TYPES OF INVESTOR

The Contrarian buys when the rest of the world sells.Trend followers are more conservative and tend to invest in products such as bank stocks. The last is the very conservative hedger and holder the famous small investor of India who wants high return and low risk, preferably guaranteed by the government. Researchers in the field have also found that investor personality may differ across asset classes, with more risks being taken with a more familiar category.

Characteristics The measured investor starts investing early, enjoys investing and is happy with his or her current financial situation. STRENGTHS Regularly rebalances his or her portfolio. Invests regularly. Avoids concentration in a single investment. Is committed to an investing plan. WEAKNESS Holds losers too long. Does not take profits.

MEASURED INVESTOR

RELUCTANT INVESTOR
CHARACTERISTICS The reluctant investor does not enjoy investing and prefers to spend as little time as possible on his or her investments. However, the reluctant, investor is confident that he or she will have a comfortable retirement. Strengths Gets rid of investments that are losing. Avoids concentration of portfolio in a single investment. Does not chase hot investments. WEAKNESS Invest too little and too late. Does not invest regularly, even if he or she has the money to do so. Does not regularly rebalance his or her portfolio.

COMPETITIVE INVESTOR
CHARACTERISTICS The competitive investor enjoys investing, but makes a habit of trying to beat the market. This investor is happy with his or her current situation and is confident about the future. STRENGTHS Invests regularly. Starts investing early. Puts as much money as possible into his or her investments. Regularly rebalances his or her portfolio. WEAKNESS Holds losers too long and does not take profits. Fails to adequately diversify his or her investments. Is over-confident and chases hot investments.

SOURCES OF INVESTMENT INFORMATION

In the investment process we have seen that the investor should have knowledge about the investment alternatives and the markets. He has to analyse the economy, industry and the company. For all these, he needs adequate flow of information varies with the type of information required.

INTERNATIONAL AFFAIRS
With increasing globalisation, international events affect the economy of the nation. Nations are economically and politically linked with each other. The economic crisis of one nation has a contagion effect on the other. The depreciation of the peso value in Mexico affects the trade in Asia. The South-East Asian crisis has affected Asia, United states and Europe. Indian capital market reacted to the crisis and there was a fall in the sensex for a brief period. The policies of the IMF and the World Bank also affect the volume of loan for the development purpose. Not only the economic events but political events and wars also affect the stock market. U.S air raids on Iraq affected the Indian economy and the capital market. Almost all the daily news papers carry the international news. Some foreign journals like London Economist, Far East Economic Review and Indian magazines like Business World and Fortune India review the international events. International financial institution like IMF, World Bank and Asian Development Bank publish their own survey reports periodically.

The growth of the national economy and political events within the nation influence the investment decisions. The political events are provided by the news paper, magazines like India Today, Out Look, Fortune India, The Week etc. The economic events and their implication on the securities markets are analysed in Financial Express, Economic Times and Business Line. RBI Bulletin and annual reports give a wide range of information regarding macro economic indicators like GDP,GNP, inflation, agricultural and industrial production, capital market, development in the banking sectors and the balance of payment. Center for Monitoring India Economy also publishes reports about the macro economic factors. The Economic Survey of India and reports of companies also provide information regarding the economy, industry and other sectors.

NATIONAL AFFAIRS

INDUSTRY INFORMATION
Information about the industry is required to identify the industries that perform better than the national economy as a whole. Financial news papers regularly bring out industrial studies for the benefit of the investors. Experts opinions about the industries are available in Business India, Business Today and Dalal Street. CMIE also publishes data regarding the industries. Bombay Stock Exchange publishes the Directory of Information that contains industry and company information.

COMPANY INFORMATION
A source of company information must be developed to facilitate the company analysis. The BSE,NSE and OTCEI provide details about the listed companies in the web sites. Almost all the financial journals carry out the company stocks. The Annual Reports of the companies and the un-audited quarterly and half-yearly results also provide an insight into the performance of the company. Software companies also sell details regarding the financial performance of the companies in the floppies.

