THE CONCEPT OF INVESTING

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THE CONCEPT OF INVESTING
CHAPTER ONE
Practical Investment Management Robert A. Strong
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Investing Defined
To consume, to save, or to invest a dollar that
is earned ?
Both saving and investing amount to consumption
shifting through time.
However, saving involves little, if any, risk,
while investing is a risky endeavor.
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Investment Alternatives
Assets are things that people own.
Financial assets have a corresponding liability,
while real assets do not.
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Investment Alternatives
A security is a legal document that shows an
ownership interest.
Although securities are historically associated
with financial assets, they are also applicable
to real assets.
Securitization is the process of converting an
(financial or real) asset or collection of assets
into a more marketable form.
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Investment Alternatives
There are three broad categories of securities.
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Three Reasons for Investing
Why invest ???

• People invest to
• supplement their income
• Dividends and Interest
• earn capital gains
• Appreciation refers to an increase in the value
  of an investment.
• experience the excitement of the investment
  process

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The Academic Study of Investments
Theoretical research involves building
mathematical models and proposing pricing
relationships rather than studying actual market
data.
E.g. Arbitrage relationships, impact of stock
splits and cash dividends on investors
Theoretical models are frequently tested by
conducting empirical research.
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The Academic Study of Investments
Empirical research uses actual market data
rather than mathematical models.
An anomaly is an observed result that defies
explanation within the known theoretical
framework.
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The Academic Study of Investments
The investment community can learn much from both
rigorous academic research and from the life
experiences of people on the front lines of the
marketplace.