INVESTMENT ANALYSIS
Topic: Concept of Investment
Hi guys, let’s
do some theories – you never can tell, most students concentrate on calculations and on the judgment
day, simple theory will put them off;
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questions and answers, email theotherwomaninmarriage@gmail.com
INTRODUCTION
Economist view investment as an
addition to fixed capital stock or the value of an economic output at any given
point in time that takes the form of new investment, new structure, new
production, change in inventory in whatever form. It should be noted that in economics, there
are two types of investment namely;
a. Social
Investment
b. Economic
Investment
Social investment is undertaken
to improve the well being or the welfare of the citizens as such, no profit or
return is expected from such venture.
Economic Investment is undertaken
primarily for profit marking. For the
purpose of this lecture, economic investment will be the bone of contention.
Financial analyst view of
investment: Financial analyst define investment as the act of committing
resources into an undertaken with the hope of reaping returns in the
future. In this context, financial
scholars see investment as the commitment of funds into an undertaken with an expectation
of positive return commensurate with the level of risk assumed.
DISTINGUISHING BETWEEN INVESTMENT, GAMBLING AND SPECULATION
PARAMETERS
|
INVESTMENT
|
SPECULATION
|
GAMBLING
|
Time horizon
|
The length of time between the date investment is
made and the future date when it is relinquished or sold is usually more than
1 year. The time horizon for
investment is a long period of time – sometime commitment of funds.
|
The holding period for any form of speculation is
usually less than 1year. It could be 2
weeks or 1 month or 5 months but less than a year.
|
The holding period of gambling can be measured in
seconds.
|
Planning horizon
|
An investor has relatively longer planning
horizon of at least one year. Before investing
a feasibility study is conducted to determine whether or not the investment
will generate adequate cash-flow and profit, withstand the risk it will
encounter and remain viable in the long-term.
|
A speculator has a short planning horizon –
usually few days or few months. In the
actual sense, most speculators have no time for feasibility study or do not
conduct F.S. All they do is identify
and buy sellable asset in expectation of profit from market fluctuate or with
the hope of selling them when t he price appreciate.
|
Gambling has absolutely no planning horizon. The Gambler does not do the kind of search;
investigation, analysis, scrutiny or evaluation that is supposed to precede
any rational investment activities.
|
Risk disposition
|
An investor is normally not willing to assume
more than moderate risk, meaning that an investor is not willing to assume
risk more than the expected return
|
A speculator is ordinarily willing to assume high
risk.
|
Highly risky. A gambler takes on risk that is
greater commensurate with the expected returns. He assumes higher risk.
|
Return expectation
|
An investor usually seeks a modest rate of return
which is commensurate with the limited risk assumed by him.
|
A speculator looks for a high rate of return in
exchange for the high risk borne by him.
|
A gambler expects higher returns.
|
Basis for decision
|
An investor attaches greater significance to
fundamental factors and attempts a careful evaluation of the prospects of the
firm.
|
A speculator relies more on hear say (rumour) and
market psychology to forecast what the future market will be like. If he expects price increase, he commits
his funds.
|
The basis
for his decision is the outcome i.e. the return.
|
CHARACTERISTICS OF GOOD INVESTMENT
A good investment has the following characteristics:
a. REASONABLE INCOME: For any investment
to be considered good enough, such an investment must be capable of yielding reasonable
return relative to the size of the fund invested. In other words, proportional to the cost of
investment.
b. MARKETABILITY: A good investment must be highly marketable in the sense
that it can be readily bought and sold.
c. LIQUIDITY: Any good investment must be highly liquid. This refers to the degree of ease in which
such an investment can be converted into cash without any significant loss or
value.
d. STABILITY OF INCOME: A good investment should be capable of yielding
or generating income on continuous basis.
It needs not to be constant in terms of amount, but it should be
regular.
THE INVESTMENT PROCESS OR PORTFOLIO MANAGEMENT PROCESS
The investment process describes
how an investor should go about making decisions with regards to what
marketable securities to invest in, how extensive the investment should be, and
when the investment should be made.
There are five steps in the
investment process:
i.
Setting Investment Policy
ii.
Performs Security Analysis
iii.
Constructs a Portfolio
iv.
Revise the Portfolio
v.
Evaluate the performance of the portfolio
Setting Investment Policy:
This is the investment planning
stage where the investor defines his mission statement as well as his risk
tolerance level. He also determines his
investment objectives at this stage as well as his asset mix.
Perform Security Analysis:
Performing security analysis
involves examining several individual security market prices in an attempt to
predict future price movement.
Portfolio Construction:
Portfolio construction involves identifying those specific assets in
which to invest as well as determine the proportions of the investor’s wealth
to put into each one.
Portfolio Revision:
Portfolio revision concerns the periodic repetition of the three
previous steps. Revising a security is
necessary because over time, the prices of the security changes, meaning that
some securities that initially where not attractive may become attractive and
others that were attractive at one time may no longer be so. Thus, the investor may want to add the former
to his or her portfolio, while simultaneously deleting the latter.
Portfolio Performance
Evaluation:
It involves determining periodically how the portfolio performed, in
terms of not only the return earned but also risk experienced by the investor.
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