainoutcome that
depends on luck
PurposeWay to earn anincome
Income andentertainment
More onentertainment
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 6/41
ISSUES INVESTOR SPECULATOR GAMBLER
Time horizonLong run (at leastone year)
Short-termoriented (only a
few days, weeks ormonths)
Very short-timeperiod
Investmentdecision
Make a carefulanalysis
Based on rumors,intuitions or
simple market
analysis
Depend on luck
Risk assume
Low to moderaterisk, therefore low
and moderatereturn
Moderate to highrisk-moderate to
high return
High risk, highreturn
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 7/41
ISSUES INVESTOR SPECULATOR GAMBLER
Incomeexpectation
Moderate capitalappreciation
Rapid capitalappreciation
Rapid capitalappreciation
Sources of funds
Prefer use own
money rather thanborrowing fundsthrough financial
institutions
Uses own moneyto buy securities
and sometimesborrows money
from moneybroker or financial
institutions
Usually borrows
money frommoney broker orfinancial
institutions
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 8/41
RISK RISK RETURN RETURN TIME TIME
INVESTMENT INVESTMENT Substantial /Substantial /
LowLowSubstantial /Substantial /
LowLowMedium /Medium /
LongLong
SPECULATION SPECULATION Substantial /Substantial /HighHigh
Substantial /Substantial /HighHigh
Short /Short /MediumMedium
GAMBLING GAMBLING HighHigh HighHigh ShortShort
SAVINGS SAVINGS LowLow LowLow Short/MediumShort/Medium
8
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 9/41
� Mainly determined by the investors· personal characteristics such
as age, sex, health, family responsibilities and past experiences.
�
T hese
factors
will
affect
the
investors·
willingness
to
assume
risk.
� Investors invest in any kind of investment program fro two main
goal:
1. Personal goal
2. Financial goal
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 10/41
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 11/41
3 . Res rv r r y: all indiv idual s hould hav s kind of
s av ings r r s rv und to meet any unexpected needs in the
futur .
4. Childr ·s ducation: hildr ·s ducation is tting mor and
mor xpens iv wadays . Inv s tment pr r ams pr v ide the
oppor tunities to s av y r the childr ·s ducation.
5. Pr v iding for r tir t: to pr par r a comfor tabler tir t and to ens ur that we hav s ufficient funds to pay
any dical expenditur s and to liv r tably dur ing
r tir t per iod.
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 12/41
1. Safety ri i l: mai t i i g t he ori gi l val ue of t he
i vest ment d pr t ti g t he pur hasi g power t he funds.
Invest ment r gr m shoul d be r dily mar ket bl d has pri st bility .
2. Assur i me and fi i l i dependence: i vest r s will
have a st bility i me, exampl , i t r st d di vi dend.
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 13/41
3 . Pr t ti i st i l ti : i l ti will r duce a pur hasi
power . T he val ue of money is decr si s ti me goes .
4. Liq ui dit y of port li s: meas ur d by how eas y can s uriti s be
convert d i t s h wit hout l si its pri i pal .
5. P rt li di versi i ti : ¶don·t put your s i bas ket ·. If
port li is pr perl y di versi i d, t he ris k i vol ved can be
s uffi i tl y r duced.
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 14/41
I v st tlicy
I v st talysis
al ati f c riti s
rtf listr cti
14
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 15/41
(i) Personal objectives
- insurance protection
- providing a home
- liquidity reserves/reserve for emergency
- large needs before retirement/childrens education
- providing for retirement
(ii) Financial objectives
- safety of principal
- assurance of income
- protection against inflation
- liquidity of portfolios
- portfolio diversification
15
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 16/41
� Involves comparing the type of industry and
the kind of security whether fixed or variable.
� To understand the future share price
behavior, the expected return and riskinvolved.
16
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 17/41
� Determine the value of the securities base on the presentvalue of future stream of income.
�
Compared to the current market price to determine theattractiveness of the security.
� If value of security is underprice should be bought, helduntil price is right for reselling.
� If value of securities is overprice should be sold.
17
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 18/41
� A group of investment with different patterns
of returns over time.
� Requires knowledge about personal and
financial objectives should considering thetiming, selection of investment and allocation
of savings to different investment.
18
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 19/41
Financial
Psychological
Management
19
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 20/41
� Refers to whether an investor can allocatesome portion of savings for investment
activities.
� More savings to cater for present and futurefinancial requirement, less financialconstraints.
20
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 21/41
� Refers to how well an investor can absorb the
consequences of investment decision such as
emotions like greed, fear and caution.
� If investors cannot control their emotion,might end up making wrong and costly
investment decision.
21
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 22/41
� Refers to the lack of expertise in managing theinvestment activities.
� Might not have the time or proper knowledgeto analyze the investment alternatives.
22
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 23/41
RISK
Def: uncertainty about the size of future return on a principal amount of money invested.
RETURN
Def: the future value amount that we are going to get froman investment activity.
RISK
&RETURN
TRADEO
FF Def: Risk and return are positively correlated.Higher rate of return, High risk the investment alternative.
