Category: Investments

Investment and its types

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Investment:

The commitment of funds/finance to one or more assets which will be held over some time period for the purpose of earning returns.

Investments:

The field of study which involves the study of investment environment, investment process and investment securities and markets.

The definition of Investments includes:

1. Investment Environment:

  • Types of Securities
  • Types of Financial Markets
  • Types of Investment Companies

2. Investment Process:
Steps of making investment is Investment process.

3. Investment Securities:
Types, Evaluation and Analysis of Securities.

4. Investment Markets
Markets, types and decisions of the appropriate market for investment.

Types of Investment

1. Direct Investment:
The Investor himself makes the investment with his knowledge and decision.

2. Indirect Investment:
When there is an intermediary between the Investor and Investment that is indirect investment. The investor hand over his finances to the investment company that will invest the amount further and give him returns. (Usually an investment company does not invest in a single investment, rather divide that investment into smaller units and divide among investors that helps to reduce the risk.) It is on the discretion of the investment company where to invest the finances, the investor will get his agreed rate of return.

2. Equity Investment:
The investment in the equity shares of a company is called equity investment. That can be in common stock or preferred stock.

2. Debt Investment:
The investment in bonds, loans, deposits and debentures is debt investment.

3. Derivative Securities Investment:
Investment in paper assets such as options, futures, and contracts is known as derivative securities investment.

  • There is a physical asset involved behind these investments.
  • The value of investment is measured on the basis of underlying assets.

4. High Risk Investment:
The investment in securities like Futures, Junk Bonds or Speculative Bonds are considered high risk investments. The major risk is the Interest Rate Risk that cause variability in their value. Thus they provide high yield in compare to other securities.

5. Low Risk Investment:
The investment in securities like Treasury Bills, Bonds and stocks are low risk investments thus yield low return as well.

6. Short Term Investment:
The investment in securities which are matured within a year is short term investment.

7. Long Term Investment:
The investment in securities which have maturation life of over a year or have no limited maturity life like stocks is long term investment.

8. Domestic Investment:
Investing within the premises of the country is called domestic investment.

9. Foreign Investment:
Whereas investment in foreign countries or either in foreign currency securities within own country is foreign investment.

Investment Process

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The following is investment process which is followed when an investment decision is to be taken.

  1. Meeting the prerequisite of investment
  2. Setting investment policy/goals
  3. Security evaluation or analysis
  4. Portfolio construction
  5. Managing the portfolio & its performance

Prerequisite of Investment:

For Individuals

– Fulfillment of basic needs
– Keep cash to bear sudden (emergency) requirements
– In case of loss, you must have enough strength to meet it.

For Companies

– Ensure the uninterrupted operations
– fulfill their short term financial needs
– fulfill their raw material and employees needs

Setting Investment Policy or Goals:

Timing of Investment:
If company wishes to invest for short term or long term investment.
Form of Investment:
If company wishes to investment is in real or financial assets.
Risk:
If company wishes to invest in high risk or low risk investments.
Return Expectations:
If company has high return or nominal return expectations.

Security Evaluation and Analysis:

Technical Analysis:
It is a security analysis for forecasting the  future direction of prices through the study of past relevant data like price and return behaviors.

Fundamental Analysis:
It is the study of the fundamentals of a company to determine if the business has potential for investment by considering the Risk , required rate of return and companies cash flows , profits and other data by analyzing their financial statements.

Portfolio Construction:

The investments are diversified into various sectors to minimize the risk. That means we do not invest our whole amount in a single opportunity or investment. When we gather different investments we have a portfolio of investments. We can use different techniques to evaluate how can we increase our returns or reduce our risk on certain investments. Portfolio is the best method to increase your returns and reduce your risks because if somehow your decision about an investment goes wrong and you suffer losses, you have other investments which will compensate.

Managing the Portfolio & its Performance:

In this step, we observe our portfolio and look for the returns. If any of the investment is not up to to the expectations we might swap that investment with any other one.