The term investment implies the employment of current funds to earn commensurate returns in the future. An investor forgoes current consumption and invests his savings in anticipation of higher future returns. At times losses are also incurred. Hence the environment of investment is quite uncertain. In 1986, Microsoft Corporation first offered its stocks to the public and within 10 years, the stock’s value had increased by over 5000%. In the same year Words of Wonder also offered its stock to the public but 10 years later the company was defunct. So we can say that we are facing a VUCA (Volatile, Uncertain, Complex, Ambiguous) environment in the context of investments. The word investment connotes different meanings to different people. to a layman, it may mean the purchase of shares, bonds, and other financial instruments. To an economist purchase of fixed productive assets ( Capital Assets ) such as plants & machinery. To a businessman, it refers to the purchase of fixed assets such as land, building, plant, machinery, etc.
Depending upon the type of assets, all the investments can be classified as a financial or real investment.
- Financial Investment – It implies investment of funds in financial assets. Financial assets are claims over some real/physical assets. The example of financial assets are shares, bonds, mutual fund units etc. The return of financial investments in the form of interest, dividend and /or appreciation in value.
- Real Investment – Also known as economic investment is a investment on real or tangible assets. Real assets are those long term assets or fixed assets which are used in the production process. Examples of real assets are plants, machinery, equipment, building etc.
An individual investor invests in financial assets (equity shares, bonds etc) and commodity assets ( gold, silver,etc). Now a days real estate real estate investment has also become an important part of an individual invetsor’s portfolio. Real estate investment in tangible house / commercial properties to get income in the form of rent or capital gain due to price appreciation.
TYPES OF INVESTMENT / SECURITIES
- EQUITY SHARES – equity shares are also known as common stocks. An equity share represents an ownership claim in the company. The owner of equity shares is termed as equity shareholder and enjoys all voting rights in corporate matters. Equity shareholders get future benefits in the form of dividend ( amount of profit distributed as dividend) and in the form of price appreciation. However its id not obligatory on the part of the company to declare dividends every year, dividend is only given when company makes profit but on the occasion of loss no dividends are given. Hence these are also referred to as ‘variable income securitis’ as they do not promise fixed returns every year.
Equity shares are offered to general public through a public offer which are of two types.
(a) IPO – Initial public offering is the sale of equity shares by a company to general public for the first time. It can be a public issue if shares by a new company trying to raise capital or an old pvt. company which wants to be listed on stock exchange and become public company.
(b) FPO – Follow on public offering is the process of issuing additional or new equity shares to public by an already listed company. So, FPO is brought by the company which has already gone through the IPO process.
- BONDS AND DEBENTURES – these are fixed income securities. It is an IOU ( I Owe You ) of the borrower. It arises out of lending borrowing contract wherein the issuer / borrower promises to pay a fixed amount of interest to the lender/bond holder periodically and repays the loan either periodically or maturity. Bonds may be corporate bonds, government bonds, short term bonds, long term bonds, secured bonds or unsecured bonds etc. Since bonds and debentures carry a fixed rate of interest, their future benefits are known in advance therefore they have relatively lower risk than equity shares at the same time generate relatively lower returns.
- TREASURY BILLS – These are the securities issued by the central government in the context of the lending borrowing contract. An invester in Treasury bills actually lends money to the central government, this type of security carries minimum or negligible risk. These bills are issued at discount and redeemed at par and hence the rate of return is known with certainty.
- ALTERNATIVE INVESTMENT AVENUES – A number of new securities have been introduced in securities market over the past two decades. these securities includes mutual funds, exchange trade funds, derivatives, warrants, mortgaged backed securities, deep discount bonds, collective investment schemes, reak estate investment trusts, etc .
(a) Mutual Funds – collected money from individual investors and invest those funds in a wide range of assets and securities like equity shares, bonds, debentures, money market instruments or combinations. Investor has a claim to the assets established by the mutual fund int the proprotion of the amount invested, thereby becoming a part owner of the assets of mutal funds.
(b) Derivatives – A derivative is a contract between two or more parties, whose value is based on the value of the underlying asset, which maybe stocks, bonds, commodities, currencies, interest rates etc. Derivatives are highly leveraged instruments and thus too risky as compared to investment in the underlying asset. However the expectations of returns are also equally high.
(c) Collective investment schemes – It is a scheme or arrangement made by the company to collect money from the investors in the form of contributions and invest the pool of money to earn income profit, produce, or property for the contributers. Investors need to be highly cautious before giving their hard earned money to such lucrative schemes because a CIS is illegal if it is not registered with SEBI.
(d) Exchange traded funds – ETFs are baskets of securities that are traded on an exchange like individual stocks. They track an index and money is invested in securities of the index in same proportion as that in the index itself . These days we have Gold ETFs which are referred to as paper gold because you invest in gold but not in physical form , investor gets gold ETF units which will emulate returns on tangible gold.
(e) Real estate Investment Trusts – RETIs provides an alternative to pruchasing properties for investment. REITs are companies which invest in real estate – residential, commercial property and investors are able to earn real estate like profits through relatively smaller investments in REITs as compared to hefty sums of money required to buy property.
Securities market brings together buyer and sellers of securities and provide operational mechanism to facilitate the exchange of securities such as equity shares , bonds, debentures, derivatives, mutual funds, etc. One can also invest in commodities and bullions such as gold and other precious metals. An efficient and developed securities market is a prerequisite for increased investment in securities. Securities market can be classefied as following;
- ON THE BASIS OF TIME
(a) Capital Market – is the market for long term financial investment and instruments (more than one year ) . It primarily deals with equitu shares , long term bonds and debentured. In India is further classified into two segments – Equity Market and Wholesale Debt Market.
(b) Money Market – Deals with short term securities ( one year or less ). It deals with treasury bills, short term debts like commercial paper, certificate of deposite etc.
- ON THE BASIS OF NATURE OF SECURITIES
(a) Primary Market – It is the market where new securities are issued for the first time. IPO is a tool of primary market. It only deals with the first hand securities.
(b) Secondary Market – Provides the platform where existing or second hand or securities which have already been issued before are bought or sold. Shares issued in IPO are traded in the secondary market.