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