Investment Basics II MBA

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03/29/13 1G.VENKATACHALAM M.Com., MBA., M.Phil.,


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INVESTMENTPLANNING


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Supplement current income

appropriate for retiredpersons.

Save for major expenditures

such as college education,down payment on a home, orstarting a business.



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Shelter income from taxes to preserve more of your earnings.

Save for retirement

To live comfortably in your "goldenyears."



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Place (not always physical) wherefinancial instruments are traded.

Capital marketwhere long-termsecurities (those with maturitiesgreater than 1 year) are traded.

Money marketwhere low-risk,short-term securities (those withmaturities less than 1 year) are

traded.03/29/13 7G.VENKATACHALAM M.Com., MBA., M.Phil.,


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Secondary market for tradingpreviously issued securities. Tradingis done between investors; issuing

company gets nothing.

Primary market for new issues whichare available for the very first time. Theissuing company gets the proceeds.



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Secondary markets for trading listed

securities.

Physical marketplaces such as the NSE,BSE, and regional exchanges.

Utilize brokers to facilitate trading

between buyers and sellers.

Handle transactions of larger, well-known

companies' securities.



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Secondary market where securities

are traded via a

telecommunications network.

Investors trade directly with

securities dealers.

Larger, actively traded issues

make up NASDAQ, while smaller,03/29/13 10G.VENKATACHALAM M.Com., MBA., M.Phil.,


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Organized securitiesexchanges exist in more than100 countries worldwide.

Found in majorindustrialized nations such

as Japan, Great Britain,Germany and Canada.

Also found in developing

markets around the globe.03/29/13 11G.VENKATACHALAM M.Com., MBA., M.Phil.,


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SEBI.

Purpose is to provide for adequate and

accurate disclosure of financialinformation.



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Bull market generally risingsecurities prices for an extended periodof time.

Reflects investor optimism.Associated with favorable economy.

Bear market generally falling

securities prices for an extended periodof time.Reflects investor pessimism.

Associated with economic downturn.



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Stockbrokers purchase and

sell securities for investors.Select from full-service,discount, or online broker,

depending on your needs.Consider brokerage feeswhen making securities

transactions.03/29/13 14G.VENKATACHALAM M.Com., MBA., M.Phil.,


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Market orders generally takeless than 2 minutes!

Investor must first establishaccount with broker.

Trades can be executed by

phone, at the brokerage firm,or online with a PC.



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Investor placesthe order withthe broker



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Broker transmitsorder to themarket via tele-

communicationsequipment.



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Order isfilled at themarket byother buyersand sellers.



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Execution ofthe order isconfirmedto the broker.



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Execution ofthe order isconfirmedto the broker.

Broker confirms orderfulfillment. Investor has3 days to settle account.



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Market order trade now at bestavailable price.

Limit order trade when a specifiedprice or better is reached; investor is seekingopportunity.

Stop-loss order sell if price drops tocertain price; investor is seeking to limitlosses.



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Allows investor to purchasesecurities on credit by borrowingpart of purchase price from broker.

Increases gains whenreturns are positive.

Increases losses whenreturns are negative.



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Transaction w/out

w/marginInitial investment (100 shares @ $50)

Amount invested $5,000$2,500

Amount borrowed $ 0 $2,500

Total purchase $5,000$5,000

Price INCREASES(100 shares @ $70)

Gross proceeds $7,000$7,000

Less interest (9%) $ 0 $03/29/13 23G.VENKATACHALAM M.Com., MBA., M.Phil.,


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Transaction w/out w/margin

Initial investment (100 shares @ $50)

Amount invested $5,000 $2,500

Amount borrowed $ 0 $2,500Total purchase $5,000 $5,000

Price DECREASES(100 shares @ $30)

Gross proceeds $3,000 $3,000Less interest (9%) $ 0 $ 225

Net proceeds $3,000 $2,775

Net loss ($2,000) ($2,225)03/29/13 24G.VENKATACHALAM M.Com., MBA., M.Phil.,


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Return = Profit (loss) Amount Invested

w/out w/margin

Price Increase $2,000 $1,775

$5,000 $2,500Return 40% 71%

Price Decrease ($2,000) ($2,225)$5,000 $2,500

Return (40%) (89%)



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Allows investor to sell securities

borrowed from the broker orbroker's accounts.

Before period is over, investormust buy securities to replacethose borrowed.

Investor loses if securitysprice has increased.

Investor profits if securitys

price has declined.



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Example of Short Sale:

Investor wishes to short 100 shares

of ABW now selling at $52.50/share.Broker sells borrowed shares for

investor:100 x $52.50 = $5,250 proceeds



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Costs 100 x $40 = $4000 toreplace shares.

Investor receives:

$5250 $4000 = $1250 profit!!

Scenario A:

Price of security drops to $40/share& investor repurchases:



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Costs 100 x $60 = $6000 to replaceshares.

Investor receives:

$5250 $6000 = ($750) loss!!

Scenario B:

Price of security rises to $60/share &investor repurchases:



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To profit from short sellingnot only must the price of the security fall,but it must do so within the given timeperiod.

Double danger!



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Types of Information to Follow:

Economic developments andcurrent events

Alternative investment vehicles

Current interest rates and pricequotations

Personal investment strategies



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Annual Reports

Financial Press

(WSJ andfinancialmagazines)

BrokerageReports

AdvisoryServices

InvestmentAdvisors

On-Line

Sources



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Online services

Educational

materialInvestment tools

Investment

planning

Research andscreening

Portfoliotracking

Day trading



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Do your own research.

Realize that frequent trades

mean higher transaction costs.Dont believe everything youread.

Avoid online scams.



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Build a diversified portfolio ofsecurities based upon your

goals and personal situation.

Allocate your assets accordingto your objectives.

Track your investments andrebalance your portfolio as your

needs change.03/29/13 35G.VENKATACHALAM M.Com., MBA., M.Phil.,


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Investment Basics II MBA

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