Man 413 Investment Management PDF

MAN 413 2/20/20 INVESTMENT MANAGEMENT THE CONCEPT OF «INVESTMENT» 2/20/20 2/20/20 CONSUME SAVE 2/20/20  THE CONCEPT OF INVESTMENT Money management involves the decision of consumption and saving....

MAN 413 2/20/20 INVESTMENT MANAGEMENT THE CONCEPT OF «INVESTMENT» 2/20/20 2/20/20 CONSUME SAVE 2/20/20  THE CONCEPT OF INVESTMENT Money management involves the decision of consumption and saving. Sources of Income: wage / salary income, business income, professional income, rent income, interest income, dividend income The portion of the income that is not spent for consumption is called saving 2/20/20  THE CONCEPT OF INVESTMENT Consumption items : Food and beverages Housing / Shelter Clothing Home appliances Health Education Travel Entertainment Communication Transportation 2/20/20  THE CONCEPT OF INVESTMENT FINANCIAL PLANING PROCESS: What are the sources of income? What is the amount of money allocated to consumption?  What is the amount of money allocated to savings? Income > Consumption  “SURPLUS”  SAVE and/or INVEST Consumption > Income  “DEFICIT”  FIND MONEY (FINANCING) 2/20/20 SAVING VS. INVESTING 2/20/20  SAVING VS. INVESTING “SAVING” : Setting aside money for emergencies or future spendings “INVESTING” : Buying shares of stock, bond, mutual funds, real estate with the expectation that the investment will make money. 2/20/20  INVESTMENT ALTERNATIVES Bank time deposit account Participation account  Real estate Securities such as stock, bond, bill.  Precious metals such as gold and silver.  Foreign currencies Cryptocurrencies 2/20/20  REAL ASSETS VS FINANCIAL ASSETS REAL ASSETS: Tangible investments Physical assets that have intrinsic worth due to its properties. Types: Precious metals, commodities, real estate, land, equipment, natural resources More stable but less liquid 2/20/20  REAL ASSETS VS FINANCIAL ASSETS FINANCIAL ASSETS: Carries a corresponding liability Non-physical assets that have intrinsic worth due to its contractual claim. Types: Bank deposits, bonds, stocks More liquid than real assets 2/20/20  SECURITIES SECURITIES: A legal document that shows an ownership interest. Securitization is the process of converting an asset or collection of assets into a more marketable form. 2/20/20  SECURITIES SECURITY GROUPINGS: Equity securities – common stock (dividend, capital gain / loss) Fixed income securities – bond (interest) Derivatives assets – options, futures, forwards, swaps 2/20/20  WHY DO WE INVEST? 1. Supplement income 2. Earn capital gain 3. Experience the exitement 2/20/20  WHO IS AN INVESTOR? An investor is any person or other entity (such as a firm or mutual fund) who commits capital with the expectation of receiving financial returns. Investors rely on different financial instruments to earn a rate of return and accomplish important financial objectives like building retirement savings, funding a college education, or merely accumulating additional wealth over time A wide range of investment instruments exist to accomplish goals, including stocks, bonds, commodities, mutual funds, options, futures, foreign exchange, gold, silver, retirement plans, and real estate (See Figure 1) Investors can analyze opportunities from different angles, and generally prefer to minimize risk while maximizing returns.  WHO IS AN “INVESTOR?” Highlights: Investors use different financial instruments to earn a rate of return to accomplish financial goals and objectives. Investment securities include stocks, bonds, mutual funds, derivatives, commodities, and real estate. Investors can be distinguished from traders in that investors take long-term strategic positions in companies or projects. Investors build portfolios either with an active orientation that tries to beat the market index or a passive strategy that attempts to track an index.  FIGURE 1. DIFFERENT TYPES OF INVESTMENT INSTRUMENTS  TYPES OF INVESTORS There are two types of investors: -Retail Investors - Institutional Investors  RETAIL INVESTORS A retail investor is an individual who purchases securities for his or her own personal account rather than for an organization. (See Fig.2) Retail investors typically trade in much smaller amounts than institutional investors such as mutual funds, pensions, or university endowments. Retail investors are non-professional market participants who generally invest smaller amounts than larger, institutional investors. Individual investors are thought to be less knowledgeable, less disciplined, less skillful, and more prone to behavioral and emotional errors than professionals. Despite their lack of knowledge, the retail investment space is enormous with individuals investing through retirement accounts, brokerage firms, online trading accounts, and roboadvisors. FIGURE 2. RETAIL INVESTORS  INSTITUTIONAL INVESTORS An institutional investor is a company or organization that invests money on behalf of other people. Mutual funds, pension funds and insurance companies are examples (See Fig. 3). Institutional investors often buy and sell substantial blocks of stocks, bonds, or other securities. They move large blocks of shares and they have a tremendous influence on the stock market's movements. They are considered to be sophisticated investors who are knowledgeable and, therefore, less likely to make uneducated investments. Institutional investors are subject to fewer of the protective regulations that the Securities and Exchange Commission (SEC) The money that institutional investors use is not actually money that the institutions own themselves. Institutional investors generally invest for other people. FIGURE 3. TYPES OF INSTITUTIONAL INVESTORS END OF THE CHAPTER KEEP CALM AND ENJOY SPRING SEMESTER (Hint: this is better)