Q 1-1: Define the term investments? An investment can be explained as the commitment of funds to one or more resources that might be held over some future time frame. Investment consists of management of investor’s wealth, which is the sum of at first invested amount, current income and present value of all future incomes. Investments can be produced both in financial and real property and both marketable and non-marketable securities.
Q 1-2: Describe the broad two-step process involved in making investment decisions? Investors can choose from among a wide range of securities in search of their expected returns. Traditionally, investors have analyzed and managed securities utilizing a broad two-step process. Security analysis: the first part of the investment decision process involves the valuation and analysis of individual securities.
It is essential to understand the characteristics of varied securities and the factors that affect these characteristics. A valuation model is put on these securities to estimate their value or price. Value is the function of expected return on the security and the chance involved. Portfolio management: After securities have been evaluated, it becomes easy for an investor to select a stock portfolio of his choice. A stock portfolio is a collection of different assets, in which an investor invests his wealth. But buying different stocks is not the final end of the story.
An investor needs to know when and how to revise or enhance the portfolio, while maintaining his return and risk choices. Portfolio must be managed whether an investor opts for active or passive investment strategy on the market. A passive investment str tegy involves determining the desired investment proportions and assets, making a few occasional changes to profile type and percentage of property. A dynamic investment strategy involves specific investment decisions on a regular basis to improve the investment proportion chosen, or the assets in a particular category, based on the belief that it’ll be profitable to take action.
The decision of deciding on a dynamic or a unaggressive strategy depends on how efficient the market is. The idea of effective market will be detailed later. Q 1-3: Is the study of investments important to many individuals? The study of investment is concerned with the economic wellbeing of the people.
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Every individual must invest his profit a way so that his prosperity might not lose its value. Because of the inflationary styles the economic prosperity of the individuals is bound to decline if it’s not spent to yield a profit that should at least compensate for the loss in value because of this of inflation. Before couple of years, the retirement benefit account and pension money have been invested at an increasing rate in the financial marketplaces through investment companies, which is a form of indirect investing. The working individuals can plan their pension income by buying the financial marketplaces through investment companies.
The investment activity can range from a simple starting of a Savings Account in a bank or investment company, to the more complicated ways of investing in derivative securities. A wide range of other choices of investing in different assets carries various risk and return levels. The investors who are directly buying the financial markets must have a knowledge of investment concepts so that they might be able to devise a strategy to meet their investment objectives. Even those who do not want to invest straight should know about the investment concepts in order that they may not lose their prosperity by giving it in wrong hands.
The research of investment also enhances the career opportunities for a person, which may be satisfying both professionally and economically, in investment banking, security trading, security analysis, stock portfolio management, stockbrokers or financial planners. Q 1-4: Distinguish between a financial and a real asset? Real property are tangible assets which are priced on the basis of their physical characteristics such as silver, silver, natural cotton or real estate.
In comparison, financial resources are paper, or electronic claims on some issuer, like federal government or companies. Obviously, these claims do not have any physical characteristics and are priced based on the expected future benefit produced from them. Included in these are certificates of debris, bonds, shares, treasury bills, and other marketable or non-marketable securities.
Q 1-5: Describe the return and risk trade-off confronted by all traders? Investors desire to earn come back on the amount of money that they make investments. They must realize that cash comes with an opportunity cost. By keeping cash idle, one forgoes the opportunity to earn a return. However, while investing, it’s important to tell apart between an expected and a understood return.