CHAPTER ONE: Introduction to investment1.1 Meaning of investment Investment is the current commitment of dollars for a period of time in order to derive futurepayments thatwill compensate the investor for (1) the time the funds are committed, (2) theexpected rate ofinflation, and (3) the uncertainty of the future payments. The “investor” can bean individual, agovernment, a pension fund, or a corporation. Similarly, this definition includesall types ofinvestments, including investments by corporations in plant and equipment andinvestments byindividuals in stocks, bonds, commodities, or real estate. In all cases, the investoris trading a known dollar amount today for some expected future stream of payments that will begreater than the current outlay. At this point, we have answered the questions about why people invest and what they want fromtheir 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, andthe uncertainty of the return. Investing may be very conservative as well as aggressivelyspeculative. Whatever be the perspective, investment is important to improve future welfare.Funds to be invested may come from assets already owned, borrowed money, savings orforegone consumptions.By forgoing consumption today and investing the savings, investors expect to enhance theirfuture consumption possibilities by increasing their wealth. Investment can be made to intangibleassets like marketable securities or to real assets like gold, real estate etc. More generally itrefers to investment in financial assets. InvestmentsRefers to the study of the investmentprocess, 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 twoprimary functions: analysis and management.1| P a g e
Investment environmentInvestment environment can be defined as the existing investmentvehicles in the market available for investor and the places for transactionswith these investment vehicles.1.2 Investment vehiclesInvestment in financial assets differs from investment in physical assets inthose important aspects:• Financial assets are divisible, whereas most physical assets are not. Anasset is divisible if investor can buy or sell small portion of it. In case offinancial assets it means, that investor, for example, can buy or sell a smallfraction of the whole company as investment object buying or selling anumber of common stocks.• Marketability (or Liquidity) is a characteristic of financial assets that is notshared by physical assets, which usually have low liquidity. Marketability (orliquidity) reflects the feasibility of converting of the asset into cash quicklyand without affecting its price significantly. Most of financial assets are easyto buy or to sell in the financial markets.