Investments Background And Issues

AFTER STUDYING THIS CHAPTER YOU SHOULD BE ABLE TO:

Define an investment.

Distinguish between real assets and financial assets.

Describe the major steps in the construction of an investment portfolio.

Identify major participants in financial markets.

Identify types of financial markets and recent trends in those markets.

Related Websites

http://www.ceoexpress.com

This site provides a list of links related to all aspects of business, including extensive sites related to finance and investment. http://www.corpgov.net

Dedicated to corporate governance issues, this site has extensive coverage and numerous links to other sites related to corporate governance. http://www.finpipe.com

This is an excellent general site that is dedicated to finance education. It contains information on debt securities, equities, and derivative instruments.

http://www.financewise.com

This is a thorough finance search engine for other financial sites.

http://www.federalreserve.gov/otherfrb.htm This site contains a map that allows you to access all of the Federal Reserve Bank sites. Most of the economic research from the various banks is available online. The Federal Reserve Economic Database, or FRED, is available through the St. Louis Federal Reserve Bank. A search engine for all of the Bank's research articles is available at the San Francisco Federal Reserve Bank. http://www.cob.ohio-state.edu/fin/journal/ jofsites.htm

This site contains a directory of finance journals and associations related to education in the financial area. http://finance.yahoo.com

This investment site contains information on financial markets. Portfolios can be constructed and monitored at no charge. Limited historical return data is available for actively traded securities. http://moneycentral.msn.com/home.asp Similar to Yahoo! Finance, this investment site contains comprehensive information on financial markets.

An investment is the current commitment of money or other resources in the expectation of reaping future benefits. For example, an individual might purchase shares of stock anticipating that the future proceeds from the shares will justify both the time that her money is tied up as well as the risk of the investment. The time you will spend studying this text (not to mention its cost) also is an investment. You are forgoing either current leisure or the income you could be earning at a job in the expectation that your future career will be sufficiently enhanced to justify this commitment of time and effort. While these two investments differ in many ways, they share one key attribute that is central to all investments: You sacrifice something of value now, expecting to benefit from that sacrifice later.

This text can help you become an informed practitioner of investments. We will focus on investments in securities such as stocks, bonds, or options and futures contracts, but much of what we discuss will be useful in the analysis of any type of investment. The text will provide you with background in the organization of various securities markets, will survey the valuation and risk-management principles useful in particular markets, such as those for bonds or stocks, and will introduce you to the principles of portfolio construction.

Broadly speaking, this chapter addresses three topics that will provide a useful perspective for the material that is to come later. First, before delving into the topic of "investments," we consider the role of financial assets in the economy. We discuss the relationship between securities and the "real" assets that actually produce goods and services for consumers, and we consider why financial assets are important to the functioning of a developed economy. Given this background, we then take a first look at the types of decisions that confront investors as they assemble a portfolio of

Part ONE Elements of Investments investment

Commitment of current resources in the expectation of deriving greater resources in the future.

assets. These investment decisions are made in an environment where higher returns usually can be obtained only at the price of greater risk, and in which it is rare to find assets that are so mispriced as to be obvious bargains. These themes—the risk-return trade-off and the efficient pricing of financial assets—are central to the investment process, so it is worth pausing for a brief discussion of their implications as we begin the text. These implications will be fleshed out in much greater detail in later chapters.

Finally, we conclude the chapter with an introduction to the organization of security markets, the various players that participate in those markets, and a brief overview of some of the more important changes in those markets in recent years. Together, these various topics should give you a feel for who the major participants are in the securities markets as well as the setting in which they act. We close the chapter with an overview of the remainder of the text.

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