Stoke Exchange Directory comes in volumes. It gives information about all listed public companies and major public sector corporations. Kotharis Economic and Industry Guide of India gives relevant financial information about the limited companies. Times of India Directory gives details information about many industrial group and companies.

STOCK MARKET INFORMATION

All the financial dailies and investment related magazines publish the stock market news. Separate News Bulletins are issued by BSE,NSE, and OTCEI providing information regarding the charges that take place in the stock market. SEBI news letter gives the changes in the rules and regulations regarding the activities of the stock market. Reserve Bank of India Bulletin also carries the information about the stock market

The dictionary meaning of risk is the possibility of loss or injury; the degree or probability of such loss. In risk, the probable outcomes of all the possible events are listed. Once the events are listed subjectively, the derived probabilities can be assigned to the entire possible events For example, the investor can analyse and find out the possible range of returns from his investments. He can assign some subjective probability to his returns, such as 50% of the time there is a like hood of getting Rs 2 per share as dividend and 50% of the time the possible dividend may be Rs 3 per share. Often risk is inter changeably used with uncertainty. In uncertainty, The possible events and probabilities of their occurrence are not known. Hence, risk and uncertainty are different from each other.

RISK DEFINED

TYPES OF RISKS
Risk consists of two components, the systematic risk and unsystematic risk. The systematic risk is caused by factors external to the particular company and uncontrollable by the company. The systematic risk affects the market as a whole. In the case of unsystematic risk the factors are specific, unique and related to the particular industry or company.

SYSTEMATIC RISK
The systematic risk affects the entire market. Often we read in the newspaper that the market is in the bear hug or in the bull grip This indicates that the entire market is moving in a particular direction either downward or upward. The economic conditions, political situations and the sociological changes affect the security market. The recession in the economy affects the profit prospect of the industry and the stock market. The 1998 recession experienced by developed and developing countries has affected the stoke markets all over the world. The South East Asian crisis has affected the stock market world wide. There factors are beyond the corporate and the investor. They cannot be entirely avoided by the investor. It drives home the point that the systematic risk is unavoidable. The systematic risk is further sub-divided into :Market Risk Interest Rate Risk Purchasing Power Risk.

Jack Clark Francis has defined market risk as that portion of total variability of return caused by the alternating forces of bull and bear markets. When the security index moves upward haltingly for a significant period of time, it is known as bull market, the index moves from a low level to the peak. Bear market is just a reverse to the bull market; the index declines haltingly from the peak to a market low point called trough for a significant period of time. During the bull and bear market more than 80 per cent of the securities prices rise or fall along with the stock market indices.

MARKET RISK

INTEREST RATE RISK

Interest rate risk is the variation in the single period rates of return caused by the fluctuations in the market interest rate. Most commonly interest rate risk affects the price of bonds, debentures and stocks. The fluctuations in the interest rates are caused by the changes in the government bonds. The bonds issued by the government and quasigovernment are considered to be risk free. If higher interest rates are offered. Investor would like to switch his investments from private sector bonds. If the shift in government to tide over the deficit in the budget floats a new loan/bond of a higher rate of interest, there would be a definite shift in the funds from low yielding bonds to high yielding bonds and from stock to bonds. Interest rates not only affect the security traders but also the corporate bodies who carry their business with borrowed funds. The cost of borrowing would increase and a heavy out flow of profit would take place in the form of interest to the capital borrowed. This would lead to a reduction in earning per share and a consequent fall in the price of share.

PURCHASING POWER RISK

Variations in the returns are caused also by the loss of purchasing power of currency. Inflation, is the reason behind the loss of purchasing power. The level of inflation proceeds faster than the increase in capital value. Purchasing power risk is the probable loss in the purchasing power of the returns to be received. The rise in price penalises the returns to the investor, and every potential rise in price is a risk to the investor.

