Nishant Kumar

Nishant Kumar
Assistant Professor
Assistant Professor
Arka Jain University
Arka Jain University
 MODULE 1
INVESTMENT:

Investment is the commitment of a resource to a long-term increase in value.

Investment necessitates the loss of a current resource, such as time, money, or effort.

In the world of finance, investing is done in order to profit from the asset being put
to use. A gain (profit) or loss realised through the sale of a home or investment,
unrealized capital gain (or loss), investment income like dividends, interest, or rental
income, or a mix of capital gain and income may all be included in the return. The
return may also include foreign exchange profits or losses as a result of shifting
exchange rates.

One needs to invest to:

 earn return on your idle resources

 generate a specified sum of money for a specific goal in life

 make a provision for an uncertain future

An investor could be at danger of losing all or a portion of their invested money.

Contrary to arbitrage, when profit is made without risk or capital investment,
investment involves both. Savings are subject to the (often low) risk of financial
provider default. Savings accounts opened in foreign currencies are also subject to
foreign exchange risk. If the currency of the account is different from the account
holder's home currency, there is a chance that the exchange rate will change
negatively, causing a decline in the value of the savings account measured in the
account holder's home currency.
Compared to savings, investments often involve more risk due to a wider array of risk
factorsand a higher degree of uncertainty.

Investment attributes:
Each investor has particular goals that he or she wants to accomplish with their long-
or short-term investments. These goals could be pecuniary or of a more personal
nature. The goals include the security and safety of the primary amount invested,
profitability (via interest, dividends, and capital growth), and liquidity
(convertibility into cash as and when
Nishant Kumar
Assistant Professor
Arka Jain University
 required). These goals are all-encompassing since every investor wants to achieve a
healthy balance between these three financial goals. Even if the interest rate offered
is incredibly alluring, an investor won't want to incur an excessive level of danger
with regard to his principal. These goals or elements are referred to as investment
qualities.

1. Period of Investment:
When choosing an investment channel, the period of investment is a key factor. Such
a time could be brief (up to a year), medium (between one and three years), or
lengthy (more than three years). The return or interest rate is typically higher for
longer-term investments while being lower for shorter-term investments. Liquidity
and investment duration are related. Investors need to determine when they need
their money returned and modify the time frame accordingly. A extremely long-
term investment is a LIC policy. A short-term investment with the highest liquidity
and the lowest rate of return is the balance in a savings account.
2. Risk in investment:
The risk in the investment may be related to non-payment of principal amount
or interest thereon. In addition, liquidity risk, inflation risk, market risk, business
risk, political risk, etc. are some more risks connected with the investment
made. The risk in investment depends on various factors.

3. Return:
A reasonable rate of return on an investment is the first and foremost condition for
effective investment. The rate of return is the ratio of the sum of annual income and
price appreciationfor the purchasing price of the asset or investment.

4. Liquidity:

Liquidity means the marketability of an investment. For example, equity shares of a

big company can be easily liquidated in the stock markets. On the other hand,
money invested in an asset (machinery) cannot be liquidated as easily as the equity
share. An investment is considered highly marketable or liquid. It can be easily
transacted with low transaction costs and low price variations. A finance manager
looks for more liquid investments when the funds are available for a short period

Nishant Kumar
Assistant Professor
Arka Jain University
 5. Tax benefits:
It is valid for some investments and not for all. Most of the countries have tax
incentives for particular investments except tax-free countries. So, it is an
important consideration for investments that have tax benefits because taxes
form a major part of their expenses.

Investment alternatives
The stock market, debentures or bonds, money market instruments, mutual funds,
life insurance, real estate, precious metals, derivatives, and non-marketable assets
are some of the several paths and investment options. All are distinguished based on
their unique characteristics, such as risk, return, period, etc.

Risk And Return

1. In finance, the idea of risk and return refers to an examination of the
potential of difficulties in investing while calculating the returns from the
same investment.

2. The fundamental tenet is that high-risk investments offer investors superior

returns, andvice versa. As a result, the rewards reflect the cost of the risk.

3. Despite this, high-risk ventures don't always result in greater profits. That is
specifically the "high risk" that investment entails. It's a coin-toss scenario, therefore
the investor needs tobe ready for both possible outcomes: profit and loss.

Nishant Kumar
Assistant Professor
Arka Jain University
 Risks

Risks can come in many different forms whether you invest or save money.
However, the risks are often divided into two categories: systematic risks and
unsystematic hazards.

