What is an 'Investment'

An investment is an asset or item that is purchased with the hope that it will generate income or will
appreciate in the future. In an economic sense, an investment is the purchase of goods that are not
consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset
purchased with the idea that the asset will provide income in the future or will be sold at a higher price for
a profit.
According to economics, investment is the utilization of resources in order to increase income or production output
in the future. An amount deposited into a bank or machinery that is purchased in anticipation of earning income in
the long run are both examples of investments.

Different Types Of Investments

It is very necessary to know different types of investment before you actually start investing. There are hundreds of
different investments types available. An understanding of the core concepts and a thorough analysis of the various types
of investment can help you to make the right choice. Take a look at different investments types given below.
Bonds investments

One of the different kinds of investments is bond investments. Bond is commonly used to refer to any securities that are
founded on debt. These are fixed income instrument which are issued for the purpose of raising capital. When you
purchase a bond, you are lending out your money to a company or a government. In return, they will give you interest on
your money and eventually pay you back the amount you lent out. Bonds issued by the Government carry the lowest level
of risk but could deliver fair returns.
Stocks investments

Buying stocks is also one of the investments types. To purchase a stock makes you to become a part-owner of the
business. This entitles makes you to receive the profits generated by the company. These profits are called as dividends.
Stocks are more volatile and riskier than bonds. However, stocks provide relatively high potential returns as compared to
bonds.
Mutual Funds investments

Another different investments types that you can invest is mutual funds. Mutual fund is the collection of stocks and bonds.
This also involves paying a professional manager to select specific securities for you. The advantage of these mutual
funds is that you can invest your money without the time. Another primary advantage to mutual funds is a built in level of
diversification. Mutual funds investment is very popular because of its cost efficiency, sound regulation and professional
management.
Bank deposits

Investing or depositing your money in a bank or a post office is another kind of investments. It is very simple and common
way of securing surplus funds. Generally, bank offer the safest investment options.
Real estate investments

Real estate has become a profitable investment proposition due to the ever increasing lost of land. This investment
involves a long term commitment of funds.
Investment is a process that involves risking ones savings in the hope of a monetary gain. The various types of
investments given above will guide you to choose the right one. Make a wise decision while investing your money and
maximize your profit.

Fundamental AnalysisTechnical AnalysisDefinitionCalculates stock value using economic factors, known as

