INVESTMENT PROCESS ON SECURITIES INVESTMENT

SHREE KRISHNA SIGDEL

Lecture and Advocate
Securities:
Security is an instrument representing ownership (stocks), a debt agreement (bonds/debenture) or the
rights to ownership (derivatives).
Security is a piece of paper representing the investor's right to certain prospects or property and the
condition under which he/she may exercise these rights.
Security is essentially a contract that carries value and can be traded. It is a proof of ownership of stocks,
bonds or other investment instruments. It serves an evidence of property rights and enables the holder to
receive interest or dividends.
Security is a financial asset. A note, stock, preferred stock, bond, debenture, option, right, warrants are
common examples of securities.
Investment:
Investment is a combination of science (Financial fundamentals) and art (qualitative factors).
Investment is the sacrifice of present rupee and resource for future rupee return. Generally in investment
we committee our time, money and efforts for future additional monetary or non monetary return.
Investment of any kind is guided by two attributes: time and risk. The sacrifice or commitment of
resources takes place in the present and is certain. The reward comes later and the magnitude of return is
generally uncertain. Therefore, every investment entails some degree risk.
Investment has two meanings: Investment in economics means purchase of capital goods also termed as
"Real Investment". Investment on some kind of tangible assets, such as land, machinery, factories,
buildings or putting one self through college are some best examples of economical investment.
Investment in finance means buying securities or other monetary or paper (financial) assets in the money
markets or capital markets or in fairly liquid real assets, such as gold, real estate or collectibles.
Investment must ensure that money will be available when it is needed and the invested money should
grow because a Rupee's real value today is greater than a Rupee's value tomorrow in a world of inflation.
Investment Process:
Investment process gives answer of: how, when, where and how much should be invest? The investment
process guides a path towards the success of market winning by dealing and describing:
9 How an investor makes decisions about investment?
9 Which investment alternative should be chosen?
9 How large the investment should be?
9 When to invest?
The investment process consists following five step procedure:

A)
Investment policy should be set: the investment process start by identifying goals and creating a
new plan and policy. Investment policy involves determining the investment objectives and amount of
one's investable wealth. The plan may consist of many future funding needs such as retirement, college
education, and land purchase. The investment policy qualifies the investment goal. Making money alone
cannot be an appropriate objective. It is appropriate to state that the objective is to make a lot of money by
recognizing the possible losses.
A clear investment policy help to plan, implement and manage portfolio that achieve high return while
controlling risk. Policies assist in strategic assets allocation. setting a clear investment policy also
involves the identification of potential categories of financial assets for consideration in ultimate
portfolio. The identification of assets depends upon many things such as investment objectives, investable
wealth, tax consideration, retirement, education expenses, mortgage, stocks, bonds, mutual funds,
pensions, social security etc.
B)
Performing security analysis: There are thousands of securities to purchase on the financial
markets. So these securities must be analyzed. Analyzing securities is to find out the mis-priced securities.
Performance analysis of security is carried out through.
1) Stock screening by considering
Earning growth
Recent earnings surprises
Price /earning ratio
Dividends
Market cap or size
Industry
Relative Strength
2) Stock Research: Stock research is carried out after narrow down the list of stock by stock screening.
There is availability of great resources for researching stocks. Company's annual report and its financial
statement are used for financial resources as:
From the income statement
Earnings growth
Revenue growth
Stable or increasing margins
Tax subsidies
Number of common share outstanding.
From the cash flow statement:
Cash flow: Ideally, cash flow should be positive large and increasing.

From Balance Sheet.

Debt to equity ratio, lower is better and zero is ideal
Cash relative to annual sales
Return on equity; Higher is better.
Receivables and inventory.
Current ratio, the higher the better.

3) Analysis: Many approaches can be used to analyze the securities. These approaches, in broad sense can
be classified into two types.
i) Technical Analysis: Technical Analysis of security prices involves the study of previous market
price in an attempt to predict the future price movement. Technical analysis ignores the company

underlying the stock and instead tries to predict price changes by studying the market itself. In
technical Analysis past trends in the price is examined and is compared with the recent emerging
trends. The matching of emerging trends or patterns with the past one patterns repeat themselves.
Moving averages, support and resistance, advance/decline lines, relative, strength, momentum and
volume of trading are examined in the technical Analysis.
ii) Fundamental Analysis: Fundamental analysis tries to identify the real or true value of financial
assets.
The real value of any kind of financial assets is the present value of the future cash flow given by the
assets or expected by the holder.
Fundamental analysis evaluates a stock by examining the company, especially its operations and its
financial conditions. In fundamental analysis several valuation methods, factoring in P/E ratio,
dividend yields, book value, price/sales ratio, return on equity etc. are looked.
The fundamental analyst attempts to forecast the timing and size of the cash flows and then converts
them into their equivalent present value by using appropriate discount rate.
C)
Asset Allocation and portfolio Construction: Assets allocation is based on investment goals,
Investor experience and risk tolerance. Assets allocation is putting savings into investments, as opposed
to letting it sit in bank. Dividing your money across different assets classes (stocks, bonds, money, market
etc) is the first step when making investments and is arguably the most important decision.
Portfolio Construction gives the answer of question like "Which companies should I invest in?" While
constructing a portfolio, the selectivity, timing and diversification need to be addressed by the investor. A
well constructed portfolio help investors archive at desired investment goals. The portfolio construction
should ensure the optimum use of people, money and other resources.
Assets allocation and portfolio construction is of two types- active and passive. Active assets allocation
and portfolio construction is based on market views.
D)
Portfolio Revision:
Portfolio revision is the repetition of previous three steps of investment
process. Over the period of time, the objectives of investor at may change and the current portfolio may
no longer be optimal. Portfolio revision is the evaluation of outcome with the help of performance
measures. Thus it can be said that portfolio revision is the art of optimizing assets and raising the worth of
a portfolio. A timely revision of portfolio helps in obtaining maximum profit because:
- The investor can sell some unattractive securities and introduce attractive ones to form a new optimal
portfolio.
- Some securities that are initially unattractive may turn out to be attractive later and Vice Versa.
E)
Portfolio performance evaluation: The last step in investment process is portfolio performance
evaluation. This step gives the answer of the question."How the portfolio performed?" the performance of
portfolio should be evaluated in term of return earned and the risk experienced by the investor. For
evaluation of portfolio performance appropriate measures of return and risk is needed. Evaluation must be
carried out by relevant standards.
Selected References:
Cheney, J.M and Edward A. Moses, Fundamentals of Investments (10th edition),
Company.

West

Publishing

Elton/ Gruber (1995) Modern Portfolio Theory and Investment Analysis, Singapore:John Wiley
&
Sons (Asia) Pvt. Ltd.
Keyoshaki and Kiter, Rich Dad-Poor Dad, Bhakar Prakashan, Kathmandu.
Thapa, Kiran (2003) A practice Book of Investment Analysis, Kathmandu, Asmita Books Pub.
Weston, J.F and Thomas E. Copeland (1992), Managerial Finance (Ninth
Edition), The Dryden
press, Orlando, Florida.
www.fineportfolio.com
www.investorguid.com
www.investopedia.com
www.pillsburylaw.com
www.wikipedia.com