Investment Basics: Analysis

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Table of Contents

Introduction
Process of investment
Types of investments
Investment securities
Conclusion
References

Introduction

Individuals often defer consumption to engage in asset purchasing, loan issuance, and banking investment aimed at future return generation. These investments offer diverse risk-reward trade-offs (Sullivan & Steven, 2003). The creation of personal investment portfolios is often aimed at returns maximization while on the other hand minimizing exposure to risks. Several processes are involved in investment.

Process of investment

The investment process begins with the identification of investment opportunities (Bodie, Kane & Marcus, 2010). At this stage, a business plan is developed in order to identify the possible trend of implementation and the factors that affect the process of implementation. The process to investment can therefore be classified as follows:

Business plan review, including costing, material, personnel, and market requirements of the venture.
Review of the findings of the investment in question concerning the findings highlighted in the business plan.
Investment appraisal using the existing techniques available to the investment in question.

Types of investments

Available investment options largely vary across the market. The investment may be in the form of cash investments, debt securities, stocks, mutual funds, derivatives, and in terms of commodities. Cash investments include bank account savings, deposit certificates (CDs), and treasury bills (Sullivan & Steven, 2003). Such investments carry little interest and are vulnerable to increased risks during inflation periods. Debt securitiesz on the other hand, offer fixed periodic payments as their returns and at maturity offer capital appreciation. This type of investment is much safer and poses minimal risks as compared to equities.

Stock buying is also referred to as equity. Such investments result in sharing of profits accrued by the corporate. Stocks are generally more risky and volatile compared to bonds. Mutual funds involve a collection of both stocks and bonds (Jeffrey, Douglas & Stephen, 2009). Normally professional managers are involved in the identification of specific securities in investment. Derivatives on the other hand involve contracts whose values are drawn from the underlying asset values. Different types of investments present their own unique types of risks. The development of investment securities has been cited as a measure to curb the effect of these risks.

Investment securities

Certificates/documents showing that an individual bears interest in a business or has lent money to the business/company are referred to as investment securities (Kevin, 2008). Various investment securities are available for consideration in personal investment portfolios. These include mutual funds, bonds, stocks, and derivatives.

Bonds

Bonds refer to loan types or debt security over a specified time where the issuer gives interest at an earlier predetermined rate. Normally the yare issued by credit institutions, agencies of government, corporate entities, and public authorities (Graham & David, 2004). Payment of principal amount is done at later dates often referred to as the date of maturity. Bond issuers have the option of paying interest at specified intervals or as a lump-some payable at maturity.

They generate fixed income treated as interest. The common bond issuing technique is underwriting (Kevin, 2008). Some of the commonly issued bonds include treasury bonds, high yield bonds, sinking bond funds and participating bonds among others. The most common type of bonds is municipal bonds and corporate bonds. While municipal bonds are issued by state offices and governments for government-sponsored functions, corporate bonds are generally issued by both private and public entities. They are often referred to as debt obligations.

Stocks

Stocks are classified as either common or preferred. Common stocks are the most regular stock types that people commonly refer to (Sullivan & Steven, 2003). The majority of stock issuance is done in this form. They are representative of the company’s ownership and the bearers can claim part of profits generated by the company. The bearers are also entitled to one vote per share. The bearers are also not entitled to any payments in case of a company’s bankruptcy until such time that all creditors, holders of bonds and the preferred shareholders are paid (Kevin, 2008).

On the other hand, the preferred stocks are to an extent representative of the company’s ownership though they do not come with equal voting rights as the case of common shareholders. Additionally, the holders are guaranteed fixed dividend issuances forever. The holders are also paid off before payment of common shareholders in case of liquidation. However, the shares are callable and the company may at any one time choose to purchase them for a given reason.

Derivatives

These instruments derive their values from direct securities including bonds and equities. Previously they were referred to as hedging apparatus. They include swaps, warranties, re-purchase arrangements, and index options among others. These methods cushion investments against various conditions including inflation and recession.

Mutual funds

This refers to a collective investment scheme that is professionally managed (Sullivan & Steven, 2003). The scheme draws money from several investors and invests the same into investment securities earlier discussed. The funds’ manager trades the investment in compliance with the objective for which it was formed. In the case of mutual funds, risks are distributed across several investors and hence the burden in case of the venture suffering a given risk.

Conclusion

It is important to note that an investment is a risk posing venture. Capital is committed to financial instruments/asset purchases to gain profitable returns out of it. Through analysis before the investment is necessary to ensure knowledgeability in the area of investment being undertaken by the entity.

References

Bodie, Z., Kane, A. & Marcus, A. (2010). Essentials of investments: 2011 custom edition (8th ed.). Boston, MA: McGraw Hill.

Graham, B. & David D. (2004). Security Analysis. McGraw-Hill Book Company.

Jeffrey H B., Douglas K. C. & Stephen R F. (2009). Trading Volume and Stock Investments, Financial Analysts Journal, 65(2): 67.

Kevin A. H. (2008). “Investment,” The Concise Encyclopedia of Economics. Library of Economics and Liberty.

Sullivan, A. & Steven M. S. (2003). Economics: Principles in action. Upper Saddle River, New Jersey: Pearson Prentice Hall. 271.

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