Overview of Investment

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Overview of Investment

• What is investment?
• How to invest?
• Real asset investment vs. financial asset
  investment
• Types of financial assets
• The investment process
• Introduction to financial markets
• Competitive and efficient market
• Major players
• Recent trends in investment

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The Top 10 Richest in US (Forbes, 2005)

• 1. William H. Gates
• 2. Warren E. Buffett
• 3. Paul G. Allen
• 4. Michael Dell
• 5. Lawrence Ellison
• 6. Christy Walton
• 7. Jim C. Walton
• 8. S. Robson Walton
• 9. Alice L. Walton
• 10. Helen R. Walton

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What Is Investments

• Investment
• An investment is the current commitment of money
  or other resources in the expectation of reaping
  future benefits.
• Real Assets Investment
• Real assets (such as plants and machinery) are
  assets used to produce goods and services
• Financial Assets Investment
• Financial Assets are claims on real assets or the
  income generated by them

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Types of Financial Assets

• Fixed-income securities
• Securities pay a specified cash flow over a
  specific period.
• Equity
• An ownership share in a corporation
• Derivatives
• Securities providing payoffs that depend on the
  values of other assets.

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The Investment Process

• Asset allocation
• The choice among broad asset classes such as
  stocks, bonds, real estate , commodities and so
  on
• Security selection
• The choice of which particular securities to hold
  within each asset class
• Top-down strategy vs. bottom-up strategy

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Competitive market

• Risk-return trade off
• Assets with higher expected returns have greater
  risk
• Efficient markets
• Active management
• Finding undervalued securities
• Timing the market
• Passive management
• No attempt to find undervalued securities
• No attempt to time
• Holding an efficient portfolio

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Major Players in the Financial Markets

• Firms
• Households
• Government
• Financial intermediaries

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Financial Intermediaries

• Investment companies
• Mutual funds
• Investment bankers
• Firms underwriting the sale of new securities to
  the public
• Big names Goldman Sachs, Merill Lynch, Salomon
  Sith Barney
• Banks
• Insurance companies
• credit unions

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5. Globalization

• American Depository Receipts (ADR)
• Foreign securities that are offered in dollars
• International mutual funds
• derivative securities with payoffs depend on
  prices in foreign security markets
• Which one will you prefer to invest, U.S. firms
  or foreign firms?

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Securitization

• Securitization pooling loans into standardized
  securities backed by those loans, which can then
  be traded like any other security.
• Mortgage pass-through securities (mortgage-backed
  securities)
• Pools of home mortgage loans sold in one package.
  Owners of pass-through receive all of the
  principle and interest payments made by the
  borrowers
• If the homeowner defaults on the loan, the
  pass-through agency makes good on the loan. That
  is, no credit risk for investors.

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Financial Engineering

• The creation of new securities by unbundling or
  by bundling
• Unbundling means breaking up and allocating the
  cash flow from one security to create several new
  securities
• Bundling means combining more than one security
  into a composite security.