fundamentals.Uses price movement of security to predict future price movementsData gathered fromFinancial
statementsChartsStock boughtWhen price falls below intrinsic valueWhen trader believes they can sell it on for
a higher priceTime horizonLong-term approachShort-term approachFunctionInvestingTradeConcepts
usedReturn on Equity (ROE) and Return on Assets (ROA)Dow Theory, Price DataExampleiPhone Evaluation
(http://aswathdamodaran.blogspot.com/2012/08/apples-crown-jewel-valuing-iphone.html )AOL from November
2001 through August 2002 (http://en.wikipedia.org/wiki/Technical_analysis#Prices_move_in_trends)Visionlooks
backward as well as forwardlooks backward
6. Investment Objectives and Policy
2. The investor will have to work out his objectives first and then evolve a policy with the
amount of investible wealth at his command. Hence, the objectives of an investor must be
defined in terms of risk and return. The next step in formulating the investment policy of an
investor would be the identification of categories of financial assets he/she would be
interested in. Security Analysis This step would consist of examining the risk-return
characteristics of individual securities or groups of securities identified under step one. The
aim here is to know if it is worthwhile to acquire these securities for the portfolio. And there
are two broad approaches to finding out the mispriced status of individual securities. One
approach is known as technical analysis. The second approach is known as fundamental
approach. Portfolio Construction This consists of identifying the specific securities in which to
invest and determining the proportion of the investors wealth to be invested in each. Portfolio
construction address itself to three major problems via., selectivity, timing, and
diversification. The related questions would be: which specific shares/debentures to buy,
when to buy, and how best to combine then in a way that risk is reduced to a minimum for a
given level of expected return. Investment versus speculation Basis Investment Speculation
Type of contract Creditor Ownership Basis of acquisition Usually by outrightOften-on-margin
purchase Psychological attitude Cautious andDaring and careless of participants conservative
Reasons for purchase Scientific analysis ofHunches, tips inside intrinsic worth dope", etc.
Quantity of risk Small Large Stability of income Very stable Uncertain and erratic Length of
commitment Comparatively long-term For a short time only Source of income Earnings of
enterprise Change in market price Investment versus Gambling speculation Rameshwar Patel/
Pacific Institute of management
3. Speculation typically lasts longer than gambles but are briefer than investments. A
speculation usually involves the purchase of a salable asset in hopes of making a quick profit
from an increase in the price of the asset which is expected to occur within a few weeks or
months. Those involved in speculations are reluctant to refer to this activity as speculation
because they dislike the connotations of the word; they prefer to refer to speculations as
investment activities. A gamble is usually a very short-term investment in a game of chance.
The holding period for most gambles can be measured in seconds. That is, the result of socalled investments is quickly resolved by the roll of the dice or the turn of a card. Such
activities have planning horizons that are far too brief to do the research that should precede
any investment activity. Speculation is not the same as gambling and the two should never be
confused. The difference between speculation and gambling is that in gambling, artificial and
unnecessary risks are created whereas in speculation the risks already exist and the question
is simple who shall bear them? Gambling is a far cry from the carefully planned research
and scientific procedure which underlies the best speculative practice. The gambler plays
rumours, tips, hunches and other unreliable intuitions which should not play any but a
negative role in the trained speculators process. Speculation is a reasoned anticipation of
future conditions. It does not rely upon hearsay or labels. It attempts to organise the relevant

knowledge as a support for judgements. It is as legitimate and moral as any other form of
risk-taking business activity. Rameshwar Patel/ Pacific Institute of management
4. Investment Alternatives Equity Preference shares Debentures Bonds or fixed income
securities Government securities Savings bonds Private sector debentures PSU bonds
Preference shares Money market instruments Treasury bills Certificates of deposits
Commercial paper Repos Non-marketable financial assets Bank deposits Post office
time deposits (POTD) Monthly income scheme of the post office (MISPO) Kisan Vikas Patra
(KVP) National savings certificate Company deposits Employees provident fund scheme
Public provident fund scheme Real estate Rameshwar Patel/ Pacific Institute of management
5. Residential House Sources of Housing Finance Features of Housing Loans
Guidelines for Buying a Flat Commercial Property Agricultural Land Suburban Land
Time Share in a Holiday Resort Precious objects Gold and Silver Precious Stones Art
Objects Insurance policies Endowment Assurance Money Back Plan Whole Life
Assurance Unit Linked Plan Term Assurance Immediate Annuity Deferred Annuity
Investments and Innovation Technology Advancements in computing power and Internet
technology More complete and timely information delivery Globalization Domestic firms
compete in global markets Performance in regions depends on other regions Causes
additional elements of risk Globalization continues and offers more opportunities
Securitization continues to develop Derivatives and exotics continue to develop Strong
fundamental foundation is critical Integration of investments and corporate finance
Rameshwar Patel/ Pacific Institute of management
6. SYSTEMATIC RISK Rameshwar Patel/ Pacific Institute of management
7. Systematic Risk ( Non Diversifiable Risk) Caused by the external factors
Uncontrollable Affects the market as whole Unsystematic Risk (Diversifiable Risk ) Specific
factors related to the particular industry or a company Market Risk : Portion of total
variability of return caused by the alternate forces caused by bull and bear markets. Forces
affect the market are tangible and intangible events Tangible Events are real events such as
earthquakes, war, e.t.c. Example Pokhran Blast on May13, 1998 resulted in fall of sensex by
162 points. Intangible events related to market psychology. Example ,in 1996 recession in
economy resulted in fall of share prices These factors are beyond the control of corporate.
Interest Rate Risk : Variation in single period rates of return caused by fluctuations in
market interest rate. Rameshwar Patel/ Pacific Institute of management
8. This will affects commonly price of bonds, debentures and stocks. Caused by changes
in govt monetary policy, interest rates of treasury bills and govt bonds. Rise or fall in the
interest rate affects the cost of borrowings Purchasing Power Risk : Probable loss in the
purchasing power of returns to be received. Inflation is the reason behind the loss of
purchasing power. Inflation is of 2 types 1. Demand-Pull Inflation 2. Cost-Pull Inflation
Systematic Risk Unsystematic Risk Other Market Risk Unique Risk Names Non-
Diversifiable diversifiable Risk Risk Examples Government tax A firms cut technical wizard
Interest rate leaves rises A competitor enters a firms product market Beta(b): Measure of
Market Risk if b = 0 asset is risk free if b = 1 asset return = market return if b > 1
asset is riskier than market index b<1 asset is less risky than market index The higher
the degree of systematic risk (b), the higher the return expected by investors. UNSYSTEMATIC
RISK Rameshwar Patel/ Pacific Institute of management
9. It stems from managerial inefficiency, technological change in the production process,
availability of raw materials, changes in the consumer preference and labor problems It

