sapm session 2

8/3/2019 SAPM Session 2

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11/07/07 BIM- IV Semester 1

SESSION - 2


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Define Investment


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Investment

It is the employment of funds withthe aim of achieving additionalincome or growth in value.

Or

It is the commitment of funds made inexpectation of getting some +vereturn.


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What is Speculation?


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Speculation

Speculation needs investment and allinvestments are some whatspeculative.

Investments are putting money into

an Asset which is not necessarilyMarketable in the short run. ButSpeculation is usually more shortrun.

Speculation involves high risk and amore uncertain expectation ofreturns.


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Gambling!


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Gambling

Gambling involves taking on risk withoutdemanding compensation in the form ofincreased expected returns. It exhibits thefollowing characteristics:

1) It is typical, chronic and repetitiveexperience.

2) Never stops while winning3) Takes more risk which he cannot afford.

4) Enjoys a strange thrill (pleasure & Gain)


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INVESTMENTACTIVITY
http://investment%20activity.doc/http://investment%20activity.doc/http://investment%20activity.doc/http://investment%20activity.doc/


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APPROACHES TO STUDYSECURITIES

Study and evaluation of securitiesare based on 3 school of thoughts:

1) Fundamental Analysis

2) Technical Analysis

3) Modern Portfolio Theory


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Fundamental Analysis

Here the stocks are selected basedon EIC analysis.

Here an attempt is been made to finsout the undervalued and overvalued

stock.Under value means less than intrinsicvalue & vice versa

Intrinsic Value = Potential price+Forecasted dividends discounted

back)


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Fundamental analysis (cont)

The assumption of undervalued stockis that market will eventuallyrecognise its errors and price will be

drawn up towards the intrinsic value.

Overvalued stocks are to beidentified, so that it can be avoided

or sold out.


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Technical Analysis

This approach centers around plottingthe price movements of the stockand drawing inferences from the

price movements.

The technicians believe that stockmarket history will repeat itself.


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Technical Analysis (contd)

All the tools of the Technicians were inthe form of charts which comparesthe Price-Volume relationship.

This is the one factor which is notexplicitly seen in the FundamentalAnalysis.


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Modern Portfolio Theory

This is based on the Random Walkmodel of Efficient MarketHypothesis.

Also it lead to theory ofDiversification propounded byMarkowitz.

sapm session 2

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