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Chapter 1: Introduction To Securities

This document provides an introduction to securities, including definitions of key concepts. It discusses security analysis and portfolio management. Individual securities have unique risk and return profiles, while a portfolio combines different securities. Portfolio analysis considers risk and return across assets, and portfolio selection chooses the optimal mix for an investor. The investment process involves estimating intrinsic value and comparing it to market price. Various debt and equity instruments are also outlined.

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Nicole Avila
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67 views13 pages

Chapter 1: Introduction To Securities

This document provides an introduction to securities, including definitions of key concepts. It discusses security analysis and portfolio management. Individual securities have unique risk and return profiles, while a portfolio combines different securities. Portfolio analysis considers risk and return across assets, and portfolio selection chooses the optimal mix for an investor. The investment process involves estimating intrinsic value and comparing it to market price. Various debt and equity instruments are also outlined.

Uploaded by

Nicole Avila
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Chapter 1: introduction to Securities

 Security analysis and portfolio management are


hard work, requiring discipline and patience, and
the work is not always rewarded by exceptional
returns.
What is Security Analysis?
 Process of estimating return and risk for
individual Securities.
What is Risk?
 This means the uncertainty in the probability
distribution of returns.
What is Portfolio?
 Securities that have returns and risk characteristics
of their own in combination.
Portfolio Analysis?
 It takes the ingredients of risk and return for
individual securities and considers the blending of
combining securities.
Portfolio Selection?
 It entails choosing the one best portfolio that suits
the risk – returns preference of the investor.
Portfolio Management
 It is the dynamic functions of evaluating and revising
the portfolio in terms of stated investor’s objectives.
Investment versus Speculation
Investment
 It is a commitment of funds made in the
expectation of some positive rate of returns.
Capital Gains
 Profits earned by the investors.
Speculation / Speculator
 Seeks opportunities promising very large returns,
earned rather than quickly.
 Speculator is less interested in consistent
performance than the investor, and is more
interested in abnormal extremely high return than
the normal.
The Investment Process
- Traditional Investment Analysis, when applied
to securities, emphasizes the projection of
prices and dividends.
What is Intrinsic Value?
It is compared with the security’s current
market price.
If the current market price is below the
intrinsic value, a purchase is recommended.
If the current market price is above the
intrinsic value, a sell is recommended.
Portfolio Management
- It is also characterized by an old and new way
of solving portfolio problem.
Traditional Portfolio
Selection of those securities that best fit the
personal needs and desires of the investor.
Modern Portfolio
Suggests analysis, selection and management
may well yield less than the optimum result.
Investment Categories
- Investment generally involved real assets or financial
assets.
- Among the many properties that distinguish real
from financial assets, one of the special interest to
investors is “Liquidity”.
Liquidity
 Refers to the ease of converting an assets into
money quickly, conveniently, and at little exchange
cost.
- Financial assets can be categories in a variety of ways.
Debt Instruments
 Usually take forms of issued by the governments,
corporations and individuals.
 Provide interest in either two ways;
1. Interest is paid periodically or the securities are sold
to the investor on a discount price basis.
2. Instrument is sold at price below the eventual
redemption price.
Redemption amount
 It is referred to as the face, par or maturity value.
Nominal Rate
 It is the interest payment in dollars as a percentage of
the face, par or maturity value.
Institutional Deposits and contracts
 Money and checking and savings account all
represents fixed dollar commitment that are debt
like in character.
Government Debt Securities
 Debt securities are issued by federals, state or
local government.
 These are the safest and most liquid securities
available anywhere
Private issues
 This are offered by the corporation engaged in
mining, manufacturing merchandising and
financial activities.
Short term privately issue
• Commercial paper
It is unsecured promissory notes of from 30 to
270 days maturity.
• Bankers Acceptances
Are issued in international trade, they are high
guaranteed carried by the banks.
Long term
- There is a great variety of sub classification in
long term corporate or private bonds.
• Convertible Bonds – provides the holder with an
option to exchange his bonds for a
predetermined number of common stocks
• Call features – provided for the benefit of the
issuer.
• Sinking Funds – is often found in bond issues for
the benefit of investors.
• Debentures – these are the unsecured bonds.
What is a prospectus?
It is a document required by law that issued fro
the purpose of describing a new security issue.
Equities
 It is an ownership position, that is, in which the
investor in stocks or certain option is an owner of
the firm and is thus entitled to a residual share of
profits.
What is equity investment?
 It involves commitment of funds to an institution of
some sort that in return manages the investment for
investor.
Variable Annuities
 Under federal tax laws, certain are permitted to
have certain portions of their salaries withheld their
employers for investment.
Insurance Policies
 Purchasing a life insurance policy could well be
considered an investment.
Direct Equity Investments
- There are two main direct equity investments;
Common stocks and Preferred Stocks.
Common Stocks
 Represents ownership of position.
Stock Splits
 It occurs when the firm ends up with more shares
outstanding, which sells at a lower price and have a
lower par value than the outstanding did before the
split.
Stock Dividend
Instead of cash dividend, investors can receive
dividends in the form of stocks.
Preferred Stocks
It is also known as a Hybrid Security. Because it
has features of both common stock and bonds.

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