BBS/BBA/MBS Exam Notes

What is Investment? Who is Investor? Investment Process

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Concept of investment

“Investment involves expectations about the future. The businesses invest because they believe that the venture will be profitable. The profitability of any investment will depend upon the expectations of the future sales and profitability, which the investment will help produce. Investment is geared towards long-term profit expectations and is thus independent of the level of current disposable income. It is, therefore, assumed that business will invest almost the same amount regardless of the level of output (income) for a given expectation of long-term profits.”  (Yogesh Maheshwari, 2008: pg. 16, 17)

Who is an investor?

An investor is a person who is an individual or a corporate legal entity investing his capital venture or business but does not do the business himself on itself. He has no role to play in the day-to-day management of the business or its control except as permitted by the law.

An investor carries on investment business when he —

  1. Buys and sells assets,
  2. Arranges for others to buy and sell assets,
  3. Manages assets belonging to others, or
  4. Operates collective investment schemes. (S. S. Kaptan, 2001: pg. 4)

Investment process

Investment process is the combination of asset allocation, security selection, portfolio construction, portfolio analysis and risk management. It tells about what, where, how and why should make an investment in a particular asset. The common investment process includes following topics:

  1. Set Investment Policy

It involves determining the investor’s objectives and the amount of his or her investable wealth. Investment objective should be stated in term of both risk and return.

  • Perform Security Analysis

It involves examining several individual securities or group of security within the broad categories of financial assets previously identified.

  • Construct a Portfolio

The third step in the investment process portfolio construction involved identifying those specific assets in which to invest, as well as determining the proportions of the investors wealth to put in to each one. Here the issue of selectivity timing and diversification need to be addressed by the investor.

  • Revise the Portfolio

Portfolio revision concerns the periodic repetition of the previous three steps. That is, overtime the investor may change his or her investment objectives which in turn may cause the currently held portfolio to be less than optimal.

  • Evaluate the performance of the Portfolio

It involved determining periodically how the portfolio performed. In term not only the return earned but also the risk experienced by the investor. (Sharpe, 2002: 11-14)

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