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Unit 1: Basics of Investment

Of course, I remembered that as 'Investment' from my economics textbook. Notes
In other words, 'investing' means building up to meet future consumption demand with
the intention of making surpluses or profits, as they are popularly known.

Investments are risky, true, what if tomorrow everybody decides that 'beer' is yuck.
Maybe the government will ban beer consumption. Or your plant might develop a big
problem for all you know. Hence, there has to be a reasonable profit expectation to
motivate an investment. Also, when you or I 'invest', we forego our present consumption
or do it out of our surplus. In other words, 'savings' again supports 'investment'. Interesting,
isn't it?
We started with three things that looked as different as chalk, brick and wood, but
discovered that the three ('saving', 'borrowing' and 'investing') are related. But then,
I have a few questions in my mind already. I am sure you would have some too. What if
I save ` 500 over five months to buy a cycle and the price of the cycle shoots up by 20% by
then? I am losing the 'purchasing power' of my ` 500. Is there some way I can make up for
the risk of losing my purchasing power?
Getting a little complicated for now. Let us unravel it later.
Questions:

1. What does investing means?
2. From the case discussed what difference can you find between savings and
investment?

Source: Security Analysis and Portfolio Management, Sudhindra Bhat, Excel Books, (2008)

1.5 Summary

Security analysis and portfolio management are emerging as a widely practised profession
and an extensively researched theoretical domain.
The foundation of the basic knowledge in the area foes to the basic concept of investment.

An individual who saves operates under the stimulus of expanded future wealth. This
makes him forego current consumption and apply the resources saved to avenues which
add to his wealth at a future moment.

The fundamental investment decision is never on the limitless pursuit of extraordinary
wealth. This would never be possible as the investor would be exposed to tremendous
risk. Much of what he invests would, therefore, be a trade-off between risk and return.
A recent development in investment management is the perception of an investor that
he/she would not hold an asset in isolation. The portfolio is his major concern.

Portfolio management acquires an added significance in a dynamic investment
environment.

Many new and innovative instruments are opening up as investment alternatives.
A number of specialised institutions are emerging. And the nucleus and the reach of
organised securities markets are being extended.

Regulatory mechanisms are being streamlined and rationalised. The corporate sector
appears abuzz with activity now when the era of the de-regulation has been opened up.
All these add up to a scenario when investment is accelerated and trading systems strained.
These appear to be the future challenges of investment management.

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