differs from industry to industry. Technological changes affect the information technology
industry more than that of consumer product industry. CLASSIFICATION
BUSINESS RISK
FINANCIAL RISK BUSINESS RISK
It arises from the inability of the firm to maintain its competitive edge and the growth or the
stability of the earnings. Variation that occurs in the operating environment is reflected on
the operating income and expected dividends BUSINESS RISK
INTERNAL BUSINESS RISK \\\ Fluctuations in the sales \\ R&D \\ Personnel
Management\\ Fixed cost \\ Single Product \\

EXTERNAL BUSINESS RISK \\ Social and regulatory factors \\ Political risk \\ Business
Cycle FINANCIAL RISK \\ It refers to the variability of the income to the equity capital due to
the debt capital \\ Financial risk In a company is associated with the capital structure of the
company\\
Capital structure of the company consists of equity funds and borrowed funds Unit II:
Security Analysis - Fundamental Analysis - Analysis Industry Analysis - Investments in Industry
- Company Analysis. Rameshwar Patel/ Pacific Institute of management
10. Unit II: Security Analysis Security
Analysis and Investment Decision
Investment decision-making is an important area probing further. Investment decision-making
being continuous in nature should be attempted systematically. Broadly approaches are
suggested in the literature. These are: fundamental analysis and technical analysis.
FUNDAMENTAL ANALYSIS
ECONOMIC ANALYSIS
INDUSTRY ANALYSIS
COMPANY ANALYSIS

12. Macro Economic Analysis

13. The analysis of the following factors indicates the trends in macro economic changes that
effect the risk and return on investments. \\ Money supply \\ Industrial production \\
Capacity utilization\\ Unemployment Inflation Growth in GDP Institutional lending
Stock prices Monsoons Productivity of factors of production Fiscal deficit
Credit/Deposit ratio Stock of food grains and essential commodities Industrial wages
Foreign trade and balance of payments position Status of political and economic stability
Industrial wages Technological innovations Infrastructural facilities Economic and
industrial policies of the government Debt recovery and loans outstanding Interest rates
Cost of living index Foreign investments Trends in capital market Stage of the
business cycle Foreign exchange reserves

