Meaning of investment

Investment is an activity that is engaged in by people who have savings, i.e. investments are made from savings, or in other words,
people invest their savings .But all savers are not investor’s .investment is an activity which is different from saving. Let us see what
is meant by investment. It may mean many things to many persons. If one person has advanced some money to another, he may
consider his loan as an investment. He expect to get back the money along with interest at a future date .another person may have
purchased on kilogram of gold for the purpose of price appreciation and may consider it as a investment.
Thus investment may be defined as “a commitment of funds made in the expectation of some positive rate of return “since the
return is expected to realize in future, there is a possibility that the return actually realized is lower than the return expected to
be realized. This possibility of variation in the actual return is known as investment risk. Thus every investment involves return
and risk.
F. Amling defines investment as “purchase of financial assets that produces a yield that is proportionate to the risk assumed over
some future investment period.”
According to sharpe, ”investment is sacrifice of certain present value for some uncertain future values”.
Investment objectives/features/characteristics.
Investment is made because it serves some objective for an investor. Depending on the life stage and risk appetite of the investor, there
are three main objectives of investment: safety, growth and income. Every investor invests with a specific objective in mind, and each
investment has its own unique set of benefits and risks. Let us understand these objectives in detail.
Safety
While no investment option is completely safe, there are products that are preferred by investors who are risk averse. Some individuals
invest with an objective of keeping their money safe, irrespective of the rate of return they receive on their capital. Such near-safe
products include fixed deposits, savings accounts, government bonds, etc.
Growth
While safety is an important objective for many investors, a majority of them invest to receive capital gains, which means that they
want the invested amount to grow.There are several options in the market that offer this benefit. These include stocks, mutual funds,
gold, property, commodities, etc. It is important to note that capital gains attract taxes, the percentage of which varies according to the
number of years of investment.
Income
Some individuals invest with the objective of generating a second source of income. Consequently, they invest in products that offer
returns regularly like bank fixed deposits, corporate and government bonds, etc.
Other objectives
While the aforementioned objectives are the most common ones among investors today, some other objectives include:
Tax exemptions
some people invest their money in various financial products solely for reducing their tax liability. Some products offer tax
exemptions while many offer tax benefits on long-term profits.
Liquidity
Many investment options are not liquid. This means they cannot be sold and converted into cash instantly. However, some people
prefer investing in options that can be used during emergencies. Such liquid instruments include stock, money market instruments and
exchange-traded funds, to name a few.

Investment decision process

1. Defining the investment objective
2. Analyzing securities
3. Construct a portfolio
4. Evaluate the performance of portfolio
5. Review the portfolio

Importance of Investments
1. Longer Life Expectancy: Investment decisions have become significant because statistics show that life expectancy
has increased with good medical care.
2. Taxation: Taxation introduces an element of compulsion in a person’s savings. Every country has different tax saving
schemes for bringing
3. Interest Rates: Interest rates vary according to the choice of investment outlet. Investors prefer safe investments with
a good return.
4. Inflation: In a developing economy, there are rising prices and inflationary trends. A rise in prices has several problems
coupled with a falling standard of living.
5. Income: Investment decisions are important due the general increase in employment opportunities and an
understanding of investment channels for saving in India.
6. Investment Outlets: The availability of a large number of investment outlets has made investments useful and
important. Apart from putting aside savings in savings banks where interest is low, investors have the choice of a variety
of instruments.

Speculation
Speculation is the practice of engaging in risky financial transactions in an attempt to profit from short or medium term
fluctuations in the market value of a tradable good such as a financial instrument, rather than attempting to profit from the
underlying financial attributes embodied in the instrument such as capital gains, interest, or dividends. Many speculators
pay little attention to the fundamental value of a security and instead focus purely on price movements. Speculation can in
principle involve any tradable good or financial instrument. Speculators are particularly common in the markets for stocks,
bonds, commodity futures, currencies, fine art, collectibles, real estate, and derivatives.

Investment and Gambling

Gambling is artificial and unnecessary
risk created for increased expected
returns. The difference between
investment and gambling is very clear.
From the above discussion, it is
established that investment is an
attempt to carefully plan, evaluate and
allocate funds in various investment
outlets which offers safety of principal,
moderate and continuous returns and
long-term commitment. Gambling is
quite the opposite of investment. It
connotes high risk and the expectation
of high returns. It consists of uncertainty
and high stakes for thrill and excitement.
Typical examples of gambling are horse
racing, game of cards, lottery, etc. Gambling is based on tips, rumors and haunches. It is unplanned, non-scientific and without
knowledge of the exact nature of risk.

