1 FIN 406 Outline Investor vs Speculator Participants in the Investment Process Steps in Investing Types of Investors and Investments

2 FIN 406 A Investor Interested in the L-R holding Assume moderate risk Interested in dividend, interest income as well as capital gains. Moderate rate of return. Decision to buy is made after careful analysis of the past performance Use own money Speculator Interested in the S-R holding Assume high risk Primarily interested in capital gains. High rate of return. Decision to buy is based on intuitions, rumor, charts or market analysis. Usually borrowed money.

3 FIN 406 B Participants in the Investment Process –1. Federal, state and Local Governments Capital expenditure, operating needs, etc. “Net demander of funds”? –2. Business Both S- T and L-T financial needs. Capital expenditure, mergers & acquisitions, etc “Net demander of funds”? –2. Households Both S- T and L-T financial needs. Loans. Mortgages, car loans, etc “Net suppliers of funds”?

4 FIN 406 C Explain Investment –Sacrifice of current consumption for future consumption. Steps in Investing –1. Meeting Investment Prerequisites Explain Life Cycle Hypothesis Easy accessible funds for emergency - liquide S-T funds Protection against loss due to illness, disability - insurnace Planning for adequate retirement income - depends on investment vehicle

5 FIN 406 –2. Establish Investment Goals –Specific statement of timing, magnitude, forms, and risk associated with a desired return. –Explain risk return trade off. –What is realistically attainable? –3. Evaluating Investment Vehicle –Evaluating periodically w.r.t risk and return –Process of valuation –4. Selecting Suitable Investment Significantly alters ones investment goal if selected improperly. Max return may not be the most important factor. Tax consideration, dividend vs. capital gains consideration, etc.

6 FIN 406 –5. Constructing a Diversified Portfolio –Explain the process of forming a portfolio. –Mutual funds vs. individual stock. –6. Managing Portfolio –Explain portfolio performance. D Types of Investors –1. Individual Investors –2. Institutional Investors

7 FIN 406 Types of Investments – Securities or Properties Stocks, bonds vs. real tangible investment or personal properties. –Direct or Indirect Direct: Stocks, bonds, real estate, coins, paintings, etc …. Indirect: investment made in a portfolio. Mutual fund. –Debt, equity and Derivative Securities –Domestic vs Foreign Risk and Return