In this Article, we are going to discuss about meaning and Process of Investments. Investing in Stock Market Notes
MEANING OF INVESTMENT
Investment is the employment of funds with the aim of getting return on it. In general terms, investment means the use of money in the hope of making more money. In finance, investment means the purchase of a financial product or other item of value with an expectation of favorable future returns.
Investment of hard earned money is a crucial activity of every human being. Investment is the commitment of funds which have been saved from current consumption with the hope that some benefits will be received in future. Thus, it is a reward for waiting for money. Savings of the people are invested in assets depending on their risk and return demands.
Investment refers to the concept of deferred consumption, which involves purchasing an asset, giving a loan or keeping funds in a bank account with the aim of generating future returns. Various investment options are available, offering differing risk-reward tradeoffs. An understanding of the core concepts and a thorough analysis of the options can help an investor create a portfolio that maximizes returns while minimizing risk exposure.
Necessary steps in the process of Investments:
1. Objective and Source of the investments:
The first important stage before making investment is to determine the objectives of the investments. It addition to this, the investor has to see that he should be able to create an adequate fund for investments. This stage is important because investments assets and their relative features are identified under this stage.
2. Analysis of various investment alternatives:
When an individual has arranged a logical order of the types of investments that he requires on his portfolio, the next step is to analyse the various investment alternative for his portfolio. He must make a comparative analysis of the type of industry, kind of security and fixed vs. variable securities. Future behaviour or prices and stocks, the expected returns and associated risk must be taken into consideration while analysing various investment alternatives.
3. Valuation of securities:
The third step is perhaps the most important consideration of the valuation of investments. Investment value, in general, is taken to be the present worth to the owners of future benefits from investments. The investor has to bear in mind the value of these investments. An appropriate set of weights have to be applied with the use of forecasted benefits to estimate the value of the investment assets. Comparison of the value with the current market price of the asset allows a determination of the relative attractiveness of the asset. Each asset must be valued on its individual merit. Finally, the portfolio should be constructed.
4. Construction of portfolio:
Under features of an investment programme, portfolio construction requires knowledge of the different aspects of securities. While evaluating securities, the investor should realize that investments are made under conditions of uncertainty. These cannot be a magic formula which will always work. The investor should be concerned with concepts and applications that will satisfy his investment objectives and constantly evaluate the performance of his investments. If need be, the investor may consider switching over to alternate proposals.