EQUITY RESEARCH Session 1 Overview of Investments

SECTION 1: INTRODUCTION TO INVESTMENTS

What is Investment? Difference between Investment, Speculation & Gambling Investment Alternatives Criteria for evaluating investment alternatives

MEANING OF INVESTMENT

Sacrifice of current money or other resources for future benefits

Certain Time

Uncertain Risk

INVESTMENT vs SPECULATION vs GAMBLING Investor Speculator

Planning Horizon
Risk Appetite Return Expectation

Long duration
Moderate Modest

Short duration
High High

Basis of Decision

Fundamental Relies on hearsay, aspects and careful market psychology evaluation about prospects of firm
Mostly uses own funds Normally resorts to borrowing

Leverage

INVESTMENT ALTERNATIVES
Equity Shares
MF

Non Marketable Financial Assets Bonds

Real Estate

Life Insurance Policies

Money Market instruments

Financial Derivatives

Precious Objects

CRITERIA FOR EVALUATING INVESTMENT ALTERNATIVES Rate of Return

Current Yield

Risk

Capital Gain/ Loss Variance Standard Deviation

Beta Depth Breadth Resilience

Marketability

Tax Shelter

Initial Benefit Continuing Benefit

Terminal Benefit

Convenience

SECTION 2: PORTFOLIO MANAGEMENT

Steps in Portfolio Management How to formulate investment objectives? Impact of environment in investment decisions Common errors in investment

STEPS IN PORTFOLIO MANAGEMENT STEP 1: Specification of Investment Objectives and Constraints - Objectives: Current income, capital appreciation, safety of principal - Constraints: Liquidity, time horizon, tax, special circumstances STEP 2: Choice of Asset Mix - Proportion of stocks and bonds in the portfolio - Depends on risk appetite and investment horizon of investor STEP 3: Formulation of Portfolio Strategy - Active: Resort to sector rotation, security selection, market timing to earn superior risk adjusted returns - Passive: Holding a diversified portfolio STEP 4: Selection of Securities - Stocks: Fundamental and Technical Analysis - Bonds: YTM, Credit Rating, Tax Shelter, Liquidity

STEPS IN PORTFOLIO MANAGEMENT(2) STEP 4: Portfolio Execution

- Buying and selling of specified securities STEP 5: Portfolio Revision

- Proportion of stocks and bonds in the portfolio may change in response to price changes - May call for sector rotation, security switches STEP 5: Portfolio Evaluation

- Check if portfolio return commensurate its risk exposure

FORMULATION OF INVESTMENT DECISIONS

Fundamental Approach Psychological Approach Academic Approach

Eclectic Approach

COMMON ERRORS IN INVESTMENT MANAGEMENT

Inadequate comprehension of risk and return Vaguely formulated investment policy Nave extrapolation of the past

Untimely entries and exit

High costs Over diversification and under diversification

Wrong attitude towards profits and losses