Prepared By: Mr Njapau Noah [BEcon&Fin,M.

Econ(acc)]

UNIT 1: NATURE AND SCOPE OF INVESTMENT AND PORTFOLIO

MANAGEMENT
Introduction
In this unit we are focused to the financial investments that mean the object will be
financial assets and the marketable securities in particular. But even if further in this
course only the investments in financial assets are discussed, for deeper
understanding the specifics of financial assets comparison of some important characteristics of
investment in this type of assets

Aim
The aim of this unit is to equip you with knowledge relating to the scope of
investment, investment alternatives and types of financial securities.

Discussion
Define the term equity in your own words and then compare equity
securities with debt securities.

1.1 Understanding Investments.

The term ‘investing” could be associated with the different activities, but the common
target in these activities is to “employ” the money (funds) during the time period seeking
to enhance the investor’s wealth. Funds to be invested come from assets already owned,
borrowed money and savings. This is done through numerous ways and channels which
are looked at in the next chapter. Those who give up immediate possession of savings
(that is, defer consumption) expect to receive in the future a greater amount than they
gave up. The rate of exchange between future consumption (future Kwacha) and current
consumption (current kwacha) is the pure rate of interest Conversely, those who consume
more than their current income (that is, borrow) must be willing to pay back in the future
more than they borrowed. Investments can be broken down into financial and real assets.

1.2 Financial and Real Assets

A financial asset represents a financial claim on an asset that is usually documented by
some form of legal representation, contractual commitment usually between the investor
and the borrower, e.g. shares or stocks, bonds, cash deposits, government securities,
etc. (Hirt. Block, Fundamentals of Investment Management, (2008), Ninth Edition. A real
asset represents an actual tangible asset that may be seen, felt, held or collected, e.g.
property, gold, antique furniture, etc.

1.3 Investment Alternatives

Different people would give different answers to why they invest and in what they choose
to invest in.
There are two types of investors:
➢ Individual investors/Reatil invetors;
➢ Institutional investors
Individual investors are individuals who are investing on their own. Sometimes
individual investors are called retail investors.
Institutional investors are entities such as investment companies, commercial banks,
insurance companies.
These investors invest in different investments using different investment vehicle. An
investment vehicle is a product used by investors to gain positive returns. Investment
vehicles can be low risk, such as certificates of deposit (CDs) or bonds, or they can carry
a greater degree of risk, such as stocks, options, and futures which we will be discussing
Short term investment vehicles: these are investments in short term securities with
a shorter maturity or holding period of one year or less. Short term investments are
usually traded on money markets which is part of the broader financial markets. The main
Securities traded on money markets are:
➢ Certificates of deposit
➢ Treasury bills
 ➢ Commercial paper
➢ Bankers’ acceptances
➢ Repurchase agreements
Long term securities are those with a maturity of more than 10 years. The fixed
amounts may be stated in money terms or indexed to some measure of the price level.
This type of financial investments is
presented by two different groups of securities:
➢ Long-term debt securities ( e.g government Bonds, corporate bonds e.t.c)
➢ Long term Capital market securities ( e.g Preferred shares, Ordinary shares e.t.c)
➢

Fixed-income securities: Fixed-income securities are those securities with a fixed

return up until the maturity period when the principle can be redeemed. These are debt
instruments that include bonds and other fixed income securities such as:
➢ Treasury notes
➢ Certificate of deposit
➢ Preferred shares

Common/ordinary shares: This is another type of long-term security. Common shares

represent the ownership interest of corporations or the equity of the shares holders.
Speculative investment: Speculators are different from investors in a number of ways.
Investors use analytical procedures to determine risk and return while speculators mostly
jus t speculate and invest for a quick profit. Speculators invest using the following
investment vehicles.
➢ Options
➢ Futures
➢ Swaps
➢ Futures
➢ Commodities
➢ traded on the exchange (coffee, grain metals, other
 ➢ commodities)

Other investment tools:

➢ Various types of investment funds
➢ Investment life insurance
➢ Pension funds
➢ Hedge funds

