Definition of investment

investment refers to the allocation of money, time, or

resources into assets, projects, or ventures with the
expectation of generating future income, profit, or
appreciation in value. It typically involves a degree of risk,
and the goal is to increase wealth or achieve specific financial
objectives over time. Common forms of investment include
stocks, bonds, real estate, and starting or funding businesses.
The choice of investment depends on an individual's or
organization's financial goals, risk tolerance, and time
horizon. Successful investment requires careful analysis,
diversification, and a long-term perspective.

OBJECTIVES OF INVESTMENT

The objectives of investment can vary widely depending on

an individual's or organization's financial goals and
circumstances. Here are some common objectives:

1. *Wealth Accumulation*: Many investors aim to grow their

wealth over time by earning a return on their investments.
They seek capital appreciation and increased asset value.

2. *Income Generation*: Some investors prioritize regular

income. They invest in assets like bonds, dividend-paying
stocks, or rental properties to receive periodic income
streams.
3. *Capital Preservation*: For those concerned about
protecting their initial investment, capital preservation is the
goal. They may choose low-risk, conservative investments to
safeguard their principal.

4. *Risk Diversification*: Diversification is an objective to

reduce risk. Investors spread their investments across
different asset classes or industries to minimize the impact of
a downturn in any one area.
5. *Retirement Planning*: Many people invest with the aim
of building a nest egg for retirement. Retirement investments
are often focused on long-term growth and income
generation.

6. *Tax Efficiency*: Some investors seek to minimize their tax

liabilities through tax-efficient investments, like retirement
accounts or tax-advantaged bonds.

7. *Liquidity Needs*: Investment objectives can also relate to

short-term or long-term liquidity needs. Some investments
are chosen based on when the investor may need access to
their funds.

8. *Social or Ethical Goals*: Ethical or socially responsible

investing focuses on aligning investments with personal
values, often avoiding companies or industries that conflict
with those values.

9. *Legacy Planning*: Investors with estate planning goals

may aim to pass on wealth to heirs or charitable
organizations. Their investments may consider strategies for
efficient wealth transfer.

10. *Speculation*: In some cases, investors may have a

speculative objective, aiming to profit from short-term
market movements or trends. This can involve higher risk.

Investment Objectives and

Constraints
Investment objectives and constraints are the cornerstones of any
investment policy statement. A financial advisor/portfolio manager
needs to formally document these before commencing the portfolio
management. Any asset class that is included in the portfolio has to
be chosen only after a thorough understanding of the investment
objective and constraints. Following are various types of objectives
and constraints to be considered and several steps to correctly
determine these objectives.
Definition of Investment
Objectives
Investment objectives are related to what the client wants to
achieve with the portfolio of investments. Objectives define the
purpose of setting the portfolio. Generally, the objectives are
concerned with return and risk considerations. These two objectives
are interdependent as the risk objective defines how high the client
can place the return objective.

Investment Objectives
The investment objectives are mainly of two types:

Risk Objective
Risk objectives are the factors associated with both the willingness
and the ability of the investor to take the risk. When the ability to
accept all types of risks and willingness is combined, it is termed
risk tolerance. When the investor is unable and unwilling to take the
risk, it indicates risk aversion.

The following steps are undertaken to determine the risk objective:

1. Specify Measure of Risk: Measurement of risk is the

most important issue in portfolio management. Risk is
either measured in absolute or relative terms. Absolute
risk measurement will include a specific level of variance
or standard deviation of total return. Relative risk
measurement will include a specific tracking risk.
2. Investor’s Willingness: Individual investors’
willingness to take risks is different from institutional
investors. For individual investors, willingness is
determined by psychological or behavioral factors.
Spending needs, long-term obligations or wealth targets,
financial strength, and liabilities are examples of factors
that determine an investor’s willingness to take the risk.
3. Investor’s Ability: An investor’s ability to take risk
depends on financial and practical factors that bound the
amount of risk taken by the investor. An An investor’s
short-term horizon will negatively affect his ability.
 Similarly, if the investor’s obligation and spending are
less than his portfolio, he clearly has more ability.