difference between stock market and new issue

market?Stock market is a place where buying and
selling of listed securities happens. This happens
generally after a company or a government body has
issued new securities on the exchange to raise funds
from investors and this is referred as Primary Market
or New Issue Market. In Primary Market, companies
issue securities in order to raise fund to expand their
business and trading on these companies securities
happen in the secondary market also called as Stock
Market A stock market is a place where people buy
and sell shares where as a new issue market is just a part of the stock market, in the sense that any company which has to
raise its money from public has to come out with a public issue only after which that stock can be listed on the stock
exchange. Sometimes an issue of an existing listed company comes which increases the floating stock of that company as a
result that when more stock is available, there is a pressure on the stock and at times till the new stock is not absorbed by
the market and the stock remains depressed.
Two concepts of Investment:

1) Economic Investment: The concept of economic investment means addition to the capital stock of the society. The capital
stock of the society is the goods which are used in the production of other goods. The term investment implies the formation of
new and productive capital in the form of new construction and producers durable instrument such as plant and machinery.
Inventories and human capital are also included in this concept. Thus, an investment, in economic terms, means an increase in
building, equipment, and inventory.

2) Financial Investment: This is an allocation of monetary resources to assets that are expected to yield some gain or return
over a given period of time. It means an exchange of financial claims such as shares and bonds, real estate, etc. Financial
investment involves contrasts written on pieces of paper such as shares and debentures. People invest their funds in shares,
debentures, fixed deposits, national saving certificates, life insurance policies, provident fund etc. in their view investment is a
commitment of funds to derive future income in the form of interest, dividends, rent, premiums, pension benefits and the
appreciation of the value of their principal capital. In primitive economies most investments are of the real variety whereas in a
modern economy much investment is of the financial variety.

Returns and Risk

The higher the risk for an investment, the higher the potential returns. Any time you want to make a higher percentage rate or
capital gain than most people make, you have to consider taking on more risk. That's why bonds of companies with bad credit
ratings pay higher interest. The company could fail and the bonds could become worthless. A nice, steady investment in a blue
chip stock historically yields lower returns than the stocks of successful start-up companies. If you decide to invest in a joint
venture, you can evaluate the risk involved. If that risk seems high, you can ask for a guarantee of higher returns by getting a
better percentage of profits to compensate you for taking the risk.

What is Yield to Maturity (YTM) & What is the difference between yield to
maturity and the yield to call?
Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held
until it matures. Yield to maturity is considered a long-term bond yield but it is
expressed as an annual rate. In other words, it is the internal rate of return (IRR) of an investment in a bond if the investor holds
the bond until maturity, with all payments made as scheduled and reinvested at the same rate.

coupon rate vs YTM: coupon rate is the actual amount of interest income earned on the bond each year based on its face
value. A bond's yield to maturity (YTM) is the estimated rate of return based on the assumption that it will be held until its
maturity date and not called.

yield to call : For most bond investors, it is important to also estimate the yield to call, or the total return that would be
received if the bond purchased was held until its call date instead of full maturity. Because it is impossible to know when an
issuer may call a bond, you can only estimate this calculation based on the bond’s coupon rate, the time until the first (or
second) call date, and the market price

What is the Time Value of Money - TVM

The time value of money (TVM) is the concept that money available at the present time is worth more than the identical
sum in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn
interest, any amount of money is worth more the sooner it is received. TVM is also sometimes referred to as present
discounted value.

Time Value of Money Important in Capital Budgeting Decisions?: Present and future values of money are critical to
capital budgeting. Budgeting requires individuals and businesses to decide how to allocate or invest money. By opting to
place money into an investment, an individual or a business will be denying themselves the use of that money until the
investment pays off. If the investment's value at maturity exceeds the calculated future value of the investment's principal,
this could be an excellent choice. But if the future value of the money exceeds the value of the investment, it might be
better to choose another investment or keep the money in cash. As a concept, time value of money provides a means to
analyze the opportunity costs of capital budgeting decisions. Using the time value of money allows these decisions to take
place with a better understanding of whether or not a particular choice in allocating money is better or worse than other
available choices.

Present Vs. Future Value: The time value of money is usually expressed as the difference between the present value of a sum
of money and that same sum's future value. The present value is usually the outright value of the money, if paid immediately,
while the future value is the amount of money plus interest. This is because receiving the same amount money in the future
means the loss of an opportunity to earn interest.
BONDS:  Bonds are just like loans or IOUs. Buying a bond means you are lending out your money. Bonds are also
called fixed-income securities because the cash flow from them can be fixed. Stocks are equity; bonds are debt. The key
reason to purchase bonds is to diversify your portfolio. The issuers of bonds are usually governments and corporations. A
bond is characterized by its face value, coupon (interest) rate, maturity and issuer. Yield is the rate of return you get on a
bond. When price goes up, yield goes down, and vice versa. When interest rates rise, the price of bonds in the market falls,
and vice versa. Bills, notes and bonds are all fixed-income securities classified by maturity .Government bonds are the
“safest” bonds, followed by municipal bonds, and then corporate bonds. Municipal bonds, issued by local governments or
agencies can earn tax-free interest for residents. Bonds are not risk free. It's always possible – especially in the case of
corporate bonds – for the borrower to default on the debt payments.

