Investment analysis and portfolio management is the field that covers different investment decisions and management of pool of different suitable investments in the form of portfolio. There are a number of different investment alternatives and each one has its own features. In this area investment options are analyzed and evaluated on the basis of their potential to generate effective revenue for longer period of time. In recent world risk is common element that is present almost in every investment.
In order to eliminate that risk factor, certain technique is used which is referred to as portfolio in which different kinds of unrelated investments are pool together in single set. This portfolio is then properly managed as a whole. By making investment analysis, a suitable set of portfolio of different investments is made and then managed as whole to generate effective overall return by minimizing the risk factor associated with these investment options.
Investment Analysis and Portfolio Management Overview
What is Investment?
An economist says that when a person earns a dollar he has two options. Either he will consume it or save it. If the person decides to consume that dollar then he consumes it in car, food or clothing etc. On the other hand if he decides to save it then he will put that dollar aside and consume it at some later date.
Here is clear difference between saving & investment. In case of saving, money is put aside in almost risk-less less option like putting money in bank saving account. The person knows in advance his future returns and the deposited money is insured by the Federal Deposit Insurance Corporation (FDIC). However there are few worries involved in short run saving.
Investment on the other hand is putting money in a risky option. By purchasing shares of company listed in New York Stock Exchange is considered as investment. If the investor permits the broker to keep his shares and send account statement every month then this kind of investment is protected against loss, theft and brokerage firm failure by the Securities Investor Protection Corporation (SIPC). But the investment in such case is not secured against fall in the value. When an investor invests in stocks of particular company then he will have to worry about his investment in many aspects.
Investment and saving is related with shifting of consumption over time. The person holding possessed dollar is not spending it in current day, but will spend it later in assumption that he has invested or saved it wisely.
Investment Alternatives:
Assets:
The things that are owned by people re referred to as assets. Assets are of two kinds which are
- Financial Assets
- Real Assets
There is corresponding liability carried by financial assets somewhere. On the other hand there is no corresponding liability associated with the real assets but it can be created to finance real assets.
Securities:
Security is another kind of investment alternative which is in the form of legal document that represents an ownership. In past years securities are only associated with the financial assets like shares and bonds. But in current years these are also be linked with real assets. The conversion of an assets or group of assets in more marketable form is done through a process called securitization.
Kinds of Securities:
Securities are grouped in the following three categories
- Equity Security
- Fixed Income Security
- Derivative Assets
Equity Security:
The most prominent security in the equity category is the common stock. The ownership interest in the company is represented by stock. The dividend income is paid from the earnings of company in equity securities however it is not the legal obligation of the company to pay dividends. Mostly companies pay dividends on regular basis and try to maintain consistent growth in dividends payments.
Fixed Income Securities:
A fixed income security has defined cash flows which are fixed forever. The most important fixed income securities are bonds. Bond is legal paper that represents an obligation to repay principal amount of loan as well as interest on it. These interest payments & principal amount are fixed and no further amount is obligatory. The cost of borrowing money is represented by the interest. The preferred stock is classified by accountant as equity security but its characteristics are more like fixed income security. Mostly preferred stock pays regular dividend that is fixed forever. Therefore these are considered as fixed income security by the investment manager.
On the other hand a fixed interest rate is paid by the debt security of convertible bond. The bond holder of convertible bond has right to convert his bond into the common stocks of the company. But if the conditions of conversion feature are not potential enough at particular moment, then the bonds are simply bonds & categorized as fixed income security. On the other hand if the prices are increased then the bond can be converted into common stock & considered as equity security.
The main point to remember is that all issued stocks are not surely categorize as equity security and similarly all issued bonds are not permanently categorized as fixed income security. Their category is confirmed by their investment characteristics.
Derivative Assets
In 1990’s derivative assets become popular in the investment community. There is no universal definition of derivative asset. In simple terms the value of derivative asset is derived from the value of some other underlying asset or relationship between various other assets.
The most familiar forms of derivative assets are futures and options. Almost all large investment houses and commercial banks use these building blocks of risk management of as investment options.
Reasons of Investment
There are three reasons for making investments which are
- Income
- Appreciation
- Excitement
Income
One big reason for investment is to supplement the income. People invest in stocks & bonds of different companies that provide them income in the shape of dividends and interest payments.
Appreciation:
Another reason for making investment is appreciation in the form of capital gains. There are certain people who are at good financial stage and do not require income in the shape of dividends but rather they need growth in their investments. The increase in the value of an investment is referred to as appreciation.
Excitement:
In certain cases someone has hobby to make investments. Investment is actually means to an end rather than being an end in itself. The improved financial standing is the ultimate objective of an investment. If an investor makes many trades, but only at the breakeven point in the process, then the material benefit of all these trades is gained only by the stockbroker.
Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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