Macroeconomic Analysis The government employs two broad classes of macroeconomic

policies, viz. demand- side policies and supply-side policies.
Fiscal Policy Fiscal policy is concerned with the spending and tax initiatives of the
government. It is the most direct tool to stimulate or dampen the economy.
Monetary Policy The main tools of monetary policy are: \\ Open market operation\\ Bank
rate \\ Reserve requirements\\ Direct credit controls Economic Forecasting
14. Economic forecasting is a must for making investment decision. Forecasting techniques
can also be divided and categories: Short-term forecasting techniques and Long-term
forecasting techniques. Techniques used Economic indicators Diffusion index Surveys
Economic Model Building Industry Analysis Industry Analysis Some of the useful bases for
classifying industries from the investment decision-point of view are as follows: Growth
Industry Cyclical Industry Defensive Industry Based on the stage in the life cycle,
industries are classified as follows: Pioneering stage Fast growing stage Security and
stabilization stage Relative decline stage IMPORTANCE OF INDUSTRY ANALYSIS i. Firms in
each different industry typically experience similar levels of risk and similar rates of return. As
such, industry analysis can also be useful in knowing the investment- Worthiness of a firm. ii.
Mediocre stocks in a growth industry usually outperform the best stocks in a stagnant
industry. This points out the need for knowing not only company prospects but also industry
prospects.
CLASSIFICATION OF INDUSTRIES There are different ways of classifying industrial
enterprises. i. Classification by Reporting Agencies ii. Classification by Business Cycle KEY
INDICATORS IN ANALYSIS The analyst is free to choose his or her own indicators for analyzing
the prospects of an industry. However, many commonly adopt the following indicators. A.
Performance factors like Past sales Past earnings B. Environment factors like Attitude of
government Labour conditions Competitive conditions Technological progress C.
Outcome factors like Industry share prices Rameshwar Patel/ Pacific Institute of
management
15. Price earnings multiples with reference to these key factors, evaluations shall be done
to identify. Strengths and weaknesses Opportunities and threats ANALYTICAL
FRAMEWORKS Industry life-cycle stages (product life cycle theory) Pioneering Stage
(Introduction) Expansion Stage (Growth) Stagnation Stage (Maturity) Decay Stage
(Decline) FORECASTING METHODS The techniques for analyzing information about industry
within a time framework are briefly explained in this section. 1. The market profile 2.
Cumulative methods a) Surveys b) Correlation and Regression analysis c) Time series analysis
Conditions and profitability Profitability depends upon the state of competition prevalent in
the industry. Cost control measures adopted by its units and the growth in demand for its
products. Profitability is another area that calls for a thorough analysis on the part of
investors. No industry can survive in the long run if it is not making profits. This requires
thorough investigation into various aspects of profitability. However, such an analysis can
begin by having a bird's eye view of the situation. In this context, ratio analysis has been
found quite useful. Industry Analysis factors The securities analyst will take into consideration
the following factors into account in assessing the industry potential in making investments.
Post-sales and earnings performance The government's attitude towards industry Labour
conditions Competitive conditions Performance of the industry Industry share prices
relative to industry earnings Stage of the industry life cycle Industry trade cycle
Inventories build-up in the industry Investors' preference over the industry Technological

