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1
FIN 406
• Outline
• Investor vs Speculator
• Participants in the Investment Process
• Steps in Investing
• Types of Investors and Investments
2
FIN 406
• A
• Investor
• Interested in the L-R holding
• Assume moderate risk
• Interested in dividend, interest income as well as capital gains.
• Moderate rate of return.
• Decision to buy is made after careful analysis of the past performance
• Use own money
• Speculator
• Interested in the S-R holding
• Assume high risk
• Primarily interested in capital gains.
• High rate of return.
• Decision to buy is based on intuitions, rumor, charts or market analysis.
• Usually borrowed money.
3
FIN 406• B
• Participants in the Investment Process– 1. Federal, state and Local Governments
• Capital expenditure, operating needs, etc.
• “Net demander of funds”?
– 2. Business• Both S- T and L-T financial needs.
• Capital expenditure, mergers & acquisitions, etc
• “Net demander of funds”?
– 2. Households• Both S- T and L-T financial needs.
• Loans. Mortgages, car loans , etc
• “Net suppliers of funds”?
4
FIN 406
• C
• Explain Investment– Sacrifice of current consumption for future consumption.
• Steps in Investing– 1. Meeting Investment Prerequisites
• Explain Life Cycle Hypothesis
• Easy accessible funds for emergency - liquide S-T funds
• Protection against loss due to illness, disability - insurnace
• Planning for adequate retirement income - depends on investment vehicle
5
FIN 406– 2. Establish Investment Goals
– Specific statement of timing, magnitude, forms, and risk associated with a desired return.
– Explain risk return trade off.
– What is realistically attainable?
– 3. Evaluating Investment Vehicle
– Evaluating periodically w.r.t risk and return
– Process of valuation
– 4. Selecting Suitable Investment • Significantly alters ones investment goal if selected improperly.
• Max return may not be the most important factor.
• Tax consideration, dividend vs. capital gains consideration, etc.
6
FIN 406
– 5. Constructing a Diversified Portfolio
– Explain the process of forming a portfolio.
– Mutual funds vs. individual stock.
– 6. Managing Portfolio
– Explain portfolio performance.
• D
• Types of Investors– 1. Individual Investors
– 2. Institutional Investors
7
FIN 406
• Types of Investments– Securities or Properties
• Stocks , bonds vs. real tangible investment or personal properties.
– Direct or Indirect • Direct: Stocks , bonds, real estate, coins, paintings, etc ….
• Indirect: investment made in a portfolio. Mutual fund.
– Debt, equity and Derivative Securities
– Domestic vs Foreign
• Risk and Return