Return Objective
The following steps are required to determine the return objective of
the investor:

1. Specify Measure of Return: A measure of return needs

to be specified. It can be specified in an absolute term or
a relative term. It can also be specified in nominal or real
terms. Nominal returns are not adjusted for inflation,
whereas real returns are. One may also distinguish pre-
tax returns from post-tax returns.
2. Desired Return: A return desired by the investor needs
to be determined. The desired return indicates how much
return is expected by the investor. E.g., higher or lower
than average returns.
3. Required Return: A return required by the investor also
needs to be determined. A required return indicates the
return which needs to be achieved at the minimum for
the investor.
4. Specific Return Objectives: The investor’s specific return
objectives also need to be determined so that they are
consistent with his risk objectives. An investor having a high
return objective needs to have a portfolio with a high level of
expected risk.

Definition of Investment
Constraints
Investment constraints are the factors that restrict or limit the
investment options available to an investor. The constraints can be
either internal or external constraints. Internal constraints are
generated by the investor himself, while external constraints are
generated by an outside entity, like a governmental agency.
Definition of Investment
Constraints
Investment constraints are the factors that restrict or limit the
investment options available to an investor. The constraints can be
either internal or external constraints. Internal constraints are
generated by the investor himself, while external constraints are
generated by an outside entity, like a governmental agency.

Types of Investment Constraints:

The following are the types of investment constraints:
Liquidity
Such constraints are associated with cash outflows expected and
required at a specific time in the future and are generally in excess
of the income available. Moreover, prudent investors will want to
keep aside some money for unexpected cash requirements. The
financial advisor needs to keep liquidity constraints in mind while
considering an asset’s ability to be converted into cash without
impacting the portfolio value significantly.

Time Horizon
These constraints are related to the time periods over which returns
are expected from the portfolio to meet specific needs in the future.
An investor may have to pay for college education for children or
needs the money after his retirement. Such constraints are
important to determine the proportion of investments in long-term
and short-term asset classes.

Tax
These constraints depend on when, how, and if returns of different
types are taxed. For an individual investor, realized gains and
income generated by his portfolio are taxable. The tax environment
needs to be kept in mind while drafting the policy statement.
Often, capital gains and investment income are subjected to
differential tax treatments.

Legal and Regulatory

Such constraints are mostly externally generated and may affect
only institutional investors. These constraints usually specify which
asset classes are not permitted for investments or dictate any
limitations on asset allocations to certain investment classes. A trust
portfolio for individual investors may have to follow substantial
regulatory and legal constraints.

Unique Circumstances
Such constraints are mostly internally generated and signify
investors’ special concerns. Some individuals and philanthropic
organizations may not invest in companies selling alcohol, tobacco,
or even defense products. While formulating an investment policy
statement, such concerns and any special circumstance restricting
the investor’s investments should be well considered.

conclusion

A financial advisor/portfolio managers design and manages the

portfolio for an investor after formally documenting the investment
policy statement. The job starts from the moment the investor
articulates his objectives and constraints. It is for the benefit of both
the investor and the manager that the objectives and constraints
are correctly determined and not just documented for formality. The
more diligence is paid while formalizing objectives and constraints,
the better is portfolio aligned with the needs of the investor.

Investment classsification
Investments can be classified into several categories based on
their characteristics and attributes. Here's a classification of
investments:

1. *Asset Class*:
- *Equity Investments*: These include ownership in
companies, such as stocks or shares.
- *Fixed-Income Investments*: These are debt securities
that provide regular interest payments, like bonds.
- *Real Assets*: Investments in physical assets like real
estate, commodities, or infrastructure.
- *Cash and Cash Equivalents*: Highly liquid and low-risk
assets like money market funds or certificates of deposit.
2. *Risk Level*:
- *Low-Risk Investments*: Investments with minimal risk,
such as government bonds or savings accounts.
- *Moderate-Risk Investments*: Balanced risk and return,
like diversified mutual funds.
- *High-Risk Investments*: Investments with the potential
for significant gains or losses, like individual stocks or
cryptocurrencies.

