Unit I : Introduction to Security analysis Lesson No. 1.1- Investment MBA & MBA – Banking and Finance (Term-IV) Course : Security Analysis and Portfolio Management Unit I : Introduction to Security analysis Lesson No. 1.1- Investment

WHAT IS INVESTMENT? Investment is a commitment of funds made in the expectation of some positive rate of return. Investment is the sacrifice of certain present value for uncertain future reward.

INVESTMENT ATTRIBUTES Rate of return Risk Marketability & Liquidity Tax shelter Safety Hedge against Inflation Convenience

WHAT IS SPECULATION? Assuming business risk in the hope of earning a short-term gain. Involves buying and selling of securities with a view to earn profits due to price fluctuations.

INVESTMENT VS. SPECULATION Points of Difference Investment Speculation Planning Horizon Longer Planning Horizon Short Planning Horizon Basis for Decisions Scientific Analysis of Intrinsic worth of the security Inside information, hearsays, Market Psychology Funds Use of own funds Use of Borrowed funds Risk Moderate Risk High Risk Return Expectation Modest rate of Return High rate of return Motive Reasonable return on a consistent basis One time , large return rather quickly

INVESTMENT VS. GAMBLING Points of Difference Investment Gambling Planning Horizon Longer Planning Horizon Short Planning Horizon Basis for Decisions Scientific Analysis of Intrinsic worth of the security Based on tips and rumors Nature Planned activity Unplanned activity Risk Commercial Risk Artificial Risk Return Expectation Risk-return trade-off determines return Negative returns are expected Motive Safety of principal and stability of returns Entertainment while earning

THE INVESTMENT PROCESS It consists of the following steps: Security Analysis Portfolio Management

SECURITY ANALYSIS Security Analysis defined: The entire process of estimating return and risk for individual securities is known as Security Analysis. Approaches to Security Analysis: Traditional Security Analysis : Analysts have attempted to identify undervalued securities to buy, and overvalued securities to sell. Modern Security Analysis : Strongly influenced by Efficient Market Hypothesis. It questions the validity of Traditional Security Analysis.

PORTFOLIO MANAGEMENT Portfolio: It is a combination of Securities with their own risk and return characteristics. Portfolio Management : It is the dynamic function of analyzing, selecting, evaluating and revising the portfolio in terms of stated investor objectives.

APPROACHES TO PORTFOLIO MANAGEMENT Traditional Portfolio Management: Selection of those securities that best fit the personal needs and desires of the investor. It may yield less than optimum results. Modern Portfolio Management: Scientific approach based on estimates of risk and return of the portfolio. Analysis of securities on the basis of attitudes of investors towards risk-return trade-off.

INVESTMENT CATEGORIES Real Assets: Tangible, material things like, automobiles. Real assets are heterogeneous, thus less liquid. Financial Assets: Paper claims, that represent an indirect claim on the real assets of an entity. Eg: debt or equity instruments. Financial assets offer the benefit of liquidity to the investor.