CHAPTER 1

INVESTMENT AND
PORTFOLIO MANAGEMENT
Introduction to Investment
what is investment?
 is the current commitment of dollars for a period of time in order to derive future payments
that will compensate the investor for :

1. Time the funds are committed

2. Expected rate of inflation
3. Uncertainty of the future payments.
 the investor is trading a known dollar amount today for some expected future stream of
payments that will be greater than the current outlay.

 Investment activity includes buying and selling of the financial assets, physical assets and
marketable assets in primary and secondary markets.

involves the use of funds or savings for further creation of assets or acquisition of existing
assets, financial assets and physical assets
InvestmentAlternatives
Investment activity includes buying and selling of the financial assets, physical assets and marketable assets in primary
and secondary markets.
1. Nonmarketable Financial assets
A distinguishing characteristic of these assets is that they represent personal transactions between the owner and the
issuer.

1. Nonnegotiable certificates of deposit

2. Government savings bonds
3. Saving Account
2. Money Market Securities
Treasury Bills (T-bills) (Matures within 1,3 or 6 months)
Commercial Paper (1-270 days)
Certificates of deposit (CDs) (6 months -3 years)
Eurodollars (< 6 months)
Repurchase Agreements (RPs) (3 to 14 days)
 Bankers Acceptances (BAs) (30-180 days)

Money market securities are backed solely by the issuer’s ability to pay. With money
market securities, there is no collateral
 3. Fixed-Income Securities

Fixed-income investments have a contractually mandated

payment schedule.
• Have high risk compared to money market securities bcz of
long maturity period and characteristics of the securities.
• Investors who acquire fixed-income securities (except preferred
stock) are really lenders to the issuers.
eg. Corporate Bonds
Asset-Backed Securities
Eurobond: bond denominated in foreign currency
Treasury Bonds
4.Equity Securities
• Equity securities are financial assets that represent ownership of a
corporation.
• The most prevalent type of equity security is common stock.
• Their returns are not contractual.
Eg.Common and preferred stocks.
• The price fluctuations in preferred stock often exceed those in bonds.
5. Derivative Securities
i) Options
A call option gives the buyer the right, but not the obligation, to buy an asset
at a specified price (the strike price) prior to its expiration date.
A put option gives the buyer the right, but not the obligation, to sell
an asset at a specified price (the strike price) before the option's
expiration date.
ii) Futures and Forwards
Investment Companies

• is a financial service organization that sells shares in itself to the

public and uses the funds to invest in a portfolio of securities
such as money market instruments or stocks and bonds.

• There are managed and unmanaged investment companies.

• By pooling the funds of thousands of investors, a widely

diversified portfolio of financial assets can be purchased and
the investment company can offer its owners (shareholders) a
variety of services.
 1.Unit Investment Trusts

• are pools of money invested in a portfolio that is fixed for the life of
the fund.
• are passive investments.
• It is unmanaged

• They are designed to be bought and held, with capital preservation as

a major objective.
• To form unit investment trust , a sponsor, typically a brokerage
firm, buys a portfolio of securities which are deposited into a
trust.
• It then sells to the public shares, or “units,” in the trust, called
redeemable trust certificates.

• All income and payments of principal from the portfolio are

paid out by the fund’s trustees (a bank or trust company) to the
shareholders.
2.Close-end Investment companies
• One of the two types of managed investment companies.
• The closed-end investment company, usually sells no additional
shares of its stock after the initial public offering.
• The shares of a closed-end fund trade in the secondary markets
(e.g., on the exchanges) exactly like any other stock.
• To buy and sell, investors use their brokers, paying (receiving)
the current price at which the shares are selling plus (less)
brokerage commissions.
3.Open-ended Investment Companies (Mutual Funds)
• continue to sell shares to investors after the initial sale of shares
that starts the fund.

• The capitalization of an open-ended investment company is

continually changing- that is, it is open-ended- as new investors
buy additional shares and some existing shareholders cash in by
selling their shares back to the company.
Security Markets

Security market is a component of the wider financial market where

securities can be bought and sold between subjects of the economy,
on the basis of demand and supply.

i. Primary Markets
 The primary market is where companies issue a new security, not
previously traded on any exchange.
A company offers securities to the general public to raise funds to finance
its long-term goals.
The primary market may also be called the New Issue Market (NIM)
• There are two types of primary market issues of common stock. Initial
public offerings and seasoned.
• In the case of bonds, we also distinguish between two types of primary
market issues, a public offering and a private placement.
ii.Secondary Markets
 Is the markets where investors trade previously issued
securities.
 Exist for the trading of common stocks, preferred stocks,
warrants, bonds, put and call options.

• New York Stock Exchange,American Stock Exchange, Pacific

stock exchanges, London Stock Exchange, Nairobi stock
exchange and Mumbai stock exchange are some famous
secondary markets.

• Why Secondary Markets Are Important ?

iii. Third Market

• This market refers to trading of exchange-listed securities on

the over-the-counter market.
• an OTC market for trading in securities listed on organized
exchanges and it is used in the US for extremely large
transactions to avoid minimum exchange-regulated commission
fees.
• iv. Fourth Market
• The fourth market refers to direct trading between investors in
exchange-listed securities without the benefit of a broker.
 1.5 Basic investment transactions
• Investment Transaction means any purchase, acquisition, exchange, sale
or disposition, merger or interest exchange that results in the acquisition
or disposition of, or other transaction involving, an Investment.
1.6 Types of orders in Investment
• Market orders, limit orders, and stop orders are common order types
used to buy or sell stocks.
1.A market order
• A market order is an order to buy or sell a stock at the market's current
best available price.
• A market order typically ensures an execution, but it does not guarantee
a specified price.
• A market order is generally appropriate when you think a stock is priced
right, when you are sure you want a fill on your order, or when you want
an immediate execution.
 2. Limit Order
• A limit order is an order to buy or sell a stock with a restriction
on the maximum price to be paid or the minimum price to be
received (the "limit price").
• If the order is filled, it will only be at the specified limit price or
better. However, there is no assurance of execution.
• A limit order may be appropriate when you think you can buy at
a price lower than--or sell at a price higher than--the current
quote.
 3. A stop order
• A stop order is an order to buy or sell a stock at the market price
once the stock has traded at or through a specified price (the
"stop price").
• If the stock reaches the stop price, the order becomes a market
order and is filled at the next available market price.
• If the stock fails to reach the stop price, the order is not
executed.
• A stop order may be appropriate in these scenarios:
i) When a stock you own has risen and you want to attempt to protect your
gain should it begin to fall
ii)When you want to buy a stock as it breaks out above a certain level,
believing that it will continue to rise
THE END OF CHAPTER 1

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