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Chapter 1:
Investment Fundamentals
Objectives
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Summarize reasons why people invest, what is
required before beginning, how returns are earned,
and some ways to obtain funds to invest.
Determine your own investment philosophy.
Recognize the variety of investments available.
Identify the major factors that affect the return on
investment.
Specify some strategies of portfolio management for
long-term investors.
List three guidelines to use when deciding the best
time to sell investments.
Establishing Investment Goals
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Financial goals should be specific and
measurable.
Why are you accumulating these funds?
How much do you need?
How will you get it?
How long will it take you to reach your goal?
How much risk are you willing to assume?
Are you willing to sacrifice current consumption
to invest for the future?
Is it realistic to try and save this amount?
Investment Fundamentals
ATTENTION!
Difference
in return is a major distinction
between savings and investing.
Successful
investors begin to live off
earnings, without spending wealth itself.
Preparations for Investing
WHY PEOPLE INVEST:
 Achieve financial goals
 Increase current income
 Gain wealth and financial security
 Have funds available for retirement
Preparations for Investing
PREREQUISITES TO INVESTING:
 Live within means
 Continue savings program
 Establish lines of credit
 Carry adequate insurance
 Establish investment goals
Preparations for Investing
INVESTMENT RETURNS:
 Interest
 Dividends
 Rent
 Capital gain/loss
 Rate of return or yield
Factors That Affect
Investment Decisions
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Safety - minimal risk of loss
Risk - uncertainty about the outcome
 inflation risk
 interest rate risk
 business failure risk
 market risk
Income From Investments
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Safest
 CDs
 savings bonds
 T-bills
 Higher potential income
 municipal bonds
 corporate bonds
 preferred stocks
 mutual funds
 real estate
INVESTMENT PROESS
INVESTMENT
POLICY
ANALYSIS
PORTFOLIO
CONSTRUCTION
PORTFOLIO
EVALUATION
VALUATION
INVESTMENT POLICY
INVESTIBLE FUNDS
OBJECTIVES
KNOWLEDGE
ANALYSIS
MARKET ANALYSIS
INDUSTRY ANALYSIS
COMPANY ANALYSIS
VALUATION
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VALUATION HELPS THE INVESTOR TO
DETERMINE THE RETURN AND RISK
EXPECTED FROM AN INVESTMENT IN
THE COMMON STOCK.
CONSRUCTION OF
PORTFOLIO
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A PORTFOLIO IS A COMBINATION OF
SECURITIES. IT IS CONSTUCTED IN
SUCH A MANNER TO MEET THE
INVESTOR’S GOALS AND OBJETIVES.
IT INCLUDES THE
FOLLOWING
DIVERSIFICATION
DEBT AND
EQUITY
DIVERSIFICATION
COMPANY
DIVERSIFICATION
INDUSTRY
DIVERSIFICATION
SELECTION
EVALUATION
APPRAISAL
REVISION
SPECULATION
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IT MEANS TAKING UP THE BUSINESS
RISK IN THE HOPE OF GETTING
SHORT TERM GAIN.A SPECULATOR IS
MORE INTERESTED IN THE MARKET
ACTIONS AND ITS PRICE MOVEMENT.
DIFFERENCE BETWEEN
SPECULATOR AND INVESTOR
BASIS OF
DIFFERENCE
INVESTOR
SPECULATOR
TIME HORIZON
PLANS FOR LONGER PLANS FOR SHORT
TIME(1 YR. TO FEW
TIME (FEW DAYS TO
YEARS)
MONTHS)
RISK
ASSUMES
MODERATE RISK
WILLING TO
UNDERTAKE HIGH
RISK
RETURN
MODERATE
RETURNS
HIGH RETURNS
FUNDS
OWN FUNDS
USES BORROWED
FUNDS
GAMBLING
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A GAMBLE IS USUALLY A VERY
SHORT TERM INVESTMENT IN A
GAME OR CHANCE.TIME IS SHORTER
THAN SPECULATION AND
INVESTMENT.PEOPLE GAMBLE AS A
WAY TO ENTERTAIN THEMSELVES,
EARNING INCOMES WOULD BE
SECONDARY FACTOR.
Investment Alternatives
 SECURITIES:A.T.
SECURITIES
REGULATION ACT
1956,”SECURITIES
INCLUDE
SHARES,STOCKS,BONDS
,DEB OR OTHER
MARKETABLE
SECURITIES.
Investment Alternatives
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(continued)
What is a bond?
 a loan to a corporation, the
federal government, or a
municipality
The interest is paid twice a
year, and the principal is
repaid at maturity (1-30 years)
You can keep the bond until maturity
or sell it to another investor
Investment Alternatives
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(continued)
What is a mutual fund?
 investors’ money is pooled and invested by a
professional fund manager
 you buy shares in the fund
 provides diversification to reduce risk
 funds range from conservative
to extremely speculative
 match your needs with
a fund’s objective
Sources of Investment Information
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Newspapers
Business Periodicals
Government Publications
Corporate Reports
Statistical Averages
Investor Services and newsletters
 Standard and Poor’s stock reports
 Value Line
 Moody’s investment service