chapter_one_introduction_to_investment - CHAPTER ONE Introduction to investment 1.1 Meaning of investment Investment is the current commitment of

chapter_one_introduction_to_investment - CHAPTER ONE...

This preview shows page 1 - 3 out of 21 pages.

CHAPTER ONE: Introduction to investment 1.1 Meaning of investment Investment is the current commitment of dollars for a period of time in order to derive future payments that will compensate the investor for (1) the time the funds are committed, (2) the expected rate of inflation, and (3) the uncertainty of the future payments. The “investor” can be an individual, a government, a pension fund, or a corporation. Similarly, this definition includes all types of investments, including investments by corporations in plant and equipment and investments by individuals in stocks, bonds, commodities, or real estate. In all cases, the investor is trading a known dollar amount today for some expected future stream of payments that will be greater than the current outlay. At this point, we have answered the questions about why people invest and what they want from their investments. They invest to earn a return from savings due to their deferred consumption. They want a rate of return that compensates them for the time, the expected rate of inflation, and the uncertainty of the return. Investing may be very conservative as well as aggressively speculative. Whatever be the perspective, investment is important to improve future welfare. Funds to be invested may come from assets already owned, borrowed money, savings or foregone consumptions. By forgoing consumption today and investing the savings, investors expect to enhance their future consumption possibilities by increasing their wealth. Investment can be made to intangible assets like marketable securities or to real assets like gold, real estate etc. More generally it refers to investment in financial assets. Investments Refers to the study of the investment process, generally in financial assets like marketable securities to maximize investor’s wealth, which is the sum of investor’s current income and present value of future income. It has two primary functions: analysis and management. 1 | P a g e
Investment environment Investment environment can be defined as the existing investment vehicles in the market available for investor and the places for transactions with these investment vehicles. 1.2 Investment vehicles Investment in financial assets differs from investment in physical assets in those important aspects: • Financial assets are divisible, whereas most physical assets are not. An asset is divisible if investor can buy or sell small portion of it. In case of financial assets it means, that investor, for example, can buy or sell a small fraction of the whole company as investment object buying or selling a number of common stocks. Marketability (or Liquidity) is a characteristic of financial assets that is not shared by physical assets, which usually have low liquidity. Marketability (or liquidity) reflects the feasibility of converting of the asset into cash quickly and without affecting its price significantly. Most of financial assets are easy to buy or to sell in the financial markets.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture