FIN 406

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