3. *Investment Duration*:
- *Short-Term Investments*: Held for a relatively brief
period, often less than a year.
- *Intermediate-Term Investments*: Held for one to five
years.
- *Long-Term Investments*: Held for an extended period,
typically more than five years.

4. *Purpose*:
- *Income-Generating Investments*: Investments designed
to provide regular income, such as dividend stocks or rental
properties.
- *Growth Investments*: Aimed at capital appreciation over
time, often involving stocks with growth potential.
- *Retirement Investments*: Focused on building a
retirement fund, like 401(k)s or IRAs.
5. *Taxation*:
- *Taxable Investments*: Earnings are subject to taxation,
such as interest income from bonds.
- *Tax-Advantaged Investments*: Offer tax benefits, like
retirement accounts (e.g., 401(k), IRA).

6. *Geographic Focus*:
- *Domestic Investments*: Investments within one's home
country.
- *International Investments*: Investments in foreign
markets, including foreign stocks and bonds.

7. *Liquidity*:
- *Liquid Investments*: Easily converted to cash without
significant loss in value, like publicly traded stocks.
- *Illiquid Investments*: Not easily converted to cash, such
as real estate or private equity investments.

8. *Investment Strategy*:
- *Passive Investments*: Typically involve a buy-and-hold
strategy, like index funds.
- *Active Investments*: Involve frequent buying and selling,
often managed by fund managers or individual investors.
9. *Ethical and Social Criteria*:
- **Socially Responsible Investments (SRI)**: Consider
ethical, environmental, and social factors.
- *Impact Investments*: Intend to generate positive social
or environmental outcomes alongside financial returns.

10. *Diversification*:
- *Diversified Investments*: Spread across different asset
classes to reduce risk.
- *Concentrated Investments*: Focused on a specific asset
or sector, potentially higher risk.

Choosing the right investment category depends on your

financial goals, risk tolerance, and time horizon. Diversifying
your portfolio across various classifications can help manage
risk and achieve your investment objectives. It's advisable to
seek advice from a financial advisor to create a well-balanced
investment strategy.

Regulation of securities market

The regulation of securities markets is essential to maintain

fairness, transparency, and investor protection. It typically
involves government agencies and self-regulatory
organizations (SROs) overseeing various aspects, such as:

1. *Securities and Exchange Commission (SEC):* In the United

States, the SEC is a key regulatory authority responsible for
enforcing federal securities laws, overseeing securities
exchanges, and protecting investors.

2. *Stock Exchanges:* Exchanges like the NYSE and NASDAQ

have their own rules and regulations to ensure fair trading
practices.

3. *Broker-Dealer Regulation:* Entities involved in securities

transactions, like brokerage firms, are subject to regulatory
oversight to safeguard investors.

4. *Market Surveillance:* Regulators and exchanges employ

market surveillance tools to detect and prevent insider
trading, market manipulation, and other fraudulent activities.

5. *Disclosures:* Publicly traded companies must disclose

financial information and material events to investors,
promoting transparency.

.
6. *Investor Protection:* Regulations are in place to ensure
investors receive accurate information, have access to dispute
resolution mechanisms, and are shielded from fraud.

7. *Market Participants:* Regulations often outline the roles

and responsibilities of various market participants, including
investment advisers, asset managers, and rating agencies.

8. *Market Structure:* Rules governing market structure,

such as order types, trading hours, and circuit breakers, help
maintain market stability.

9. *Listing Requirements:* Exchanges establish criteria for

companies to list their securities, ensuring they meet certain
standards.