innovations Techniques of Industry Analysis End Use and Regression Analysis Input Output
Analysis Company Analysis Need for Company Analysis Rameshwar Patel/ Pacific Institute of
management
16. For earning profits, investors apply a simple and common sense decision rule of
maximization. That is: Buy the share at a low price Sell the share at a high price The real
test of an analysts competence lies in his ability to see not only the forest but also the trees.
Superior judgment is an outcome of intelligence, synthesis and inference drawing. That is
why, besides economic analysis and industry analysis, individual company analysis is
important.
FRAMEWORK OF COMPANY ANALYSIS The two major components of company analysis are: i.
Financial ii. Non-financial WherePio = Value of share i Dit = Dividends of share I in the t th
period K1 = Equity capitalization rate Git = Growth rate of dividends of share I (a constant)
This value is obtained by stock analysts y multiplying the i the stocks normalized earnings
per share (e) with price-earnings ratio or earnings multiplier (m) Pio = eio. Mio WherePio =
Value of share I eio = Earning of share c mio = Earnings multiplier of share i Earnings
Analysis We will now discuss differences in accounting procedures. 1. Sales Revenue
Recognition Principle 2. Inventory 3. Depreciation Accounting Income Effect on Balance Sheet
A balance sheet is a summary of account balance carried after the appropriate closing of the
books. Income statements deal with flows, whereas balance sheet deals with stocks.
Rameshwar Patel/ Pacific Institute of management
17. The impact of inflation should be considered to make the balance sheet items realistic.
Measures suggested are. a) Assets side: 1. Report marketable securities at current value. 2.
Inventory should be valued at replacement cost. 3. Land and natural resources to be shown at
net realizable value (current market price-future development, selling or interest costs. 4.
Plant & machinery at replacement cost. 5. Goodwill 6. R & D expenses b) Liabilities side: 1.
Debt. In future, at the time of maturity it is repaid in cheaper money units (rupees). It is a
gain to shareholders. 1. Deferred taxes. 2. Retained earnings. Forecasting Earnings It is
necessary to estimate a stocks future income because the value of the share is the present
value of its future income. This can be done by focussing on: a) Identification of variables:
Basically changes in income result from changes in: i) Operations of the business and (ii) In
the financing of the business. b) Determining the extent of change method: Different methods
of forecasting earnings are available. The two categories into which the methods fall. 1.
Earlier methods Earnings methods Market share/profit margin approach (breakeven
analysis) 2. Modern techniques Regression and correlation analysis Trend analysis (time
series analysis) Decision trees Simulation Determining earnings Multiplier (P/E) Ratio
The analysts followed rules of thumb to normalize P/E ratios. 1. They compared current actual
P/E with what they considered normal for the stock in question. 2. They compared price times
estimated future earnings (1 to 3 years out) with what they considered normal for the stock in
questions. 3. They compared the multiplier and growth or earnings of individual stocks with
industry group multiple and earnings growth. Dividend Discount Model of Valuation In
determination of the P/E ratio, the factors to be considered are Capitalization rate (K)
Rameshwar Patel/ Pacific Institute of management
18. Growth rate of dividend stream (g) and Dividend pay-out ratio (d/e) Comparative P/E
Approach Comparative or relative valuation makes use of the average P/E of market or
industry to determine the P/E for an individual stock. The procedure is as follows: i. Determine
the market P/E using dividend discount model. ii. Determine the market pay back period
based on earnings growth rate of market. (How many years it takes to obtain market P/E at
the given growth factor?) iii. Assign P/E to the stock based on its growth rate and market
payback period. iv. Make adjustments for dividend pay out ratio and earnings volatility. v. Find