23
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 24/41
(1) Risk Averse-- Conservative type.- require an additional expected return to compensate the high
risk that involved.- will make sure that they will get a return for each dollar they put in
an investment.
(2) Risk T aker -- Aggressive type.- Willing to accept a large amount of risk for a small increase in
the expected return.
(3) Risk N eutral -- Moderate type.- Would be satisfied if they will get only the principal that they put inthe investment.
24
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 25/41
25
RISK
S stem tic /Extern l /
Uncontroll ble /Nondiversified risk
Uns stem tic /
Intern l /Controll ble /
Diversified risk.
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 26/41
� Uncontrollable and external factors affecting theprice of securities.
� Cannot diversified.� E.g.: changes in economy, politic & social, business,
interest rate, inflation and war.� Three sources:
i. Purchasing power/inflation risk
ii. Market riskiii. Interest rate risk
26
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 27/41
� When inflation rate increases, the amount of principal and income received will not provide thesame purchasing power as its original value.
� If the price of goods and services rises due to theincrease in inflation rate (rising cost of production &excess demand), the investor actually losing thepurchasing power.
�
Affects investor who buy long-term fixed incomesecurities and who holds surplus funds in the bank.
27
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 28/41
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 29/41
� Possibility of loss due to fluctuations in stock price.� The decrease in value of the principal invested
caused by changes in prices of securities due to
tangible and intangible events.� Such as political, sociological and economic factors.
Psychological factors such as rumors, speeches byimportant people.
29
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 30/41
� Investing in growing firm and financially sound because priceof shares potentially will increase in the long run.
� Study and carefully examine the past security price behavior.
E.g. Stocks with growth patterns in the past will continue todo so in the future provided there is no change in thecompanys expectation of its product and market.
� Buy securities at the right time.
Price low BUY Price high SELL
30
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 31/41
� Fluctuation of interest rate that will affect thefuture market values & size of future income.
� Loss of the principal value because of thechange in the interest rate paid on newlyissued securities.
� When interest rate rises, lower the stockprices ² less demand from buyers.
31
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 32/41
� Invest in short-term securities to minimize
the effect of fluctuation in interest rate. The
closer the bond to its maturity date, the morecertain will be the price.
� Invest at different time on securities with
different maturity periods.
32
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 33/41
� Controllable and internal factors affecting a
particular industry.
� Can diversified.� E.g.: labor strike and mismanagement.
� Tw o sources:i. Business risk
ii. Financial risk
33
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 34/41
� Relate to the efficiency of the management in
handling the business (internal) and how it
responds to factors outside its control(external) such as business cycle.
� Affect the general operation of the companysuch as increase in operating cost, reducing
the operating profit.
34
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 35/41
� Invest in leading companies in the industry or
smaller firms with low earning record thatshows signs of improvement.
� Diversify by buying securities from different
companies of different industries.
35
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 36/41
� Refers to the method through which thecompany plans its financial structure.
�
Company that borrows to finance itsoperation carries high financial risk because ithas to bear high interest expense which affectlow net profit resulting low earning per share
(EPS).� The more debt the company has, the riskier it
is for shareholders.
36
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 37/41
� Investing in firms that use more equityfinancing than debt financing.
37
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 38/41
38
TOTAL RISK
SYSTEMATIC RISK UNSYSTEMATIC RISK
1. Due to common factor.2. Affects return on all securities.3. Cannot be protected against through
diversification.4. Sources:
a) Purchasing power/inflation riskb) Market riskc) Interest rate risk
1. Due to unique factor.2. Affects return on one security.3. Can be protected against through
diversification.4. Sources:
a) Business riskb) Financial risk
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 39/41
� Investment is defined as making a current commitment of funds in order to enjoy a
higher level of consumption in the future.
� Investing and speculating are different mainly because investors expect not more
than a fair return for the risk that they undertake whereas speculators assume high
risk with an intention to make quick profit through rapid increase in the price of
the securities.
� A well-informed investor with well-defined investment objectives and full
understanding of financial constraints has a greater chance of making a successful
investment decision.� Risk and return is positively correlated, the higher the risk the higher the return
and vice-versa.
� An investor·s attitude toward risk can be explained by 3 terms: risk averse, risk
taker and risk neutral.
39
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 40/41
� Two types of risk: systematic and unsystematic risk.
� Sources of systematic risk: purchasing power/inflation risk, market risk and
interest rate risk.
�
Purchasing power risk can be avoided by: including more variable-incomesecurities in the investment portfolio, holding more short-term securities and
investing more in real assets.
� Market risk can be avoided by: avoiding securities with volatile price movement,
following the principal of buy low sell high and not being panic easily when the
price of securities go down.
� Interest rate risk can be avoided by: choosing short-term fixed-income securities,
buying securities with different maturity period and holding securities until
maturity.
40
8/6/2019 CHAPTER 1_Introduction to Investment
http://slidepdf.com/reader/full/chapter-1introduction-to-investment 41/41