UNSYSTEMATIC RISK
As already mentioned, unsystematic risk is unique and peculiar to an industry. Unsystematic risk stems from managerial inefficiency, technological change in the production process, availability of raw material, changes in the consumer preference, and labour problems. The nature and magnitude of the above mentioned factors differ from industry to industry, and company to company. They have to be analysed separately for each industry and firm. The changes in the consumer preference affect the consumer products like television sets, washing machines, refrigerators, etc. more than they affect the iron and steel industry. Technological changes affect the information technology industry more than that of consumer product industry. Thus, it differs from industry to industry. Financial leverage of the companies that is debt- equity portion of the companies differs from each other. The nature and mode of raising finance and paying back the loans, involve a risk element. All these factors form the unsystematic risk and contribute a portion in the total variability of the return. Broadly, unsystematic risk can be classified into: Business risk Financial risk

BUSINESS RISK
Business risk is that portion of the unsystematic risk caused by the operating environment of the business. Business risk arises from the inability of firm to maintain its competitive edge and the growth or stability of the earnings. Variation that occurs in the operating environment is reflected on the operating income and expected dividends. The variation in the expected operating income indicates the business risk. For example take Anu and Vinu companies, the operating income could grow as much as 15 per cent and as low as 7 per cent. In Vinu company, the operating income can be either 12 per cent or 9 per cent. When both the companies are compared. Anu companys business risk is higher because of its high variability in operating income compared to Vinu company. Thus, business risk is concerned with the difference between revenue and earning before interest and tax. Business risk is can be divided into external business risk and internal business risk.

INTERNAL BUSINESS RISK

Internal business risk is associated with the operational efficiency of the firm. The operational efficiency differ from company to company. The efficiency of operation is reflected on the companys achievement of its pre-set goals and the fulfillment of the promises to its investors.

FLUCTUATIONS IN THE SALES

The sales level has to be maintained. It is common in business to lose customers abruptly because of competition. Loss of customers will lead to a loss in operational income. Hence, the company has to build a wide customer base through various distribution channels. Diversified sales force may help to tide over this problem. Big corporate bodies have long chain of distribution channel. Small firms often lack this diversified customer base.

RESEARCH AND DEVELOPMENT

Sometimes the product may go out of style or become obsolescent. It is the management, who has to overcome the problem of obsolescence by concentrating on the in-house research and development program. For example, if Maruti Udyog has to survive the competition, it has to keep its Research and Development section active and introduce consumer oriented technological changes in the automobile sector. This is often carried out by introducing sleekness, seating comfort and break efficiency in their automobiles. New products have to be products have to be produced to replace the old one. Short sighted cutting of R and D budget would reduce the operational efficiency of any firm.

PERSONNEL MANAGEMENT
The personnel management of the company also contributes to the operational efficiency of the firm. Frequent strikes and lock outs result in loss of production and high fixed capital cost. The labour productivity also would suffer. The risk of labour management is present in all the firms. It is up to the company to solve the problems at the table level and provide adequate incentives to encourage the increase in labour productivity. Encouragement given to the labourers at the floor level would boost morale of the labour force and leads to higher productivity and less wastage of raw materials and time.

FIXED COST
The cost components also generate internal risk if the fixed cost is higher in the cost component. During the period of recession or low demand for product, the company cannot reduce the fixed cost. At the same time in the boom period also the fixed factor cannot vary immediately. Thus, the high fixed cost component in a firm would become a burden to the firm. The fixed cost component has to be kept always in a reasonable size, so that it may not affect the profitability of the company.

SINGLE PRODUCT
The internal business risk is higher in the case of firm product. The fall in the demand for a single product would be fatal for the firm. Further, some products are more vulnerable to the business cycle while some products resist and grow against the tide. Hence, the company has to diversify the products if it has to face the competition and the business cycle successfully. Take for instance, Hindustan Lever Ltd., which is producing a wide range of consumer cosmetics is thriving successfully in the business. Even in diversification, diversifying the product in the unknown path of the company may lead to an internal risk. Unwieldy diversification is as dangerous as producing a single good.

