PB601 INVESTMENT MANAGEMENT for Polytechnic and Diploma Level: July 2013

CHAPTER 1

INTRODUCTION TO INVESTMENT

Introduction

Definition of Investment

The Differences between Investment Concept and Speculations

Financial System’s Users

1.0 INTRODUCTION

In general, investment may be referred to the ownerships of physical and financial assets. The physical assets may consist of investment and ownership of property (including buildings), machinery, technology and any forms of visible sources. Meanwhile, financial assets are comprised of shares, bonds, trade notes’ ownership and other ownership of financial assets. Although we tend to measure the wealth of economy by referring to the capacity of national production, infrastructure development, services and sophisticated technology wealth, where all of these are focused on physical assets. However, indirectly, it cannot be denied that the financial assets also make a contribution in physical assets existing. For example, in the establishment of a national car production, require a large allocation of funds to finance the project. Therefore, companies should consider the alternatives whether using existing capital provision, issuing new shares, issuing bonds or by using financial instruments available in the market. This shows that financial assets play a significant role in the existence of visible assets.

In addition, financial assets will also allow the distribution of wealth and profits in the economy became more extensive and not confined to certain groups. Most of us may not be able to have their own car factory; hence, we can still enjoy the benefits and take part in business activities if we own the shares in that car company. This example shows that the existence of financial assets not only helps the existence of physical assets, also giving space and opportunity to individuals in the economy to enjoy the benefits from whichever industry they are invested in.

1.1 DEFINITION OF INVESTMENT

Investment is the commitment of financial resources that we have today hoping to gain profit/benefit in the near future. Investment can occur by managing systematically and making decision based on specific analysis on the financial assets or physical assets. Investors are advised to make a wise decision in making an assessment of risks and returns on investment that may be encountered by them. Return or profit on the investment may consist of dividends, capital gains or interest (financial assets) and cost of an asset. In other words, investment is an activity for earning the future profits or increased in future value of money based on the current monetary value.

Most people are actually involved with an investment during their life; we will make savings to enable us to withdraw money in the near future or during emergencies. We also may purchase houses or land hoping in the future we can sell them at a higher price. If you are interested in the equity markets, you may consider of buying shares of companies that have the potential to grow, and will sell the shares back after reaching your desired price. Or, you may consider of buying insurance or make a deposit in savings account hoping that the money will grow and can be used after your retirement. Mention above is some examples of good investment in real assets and financial assets.

1.2 INVESTMENT VS SPECULATION

If we make a comparison between investment and speculation, the main element that distinguishes both of them is the exposure to risk and expected return on the sum of investment. In the area of investment, as discussed earlier, the decision was based on a reasonable assessment of risk to the accessibility and specific analysis which gives a reasonable profit. This contrasts with the high-risk speculative activity and provide a high return rate. Here, the possibility of making a large profit or loss is very high. Examples of the most common speculation are managing the sale and purchase of foreign currency or FOREX Market. Today, the speculators are not really interested in the financial assets; they just wanted to make profit as we can see today in options and futures commodity markets. In addition, speculation aimed at making a profit in the short term than the concept of a long-term investment.

1.3 FINANCIAL SYSTEM’S USERS/CLIENTS

We can divide the customers of the financial system to the three categories, namely: -

i. Household Sector

Household sector is among the consumers and a major contributor in the financial system. In general, household’s investments are not only focused on owning the physical assets such as houses, land and cars but they also invested in financial assets that have potential and attractive according to their financial capability. At the same time, households also make financial planning for their retirement by allocating part of their income that set up by government or corporate to invest in the units trust in the market. Notwithstanding, some of them are also more interested in stocks, bonds and financial instruments that have higher return with higher risk unit trusts. Thus, this situation depends on the consideration of household willingness to accept risk on their investments. Hence, there are so many financial instruments either conventional or Islamic with various features today as to attract households to make fair judgments on investment.

ii. Business Sectors

If the household sector is more focused on the question of where and how to invest their money, businesses are more focused on how and where they can obtain financial resources to fund their business. Capital funding is needed to build factories, buy machinery and equipment, paying wages and salaries of workers and allow their business operations running smoothly. In the company's efforts to get their capital, they have a number of approaches which - to borrow capital from a finance company / bank or issue a mortgage. Another method is to issue shares by taking new partners.The objective for issuance of shares by the company is to get the best price for the securities issued and also has a lower cost of capital as compared to bank loan or financial institutions.

iii. Government Sector

As business institutions, governments usually require funding to manage public expenditure. Most of the government revenue is comprises of tax collection, and if the generating revenue is not enough to cover the expenditure, the government should consider other methods to meet their needs. It should be remembered that, the government cannot issue shares as common practice as companies. They are also not recommended to print a large amount of money (even though they are basically able to do so) because this action could lead to inflation and the government usually refrain from doing so. Thus, the best that could be adopted by the government for long-term funding is through the issuance of government bonds. As for short-term financing, the government may offer treasury bills to any interested party.

-to be continued - happy readings.....