Finance and Investment Overview

Finance

• Finance is both a science and an art, applying economic and accounting principles to manage, allocate, and utilize financial resources, investments, and expenditures.

Investment

• Investment involves forgoing immediate consumption to accumulate a larger amount for future consumption.
• It's a trade-off between present and future consumption.
• Investment commits capital for a specific period to obtain future payments compensating for time, expected inflation, and uncertainty.
• Real investment involves tangible assets like machines, land, and plant, contributing to the economy's productive capacity.
• Financial investment relates to paper or electronic contracts (e.g., stocks, bonds) enabling individuals to claim real assets.

Advantages of Investing in Financial Assets

• Divisibility
• Marketability/Liquidity
• Shorter holding period
• Information availability

Investment Types

• Individual Investors: These are individuals investing on their own. Often called retail investors.
• Institutional Investors: These are legal entities that gather funds to invest in securities or other assets. They often buy and sell securities in larger quantities.

Investment Types

• Direct Investment: Buying or selling financial instruments directly in financial markets.
• Indirect Investment: Buying or selling financial instruments through financial intermediaries.

Direct vs. Indirect Investment

• Direct Investment: Provides control and allows investors to decide when to buy/sell.
• Indirect Investment: Managed by professionals, diversifying risk and allowing smaller investors access to more diversified investments.

Common Investment Vehicles

• Short-term investment vehicles: Such as money market instruments (Matures in a year or less), Certificate of Deposits, Treasury Bills, Commercial Paper.
• Fixed-income securities: Long-term investments with fixed returns over a set period. Examples include preferred stock and long-term debt securities (bonds).
• Bonds, Treasury notes/bonds- debt instruments issued by government for more than a year, corporate bonds - long-term debt instruments for private institutions borrowing money. Examples include Secured bonds, unsecured bonds (debentures), callable bonds, convertible bonds.
• Common stocks: ownership shares in a corporation, representing residual claims with limited liability.
• Speculative investment vehicles: High-risk with potential for significant returns.

Financial Markets

• Capital Market: Markets for securities with maturities longer than a year, like stocks and bonds.
• Money Market: Short-term securities market (a year or less) where funds are borrowed and lent.
• Primary Market: Where securities are first issued to investors.
• Secondary Market: Allows investors to buy and sell existing securities.

Money Market vs. Capital Market

• Money Market: Short term, low risk, readily converted to cash.
• Capital Market: Long term, potentially higher risk.