1.4 Types of investment

There are different investment alternatives and there are types of investments, mainly
classified in into three categories: Stocks, Bonds and Cash equivalents. These can further
be classified into two major types namely Equity and Debt securities
Defining equity: equity is mostly talked about in relation to stocks and shares.
Represents ownership or a stake in an organization, corporation or an establishment.
Equities are long term securities traded on the securities exchange markets. We shall
discuss more on securities Markets in Unit 4 as we discuss on types of markets.
There are long term investment and short-term investment each with specific
characteristics.
Types of equities
Companies that are publicly traded, meaning listed on the securities exchange offer
different types of “equities” or “securities”.
a) Common stock or ordinary shares.
b) Preference shares.
c) Debentures
d) Convertible securities
a) Ordinary shares
Ordinary shares or equities form the most important part of the capital of all companies.
The ordinary shareholders are the owners of the company. This is why, when a company
goes into liquidation, they get the residue of the assets. Ordinary shareholders also have
voting rights at the Annual General Meeting (AGM).
Ordinary shareholders are only paid a dividend at the discretion of management. They
are also not entitled to any return until the requirements of other providers of capital
(such as preference shareholders) have been met. Ordinary shareholders reap the
greatest rewards if the company does well and carry the greatest risk if the company
falls.
Equities are risky investments and yet popular because of the dividend’s investors get
from them and the likely capital growth if the company does well.
b) Preference shares
Preference shareholders like ordinary shareholders are part owners of the company rather
than creditors of it. Their rights however, differ considerably from those of ordinary
shareholders. The rights of preference shareholders include the following:
Their dividends are constant and are expressed as a percentage of the nominal value of
the shares
➢ They rank in preference to the ordinary shareholders i.e. they are the first to be
paid a dividend, or when a company collapses, they must be paid their capital first
before ordinary shareholders.
➢ Their dividends are cumulative. This means that if in one year they are not paid
dividends, they will be paid in arrears the following year.
➢ They have no voting rights.
➢ From the point of view of an investor, preference shares have neither the prospect
of growth associated with ordinary shares nor the security of debentures or loan
stock.
c) Debentures
A debenture is a written acknowledgement of a company debt. A debenture is secured
by two charges; a fixed charge that covers the company’s fixed assets and a floating
charge which covers the company’s current assets. Debentures are debts of a company,
which means that investors holding them are creditors.
D) Convertible Securities
A convertible security is an investment that can be changed into another form. The most
common convertible securities are convertible bonds and convertible preferred stock,
which can be converted into common stock. A convertible security specifies the price at
which it can be converted and pays a periodic fixed amount (a coupon payment for
convertible bonds and preferred dividend for convertible preferred shares)

1.5 Direct versus indirect investing

Investors can use direct or indirect type of investing. Direct investing is realized using
financial markets and in most cases the intermediary is a licensed broker. Indirect
investing involves financial intermediaries such investment companies i.e mutual funds.
Buying bonds or buying shares in a company or investing in shares directly through a
broker is called direct investment. In a direct investment, you’re in the driver’s seat. You
will choose the properties according to your investment criteria. You pick the location,
asset type, financing structure, investment strategy, exit plan … everything. Direct
investing empowers the individual investors with the opportunity to invest in what they
know and are passionate about.
Buying a mutual fund (having the same stock in its portfolio) is an indirect investment.
Investing in real estate takes capital and time. Even if you’re doing a “simple” investment,
such as buying a rental income property, it could take tens or even hundreds of thousands
of dollars of starting capital. But buying shares of/in a Real Estate investment trust (REIT)
for example buying shares in Real Estate investment Zambia Limited (REIZ) which is a
publicly listed company on LUSE. This is like buying stocks in a company but you open a
investment account and be ready to invest with even just a few hundred dollars. You will
understand further in unit 2 when we discuss about Investment companies and Mutual
Funds.

Summary
This unit has attempted to discuss: what investment is and alternatives of
investments. We discussed investment vehicles that can be used through direct and
indirect investing.
 Activity
1) What sort of an investment is equity?
2) What is investment?
3) Give exempla of long and short term secuirties?