10. *Market Integrity:* Regulations aim to maintain the

integrity of the market by preventing market abuse, ensuring
fair competition, and promoting market stability.
These regulations vary by country and region but generally
aim to strike a balance between facilitating capital formation
and protecting investors from fraudulent and unfair practices.
Securities regulators continuously adapt regulations to
address emerging market challenges and
technological advancements.
Regulation of the securities market involves overseeing and
maintaining fair and transparent trading practices. Here's an
overview of the regulation of both primary and secondary
markets:

1. *Primary Market Regulation:*

- *Securities and Exchange Board of India (SEBI):* In India,
SEBI is the primary regulatory authority for the securities
market. It regulates the primary market through various
regulations and guidelines.
- *IPO Regulations:* SEBI regulates Initial Public Offerings
(IPOs) to ensure that companies follow disclosure norms and
provide accurate information to investors.
- *Pricing Guidelines:* SEBI sets guidelines for the pricing of
IPOs, ensuring that shares are issued at a fair and reasonable
price.
- *Listing Requirements:* Companies need to meet certain
eligibility criteria and comply with listing requirements to get
their securities listed on stock exchanges.

2. *Secondary Market Regulation:*

 - *Stock Exchanges:* In India, stock exchanges like BSE and
NSE play a crucial role in regulating the secondary market.
They have their own rules and regulations.
- *SEBI:* SEBI also regulates the secondary market by
enforcing fair trading practices, preventing insider trading,
and ensuring market integrity.
- *Market Surveillance:* Continuous monitoring of trading
activities to detect irregularities and market manipulation.

Investor Protection:* SEBI works to protect the interests of

investors by setting disclosure norms and regulations for
market intermediaries.
- *Circuit Breakers:* SEBI can impose circuit breakers to halt
trading in case of extreme volatility.

Both primary and secondary market regulations aim to

maintain market integrity, protect investors, and ensure fair
and efficient capital formation.

Please note that regulations may evolve over time, and it's
essential to refer to the most recent guidelines and
regulations for the most accurate information.
Trading, clearing, and settlement are essential processes in
financial markets. Here's a brief overview of each:

1. *Trading*: This is the process of buying and selling financial

instruments, such as stocks, bonds, or commodities, in a
market. Trading can occur on various platforms, including
stock exchanges, electronic trading platforms, and over-the-
counter (OTC) markets. Traders, both institutional and
individual, execute orders to buy or sell assets based on
market conditions, supply and demand, and their investment
strategies.

2. *Clearing*: Clearing is the middle step that occurs after a

trade is executed. It involves ensuring that the terms of the
trade are properly recorded, confirmed, and matched
between the buyer and seller. Clearinghouses or clearing
firms play a crucial role in this process. They act as
intermediaries, validating and guaranteeing the trade's
settlement. Clearing also involves netting, where multiple
trades between the same parties are consolidated into a
single position, reducing risk and capital requirements.

3. *Settlement*: Settlement is the final stage in the trading

process. It involves the actual transfer of ownership and
funds between the parties involved in the trade. Settlement
can be done in various ways, depending on the asset type
and market regulations. In securities markets, for example,
settlement can be either "T+0" (same-day settlement) or
"T+2" (two days after the trade). Settlement ensures that the
buyer receives the purchased asset, and the seller receives
the agreed-upon funds.

These procedures are vital for maintaining the integrity and

efficiency of financial markets. They help reduce counterparty
risk, ensure transparency, and facilitate the smooth transfer
of assets and funds between market participants.

Market indices are numerical measures that represent the

performance of a group of stocks or other assets in a financial
market. They provide an overall snapshot of how that
particular market or segment is performing. Some well-
known market indices include:

1. *S&P 500*: Represents 500 of the largest publicly traded

companies in the United States.

2. **Dow Jones Industrial Average (DJIA)**: Tracks 30 large,

publicly-owned companies in the U.S.

3. *NASDAQ Composite*: Includes over 3,000 companies,

primarily in the technology sector.
4. *FTSE 100*: Measures the performance of the 100 largest
companies listed on the London Stock Exchange.

5. *DAX*: Represents the 30 largest companies trading on the

Frankfurt Stock Exchange.

6. *Nikkei 225*: Follows the performance of 225 large,

publicly traded companies in Japan.

7. *Hang Seng Index*: Tracks the performance of 50 large

companies on the Hong Kong Stock Exchange.

These indices are used by investors to gauge market trends,

make investment decisions, and compare the performance of
their investments to the broader market. They are also used
as benchmarks for investment funds and financial
instruments.