Meaning of Investment and Security and Describe the Investment process.
Meaning of Investment
Investment refers to the purchase of financial assets. While Investment, Goods are those goods, which are used for further production.
Investment implies the production of new capital goods, plants and equipment. John Keynes refers to investment as a real investment and not a financial investment.
Investment is the application of funds to hold assets over a longer-term in the hope of achieving gains and/or receiving income from those assets.
It generally does not include deposits with a bank or similar institution. Investment usually involves diversification of assets in order to avoid unnecessary and unproductive risk.
In contrast, dollar (or pound etc) cost averaging and market timing are phrases often used in the marketing collective investments and can be said to be associated with speculation.
Investments are often made indirectly through intermediaries, such as pension funds, banks, brokers, and insurance companies.
Meaning of Security
A financial instrument that represents: an ownership position in a publicly-traded corporation (stock), a creditor relationship with a governmental body or a corporation (bond), or rights to ownership as represented by an option.
Security is a fungible, negotiable financial instrument that represents some type of financial value. The company or entity that issues the security is known as the issuer.
Investment Process
There are five important steps in an investment process that should not be neglected. They are:
- Defining an Investment strategy/policy
- Analyzing securities
- Constructing a portfolio to minimize risk
- Evaluating the performance of the portfolio, and
- Revising the portfolio
An investor cannot define his investment strategy unless he defines his investment objective and investment surplus at his disposal. The objective of ‘making more money is very vague.
Of course, everyone wants to make more money! Objectives have to be clearly defined in terms of risk and return. Understanding the relationship between risk and return will go a long way while building a portfolio that can provide optimum returns for the amount of risk an investor can take.
A commonly neglected aspect while choosing a venue of investment is the individual tax status. It does not make sense for a tax-exempt investor to invest in government securities or other tax-exempt investment options.
The second step of analyzing securities enables the investor to distinguish between underpriced and overpriced stock. Return can be maximized by investing in stocks that are currently underpriced but have the potential to increase (remember buy low sell high).
There are two approaches used for analyzing securities; Technical analysis and Fundamental analysis. Technical analysis involves studying the trends of stock prices movements.
Technical analysts claim that by studying recurring trends and patterns in price movements it is possible to predict near term price movements. This is based on the assumption that price trends and the pattern repeat themselves.
Read about the Role of Financial Intermediaries and about the Secondary Markets