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Unit 1 What is Investment?By Joey LaiBanking Academy, Vietnam

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Content

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Definition

Any asset into which funds can be placed with the expectation that it will generate positive income and/or preserve or increase its valueInvestment An investment is to commit money at risk to purchase a financial instrument or other asset for a higher profitable return.orFinancial Investment

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A "real" investor does not simply throw his or her money at any random investment

Investing is not gambling

What Investing Is Not

What is spread betting? Spread betting is a type of speculation taking a bet on the price movement of a security. Investing involves investors do a lot of research before committing their money because the payoff normally takes a long time.

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Spread BettingGambling or Investing?Investors speculate on two possibilities namely the upward or downward movement of an individual share, currency, or commodity, value, or a stock index

Why bother investing?We want more money to increase our personal freedom, sense of security and ability to afford the things we want in life.

Time Horizon of Investment

These include buying a retirement fund, shares and bonds. Short-termLong-term Time HorizonThese include saving for a car or an overseas vacation. ( Bank savings)

Short-term investment: Investing money in financial instruments that are expected to be held/matured for a year or less. Example: Marketable securities, commodities, money market instruments, and options.Long-term investment: Money invested in financial instruments for more than a year. Example: long-term corporate bonds.7

Investment VehiclesInvestment Vehicles

Buying mutual fundsBuying goldBuying securitiesBuying real estates

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Classification of Financial InvestmentsBy its time horizon: short-term vs. long-termShort-term: Invest for a year or less. A shorter repayment period. ( lower in risk, lower in return, higher in liquidity)Long-term: invest for more than a year. A longer repayment period. ( higher in risk, higher in return)

Classification of Financial InvestmentsBy its mode of invest: Direct or IndirectDirect: investor directly owns a claim on a security or property. (invest in a companys shares or bonds)Indirect: investor owns an interest in a professionally managed collection of securities or properties

Classification of Financial InvestmentsBy its types: Securities and/ or PropertySecurities: Equity, Debt and/ or DerivativesReal Property: land, shop-buildings, apartmentsTangible Personal Property: gold, artwork, antiques, collectibles

Classification of Financial InvestmentsBy its nature of return:Fixed income investmentNormal bank savings, fixed-term deposits, bonds, preference sharesNon-fixed income investmentOrdinary shares

Major Types of InvestmentsDebt, Equity or Derivative Securities, Mutual FundsDebt: investor lends funds in exchange for interest income and repayment of loan in future (bonds)Equity: represents ongoing ownership in a business or property (common stocks)Derivative Securities: neither debt nor equity; derive value from an underlying asset (options)Mutual Funds: operated by an investment company which raises money from shareholders and invests in a group of assets

A financial advisor explains to an investor about mutual funds.

Photograph : Joe Readle

Types of InvestorsIndividual InvestorsInvest for personal financial goals (income, retirement, house, education)Institutional InvestorsPaid to manage other peoples moneyTrade large volumes of securitiesInclude: banks, insurance companies, mutual funds, pension funds

Risk in InvestmentEvery investment opportunity carries some risks.

Risk in Investment

Risk in Investment

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Liquidity RiskDefault RiskInflation riskPolitical riskMarket risk6Interest rate risk

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Business risk

Market risk: The possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets.Inflation risk :the possibility that the value of assets or income will decrease as inflation shrinks the purchasing power of a currency.Business risk: the possibility that a company will have lower than anticipated profits, or that it will experience a loss rather than a profit.Theriskthat an investment's returns could suffer as a result ofpoliticalchanges or instability in a country. (Political risk)The possibility of a reduction in the value of a security, especially a bond, resulting from a rise in interest rates. (interest rate risk)The lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss. (Liquidity risk)Default risk: the possibility in which companies or individuals will be unable to make the required payments on their debt obligations.17

Liquidity of Various InvestmentsLiquiditySome ExamplesVery highCash, gold, silver, savings and current accounts in banks, G-SecuritiesHighFixed deposits with banks, shares of listed companies that are actively traded, units, mutual fund sharesMediumFixed deposits with companies enjoying high credit rating, debentures of good companies that are actively tradedLow and very lowDeposits and debentures of loss-making and cash-strapped companies, inactively traded shares, unlisted shares and debentures, real estate

Savings vs. Investment

money that is supposed to be immediately liquid and safe.money that is supposed to be generating more money

Partnership Investment

Started out this way by pooling money from seven family members or extremely close friends.Warren Buffet

Upcoming... In next unit Success skill in managing your investments lies in achieving the right balance between risks and returns. Where risk is high, returns can also be expected to be high

THANKS!By Joey LaiBanking Academy, Vietnam

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