volume of stock by multiplying normal earnings with the determined P/E. GROWTH STOCKS
Characteristics of growth stocks: The following features help identify growth stocks. I.
Substantial and steady growth in EPS II. Low current DPS, because retained earnings are high
and reinvested. III. High returns on book value IV. Emphasis on R & D V. Diversification plans
for strategic competitive advantage VI. Marketing competence and edge. VII. Benefits:
Investment in growth stocks would benefit investors in many ways. VIII. 1. The market value
goes up at a rate much faster than the rate of inflation. IX. 2. Higher capital gains. X. 3. Long
range tension free holding without any need for sell & buy operations and associated
problems. XI. Valuation: The investor interested in growth shares can either employ (1)
Comparative P/E ratios approach or (2) Dividend Discount model for valuation of the stocks.
XII. Guidelines for Investment XIII. The following guidelines will be helpful to investors
interested in growth stocks. XIV. 1. Tuning is not very important, but with appropriate timing
one may be able to pick up shares at the threshold of high growth rate. XV. 2. Choice of stock
should not be based on simple factor. Multiple criteria using different appraisal techniques
may be employed. XVI. 3. It is better to diversify investment in growth stocks industry-wise.
Because different industries grow at different by evening out differences. XVII. 4. One should
hold the stock for more than 5 years to gain advantage. Estimation of Future Price
Rameshwar Patel/ Pacific Institute of management
19. Before attempting to discuss the approach that can be adopted for company level
analysis, let us about the objective of investor and how it can be quantified. It is to reiterate
the proposition that an investor looks for increasing his returns from the investment. Returns
are composed of capital gains and a stream of income in the form of dividends. Assuming he
has equity shares for a period of one year (known as holding period), i.e., he sells it at the end
of the year, the total returns obtained by him would be equal to capital gains plus dividends
received at the end of the year. WhereR1 = (P1 P11) + D t P1 = Price of the share at the
end of the year P11 = Price of the share at the beginning of the year D1 = Dividend received
at the end of the year R1 = Return for the holding period, t Quantitative Analysis This
approach helps us to provide a measure of future value of equity share based on quantitative
factors. The methods commonly used under this approach are Dividend discounted method,
and Price-earnings ratio method Forecasting Earnings per Share Traditional Methods of
Forecasting EPS Under the traditional approach the following methods of forecasting are
adopted. 1. ROI approach 2. Market share approach 3. Independent estimates approach Unit
III: Technical Analysis Concept and Tools of Technical Analysis. Technical Analysis Vs.
Fundamental Analysis. Rameshwar Patel/ Pacific Institute of management
20. Unit III: Technical Analysis
Introduction to technical analysis and assumptions
The methods used to analyze securities and make investment decisions fall into two very
broad categories: fundamental analysis and technical analysis.
What is Technical Analysis?
Technical analysis is a method of evaluating securities by analyzing the statistics generated
by market activity, such as past prices and volume. Technical analysts do not attempt to
measure a security's intrinsic value, but instead use charts and other tools to identify patterns
that can suggest future activity.
Basic Technical Assumptions
The basic and necessary assumptions regarding the technical analysis: 1) The Market
Discounts Everything 2) Price Moves in Trends 3) History Tends To Repeat Itself

TECHNICAL V/S FUNDAMENTAL ANALYSIS Several ways the technician acts:\\ 1.

Technicians believe that behind the fundamentals are important factors\\ 2. Technicians act on
the what not the why \\3. Technicians are not committed to a buy-and-hold policy \\4.
Technicians do not separate income from capital gains \\5. Technicians act more quickly to
make commitments and to take profits and losses\\ 6. Technicians recognize that the more
experience one has with the technical indicators, the more alert one becomes to pitfalls and
failure of investing \\7. Technicians insist that the market always repeats\\ 8. Technicians
believe that breakouts from previous trends are important signals \\9. Technicians recognize
that the securities of a strong company are often weak and those of a weak company may be
strong \\10. Technicians use charts to confirm fundamentals Distinctions between
Fundamental and Technical

an
1. His perspective is long-term in nature. HeHis outlook is short-term oriented. He is is
conservative in his approach. He actsaggressive. He acts on what is. on What should be. 2.
He adopts a buy-and hold policy. He doesHe believes in making a quick buck. He not usually
expect any significant increasesnuffles his investments quite often in the value of his
investments in lessrecognizing and foresees changes in stock than a year. prices. 3. He
considers total gain from equityHe does not distinguish between current investment consists
of current yield byincome and capital gains. He is interested in way of dividends and longterm gains byshort-term profits. way of capital appreciation. 4. He forecasts stock prices on
the basis ofHe forecasts security prices by studying economic, industry and companypatterns
of supply of and demand for statistics. The principal decision variablessecurities. Technical
analysis is study of stock take the form of earnings and dividends.exchange information. He
makes a judgment of the stocks value with a risk-return. 5. He uses tools of financial analysis
andHe uses mainly charges of financial variables statistical forecasting techniques besides
some quantitative tools. Rameshwar Patel/ Pacific Institute of management
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