EXTERNAL RISK
External risk is the result of operating conditions imposed on the firm by circumstances beyond its control. The external environments in which it operates exert some pressure on the firm. The external factors are social and regulatory factors, monetary and fiscal policies of the government, business cycle and the general economic environment within which a firm or an industry operates . A government policy that favours a particular industry could result in the stocks price of the particular industry. For instance, the Indian sugar and fertilizer industry depend much on external factors.

SOCIAL AND REGULATORY FACTORS

Harsh regulatory climate and legislation against the environmental degradation may impair the profitability of the industry. Price control, import/export control and environment control reduce the profitability of the firm. This risk is more in industries related to public utility sectors such as telecom, banking and transporation. The government tariff policy of the telecom sector has a direct bearing on its earnings. Likewise, the interest rates directions given in the lending policies affect the profitability of the banks. CBSC has not been able to increase its power tariff due to the stiff resistance by the West Bengal government. The pollution control Board has asked to close most of the tanneries in Tamil Nadu, which has affected the leather industry.

POLITICAL RISK
Political risk arises out of the change in the government policy. With a change in the ruling party, the policy also changes. When Sri. Manmohan Singh was the finance minister, liberalisation policy was introduced. During the Bharathiya Janata Government, even through efforts are taken to augment the foreign investment. The host government may change its rules and regulations regarding the foreign investment. From the past, an example can be cited. In1977, the government decided that the multinationals must dilute their equity and share their growth with the Indian investors. This forced many multinationals to liquidate their holding in the Indian companies.

BUSINESS RISK
The Fluctuations of the business cycle lead to fluctuations in the earning of the company. Recession in the economy leads to a drop in the output of many industries. Steel and white consumer goods insustries tend to move in tendem with the business cycle. During the boom period, there would be hectic demand for steel products and white consumer goods. But at the same time, they would be hit much during the recession period. At present, the information technology industry has resisted the business cycle and moved counter cyclically during the recession period. The effects of the business cycle vary from one company to another. Sometimes, companies with inadequate capital and consumer base may be forced to close down. In some other case, there may be a fall in the profit and the growth rate may decline. This risk factor is external to the corporate bodies and they may not be able to control it.

FINANCIAL RISK
It refers to the variability of the income to the equity due to the capital. Financial risk in a company is associated with the capital structure of the company consists of equity funds and borrowed funds. The presence of dept and preference capital result in a commitment of paying interest or pre fixed rate of dividend. The residual income alone would be available to the equity holders. The interest payment affects the payments that are due to the equity investors. The debt financing increase the variability of the returns to the common stock holders and affects their expectations regarding the return . The use debt with the owned funds to increase the return to the shareholders is known as financial leverage.

The Risk Return Relationship

Expected Return Risk Premium

Risk Free Return

Risk

Risk-return Trade-off
Financial decisions incur different degree of risk. Your decision to invest your money in government bonds has less risk as interest rate is known and the risk of default is very less. On the other hand, you would incur more risk if you decide to invest your money in shares, as return is not certain. However, you can expect a lower return from government bond and higher from shares. Risk and expected return move in tandem; the greater the risk, the greater the expected return.

 Financial decisions of the firm are guided by the risk-return trade off. These decisions are interrelated and jointly affect the market value of its shares by influencing return and risk of the firm. The relationship between return and risk can be simply expressed as follows. Return = Riskfree rate + Risk Premium

Risk free rate

Risk free rate is a rate obtainable from a defaultrisk free government security. An investor assuming risk from her investment requires a risk premium above the risk free rate. Risk-free rate is a compensation for time and risk premium for risk. Higher the risk of an action, higher will be the risk premium leading to higher required return on that action.

 A proper balance between return and risk should be maintained to maximize the market value of a firms shares. Such balance is called risk-return tradeoff, and every financial decision involves this trade off.