FEATURES OF BOND
Face/Par Value: The first characteristic of a bond is its face, or par value. This represents the amount of principal that a
bondholder will receive at maturity, and is also the value that that a bond is issued for at the time that a company or
government first sells them.

Coupon/Yield: The coupon or yield of a bond is the interest rate the issuer agrees to pay its bondholders. Interest
payments on corporate bonds are typically paid semi-annually but may also be paid annually or quarterly.

Maturity: The maturity is the date at which the bond’s principal comes due and must be repaid to lenders in full.

Issuer: The type and quality of the bond issuer is also an important characteristic of a bond, as the issuer's stability is
your main assurance of getting paid back in full.
The coupon rate, r amount of interest C, is the product of the face amount of the bond and the coupon rate. We may
write this as C = CfThis is the stated rate of interest of the bonds. For example, a bond may be paying 8% interest to the
bondholders. The dolla
What is the New Issue Market/primary market?

New issues are offered in the primary market and sold to the public for the first time as initial public offerings, or IPOs. New
issues are usually handled for a corporation by an underwriting syndicate comprised of investment banks and selling groups. An
underwriter will advise the issuing corporation on the best price at which to offer shares of the new security to the public.
Roles are:1) capital formation , 2)liquidity 3)diversification 4)reduction in cost
Functions of new market issue:
(a) Origination: Origination refers to the work of investigation and analysis and processing of new proposals.
(b) Underwriting: Underwriting entails an agreement whereby a person/organisation agrees to take a specified number of shares or
debentures or a specified amount of stock offered to the public in the event of the public not subscribing to it, in consideration of a
commission the underwriting commission.
(c) Distribution: The sale of securities to the ultimate investors is referred to as distribution; it is another specialised job, which can
be performed by brokers and dealers in securities who maintain regular and direct contact with the ultimate investors.

Meaning of Interest:
In simple meaning interest is a payment made by a borrower to the lender for the money borrowed and is expressed as a rate
percent per year.
1. As Prof. Marshall has said – “The payment made by borrower for the use of a loan is called Interest.”
Types of Interest:
There are two types or kinds of Interest:
(a) Net Interest,
(b) Gross Interest.

(a) Net Interest:

The payment made exclusively for the use of capital is regarded as net Interest or pure Interest. According to Prof. Chapman—“Net
Interest is the payment for the loan of capital when no risk, no inconveniences apart from that involved in saving and no work is
entailed on the lender.”
According to Prof. Marshall, “Net Interest is the earnings of capital simply or the reward of waiting simply.”
Thus, Net Interest = Gross Interest – (payment for risk + payment for inconvenience + cost of administering credit)
i.e., Net Interest = Net Payment for the use of capital.

(b) Gross Interest:

Gross Interest according to Briggs and Jordan has said—“Gross
Interest is the payment made by the borrowers to the lenders is
called Gross Interest or Composite Interest.”
It includes payments for the loan of capital payment to cover
risks for loss which may be:
(i) A personal risks or
(ii) Business risks, payment for inconveniences of the investment
and payment for the work and worry involved in watching—investments, calling them in and investing.
Gross Interest = Net Interest + Payment for risk + Payment for management services + Compensation for the changing value of
money.

What is Stock Exchange? Meaning

Stock Exchange (also called Stock Market or Share Market) is one important constituent of capital market. Stock Exchange is an
organized market for the purchase and sale of industrial and financial security. It is convenient place where trading in securities is
conducted in systematic manner i.e. as per certain rules and regulations.
It performs various functions and offers useful services to investors and borrowing companies. It is an investment intermediary and
facilitates economic and industrial development of a country.
The Indian Securities Contracts (Regulation) Act of 1956, defines Stock Exchange as,
"An association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting,
regulating and controlling business in buying, selling and dealing in securities."
Features of Stock Exchange
 Market for securities : Stock exchange is a market, where securities of corporate bodies, government and semi-government
bodies are bought and sold.
 Deals in second hand securities : It deals with shares, debentures bonds and such securities already issued by the
companies. In short it deals with existing or second hand securities and hence it is called secondary market.
 Regulates trade in securities : Stock exchange does not buy or sell any securities on its own account. It merely provides the
necessary infrastructure and facilities for trade in securities to its members and brokers who trade in securities. It regulates
the trade activities so as to ensure free and fair trade
 Allows dealings only in listed securities : In fact, stock exchanges maintain an official list of securities that could be
purchased and sold on its floor. Securities which do not figure in the official list of stock exchange are called unlisted
securities. Such unlisted securities cannot be traded in the stock exchange.
 Transactions effected only through members : All the transactions in securities at the stock exchange are effected only
through its authorised brokers and members. Outsiders or direct investors are not allowed to enter in the trading circles of
the stock exchange. Investors have to buy or sell the securities at the stock exchange through the authorised brokers only.
 Association of persons : A stock exchange is an association of persons or body of individuals which may be registered or
unregistered.
 Recognition from Central Government : Stock exchange is an organised market. It requires recognition from the Central
Government.
 Working as per rules : Buying and selling transactions in securities at the stock exchange are governed by the rules and
regulations of stock exchange as well as SEBI Guidelines.
 Specific location : Stock exchange is a particular market place where authorised brokers come together daily (i.e. on working
days) on the floor of market called trading circles and conduct trading activities.
 Financial Barometers : Stock exchanges are the financial barometers and development indicators of national economy of
the country. Industrial growth and stability is reflected in the index of stock exchange.

