Investment

Investment

Investment in various types of assets is an interesting activity that attracts people from all walks of life irrespective of their  the occupation, economic status, education and family background. When a person has more money than he requires for current consumption, he would be coined as a potential investor. The investor who is having extra cash would invest it in securities or in any other assets like gold or real estate or could simply deposit it in his bank account. The companies having surplus, would like to invest money in expansion or diversification of existing firm or undertake new venture. All of these activities in a broader sense mean investment.

What is investment ?

Investment is the employment of funds on assets with the aim of earning income or capital appreciation. Investment has two attributes namely time and risk. Present consumption is sacrificed to get a return in the future. The sacrifice that has to be borne is certain but the return in the future may be uncertain. This attribute of investment indicates the risk factor. The risk is undertaken with a view to reap some return from the investment.

For a Layman, investment means some monetary commitment. A person's commitment to buy a flat or a house for his personal use may be an investment from his point of view. This cannot be considered as an actual investment as it involves sacrifice but does not yield any Financial return.

To the economist, investment is the net addition made to the nation's capital stock that consists of goods and services that are used in the production process. A net addition made to the nation's capital stock means an increase in the buildings, equipments or inventories. These capital stocks are used to produce other goods and services.

Financial investment is the allocation of money to assets that are expected to yield some gain over a period of time. It is an exchange of financial claims such as stocks and bonds for money. They are expected to yield returns and experience capital growth over the years.

The Financial and economic meanings are related to each other because the savings of the individual flow into the capital market as Financial investments, to be used in economic investment. Even though they are related to each other, we are concerned only about the Financial investment made on securities.

Definition

"An investment is a commitment of funds made in the expectations of some positive rate of return. If the investment is properly undertaken, the return will be commensurate with the risk the investor assumes."

Objectives of Investment

1. Return: Investors always expect a good rate of return from their investments. Rate of return could be defined as the total income the investor receives during the holding period stated as a percentage of the purchasing price at the beginning of the holding period. Rate of return is stated semi-annually or annually to help comparison among the different investment alternatives. If it is a stock, the investment gets the dividend as well as the capital appreciation as returns. 

2. Risk: Risk of holding securities is related with the probability of actual return becoming less than the expected return. The world risk is synonymous with the phrase variability of return. Investment's risk is just as important as measuring it's expected rate of return because minimising risk and maximizing the rate of return are interrelated objectives in the investment management. An investment whose rate of return varies widely from period to period is risky than whose return that does not change much. Every investor reduce the risk of his investment by proper combination of different securities.

3. Liquidity: Marketability of the investment provides liquidity to the investment. The liquidity depends upon the marketing and trading facility. If a portion of the investment could be converted into cash without much loss of time, it would help the investor meet the emergencies. Stocks are liquid only if they command good market by providing adequate return through dividends and capital appreciation.

4. Hedgehog against inflation: As there is inflation in almost all the economy, the rate of return should ensure a cover against the inflation. The return rate should be higher than the rate of inflation, otherwise the investor will have loss in real terms. Growth stocks would appreciate in their values overtime and provide a protection against inflation. The return thus earned should assure the safety of the principal amount, regular flow of income and be a hedge against inflation.

5. Safety: The selected investment Avenue should be under the legal and regulatory framework. If it is not under the legal  framework, it is difficult to represents the grievances, if any. Approval of the law itself adds a flavour of safety. Even though approved by law, the safety of the principal differs from one mode of investment to another. Investments done with the government assure more safety than with the private party. From the safety point of view investments can be ranked as- bank  deposits, government bonds, UTI units, non-convertible debentures, convertible debentures, equity shares, and deposits with the non-banking Financial companies

Reference: Security Analysis and Portfolio Management by Punithavathy Pandian

Security Analysis and Portfolio Management by Donald E. Fischer and Ronald J. Jordan