Systematic risks are those that have the potential to affect the entire economic
market, or at the very least a sizeable piece of it. They are the risks of losing money
as a result of different macroeconomic or political hazards that have an impact on the
overall performance of the market. There are numerous varieties of systematic risks,
some of which include:

Political risk - Political risk arises largely as a result of political insecurity in a

nation or area. For example, if a country goes to war, the firms that operate
there are deemedunsafe, and therefore risky.
Market risk - Market risk is the byproduct of investors' overall inclination
to follow the market. So it is essentially the inclination of security values to
shift together.
Exchange rate risk - This type of risk arises from the unpredictability of
currency value fluctuations. As a result, it impacts enterprises that conduct
foreign exchange operations, such as export and import firms, or firms that
do business in a foreign country.
Interest rate risk - A shift in the market's rate of interest causes this type of
risk. It mostly affects fixed-income assets since bond costs are connected to
interest rates, butit also affects the valuation of stocks.

Unsystematic risk is a type of risk that impacts only one sector or one business. It is
the danger of losing money on an investment because of a business or sector-specific
hazard. A shift in leadership, a safety recall on a good, a legislative reform that might
reduce firm sales,or a new rival in the market are all examples of unsystematic risk.

RETURN:

Realized return and Expected return are the two forms of returns that are most
frequentlydiscussed.

Realized

The phrase "realised return" describes the actual return on an investment over a
given period of time. It's important to understand that nothing can change an
achieved return. It really is a number that cannot be changed after the fact. Investors
Nishant Kumar
Assistant Professor
Arka Jain University
 are only given information to enable them to make more informed financial
decisions in the future.

Expected

An investor's potential gains or losses from an investment are estimated as an

expected return. An indicator of whether an investment will typically have a
positive or negative net outcome is the expected return. The predicted return
typically sets reasonable expectations even if it is frequently based on historical
data and cannot be guaranteed in the near future.

Key points:

A risk is the chance or odds that an investor is going to lose money.

A gain made by an investor is referred to as a return on their investment

There are typically two categories that risks are placed into: systematic
risks andunsystematic risks.

Risk and return are opposite interrelated concepts.

When an investment works effectively, risk and return ought to be highly

correlated.

Nishant Kumar
Assistant Professor
Arka Jain University
 Efficient Market Hypothesis
In financial economics, the efficient-market hypothesis (EMH) holds that asset prices
accurately reflect all information. Since market prices should only respond to fresh
information, an obvious implication is that it is impossible to "beat the market"
consistentlyon a risk-adjusted basis.

KEY POINTS:

The efficient market hypothesis (EMH) or theory states that share prices
reflect allinformation.
The EMH hypothesizes that stocks trade at their fair market value on
exchanges.
Proponents of EMH posit that investors benefit from investing in a low-cost,
passiveportfolio.
Opponents of EMH believe that it is possible to beat the market and that
stocks candeviate from their fair market values.

Nishant Kumar
Assistant Professor
Arka Jain University
 The strength of the Efficient Market Hypothesis (EMH) theory’s assumptions
depends upon the forms of EMH. The following are the forms of EMH: –

 Weak Form: This form states that the stock prices indicate the public market
information, and the past performance has nothing to do with future costs.
According to the weak market efficiency theory, which is also known as the random
walk theory, prices cannot be predicted by looking at past occurrences; they are
completely random; therefore technical analysis cannot be utilised to outperform the
market.

According to the random walk theory, stock prices always follow a random course
and are unpredictable, investors cannot forecast future prices using historical data
patterns and price movements, and stock prices already accurately reflect all
available information. For instance, proponents of this approach claim that using
technical analysis to find investment opportunities has little to no value. Instead,
they would invest in index funds that follow the performance of the entire market to
maintain a passive investing portfolio.

 Semi-Strong Form: This form states that the stock prices reflect both the market and
non- market public information. The semi-strong version of the EMH contends that
the stock's reported share prices take into account only recent and previous public
(and not private) information. The efficient market hypothesis is best expressed in
this way, and empirical data shows that the majority of capital markets in developed
nations are typically semi-strongly efficient.

This type of efficiency is predicated on the idea that market stock prices react
immediately to news regarding a certain stock or asset. According to a weaker
version of the market efficiency hypothesis, traders can only benefit from private
information that is unknown to the rest of the market if they have access to it.
 Strong Form: This form says that public and private information instantly
characterizes stock prices. The EMH's strongest form, known as strong form
efficiency, makes the assumption that all recent and past information, both public
and private, that could have an impact on an asset's price has already been taken
into account and reflects the asset's true value.

Nishant Kumar
Assistant Professor
Arka Jain University
 According to this hypothesis, stock values displayed on exchanges are totally
correct. Investors who subscribe to this theory believe that even insider information
cannot provide a trader an advantage, hence they cannot outperform the market
regardless of how much access they have to additional information or how much
analysis and study they conduct.

Nishant Kumar
Assistant Professor
Arka Jain University