Depository, in very simple terms, means a place where something is deposited for safekeeping. A depository is an organisation
which holds securities of a shareholder in an electronic form and facilitates the transfer of ownership of securities on the settlement
dates. According to Section 2(e) of the Depositories Act, 1996, ‘Depository means a company formed and registered under the
Companies Act, 1956 and which has been granted a certifycate of registration under Section 12(1 A) of the Securities and Exchange
Board of India Act, 1992.’
Benefi ts of a Depository System
• Immediate allotment, transfer and registration of securities
• No stamp duty on transfer of securities
• Elimination of risks associated with physical certifi cates
• Reduction in paperwork and transaction costs
• Decrease in settlement risks & frauds
• Loan against the pledged demat shares at low cost
Valuation of dividends
What is Gordon Growth Model
The Gordon Growth Model is used to determine the intrinsic value of a stock based on a future series of dividends that
grow at a constant rate. Given a dividend per share that is payable in one year and the assumption the dividend grows at
a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends. Because the
model assumes a constant growth rate, it is generally only used for companies with stable growth rates in dividends per
share.
Securities Exchange Board of India (SEBI) was set up in 1988 to regulate the functions of securities market. SEBI promotes
orderly and healthy development in the stock market but initially SEBI was not able to exercise complete control over the stock
market transactions.It was left as a watch dog to observe the activities but was found ineffective in regulating and controlling
them. As a result in May 1992, SEBI was granted legal status. SEBI is a body corporate having a separate legal existence and
perpetual succession.

With the growth in the dealings of stock markets, lot of malpractices also started in stock markets such as price rigging,
‘unofficial premium on new issue, and delay in delivery of shares, violation of rules and regulations of stock exchange and
listing requirements. Due to these malpractices the customers started losing confidence and faith in the stock exchange. So
government of India decided to set up an agency or regulatory body known as Securities Exchange Board of India (SEBI).

Purpose and Role of SEBI:

SEBI was set up with the main purpose of keeping a check on malpractices and protect the interest of investors. It was set
up to meet the needs of three groups.
1. Issuers:
For issuers it provides a market place in which they can raise finance fairly and easily.
2. Investors:
For investors it provides protection and supply of accurate and correct information.
3. Intermediaries:
For intermediaries it provides a competitive professional market.
Objectives of SEBI:
The overall objectives of SEBI are to protect the interest of investors and to promote the development of stock exchange
and to regulate the activities of stock market. The objectives of SEBI are:
1. To regulate the activities of stock exchange.
2. To protect the rights of investors and ensuring safety to their investment.
3. To prevent fraudulent and malpractices by having balance between self regulation of business and its statutory
regulations.
4. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.
Functions of SEBI:
The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three important functions. These
are:
i. Protective functions
ii. Developmental functions
iii. Regulatory functions.
 Objectives of stock market

1. Business Operations : Stock markets provide businesses a venue for raising capital.
2. Financial Planning
3. Economic Efficiencies
4. Investor Protection

Methords of Evaluation of Investment Proposals

Payback Period Method: ...
 Accounting Rate of Return Method: ...
 Net Present Value Method: ...
 Internal Rate of Return Method: ...
 Profitability Index Method: ...
 Discounted Payback Period Method: ...
 Adjusted Present Value Method:

Preference Shares

Preference shares are the shares which promise the holder a fixed dividend, whose payment takes
priority over that of ordinary share dividends. Capital raised by the issue of preference shares is called
preference share capital

Equity Shares

Equity shares are also known as ordinary shares. They are the form of fractional or part ownership in
which the shareholder, as a fractional owner, takes the maximum business risk. The holders of Equity
shares are members of the company and have voting rights. Equity shares are the vital source for
raising long-term capital.

Money market and capital market instruments see in Indian financial system notes.