The Investment Process includes the various methods and steps adopted by prudent investors during the development of their funds in order to earn profit and minimize the risks involved therein.
The main steps in the investment process may be furnished as follow:
Steps in Investment Process
Goals settings
Identifying risk
Measuring risk-return
Formation of portfolios
Review of the performance
Portfolio Revision
Steps in Investment Process
To set goals and objectives:
The first step in the investment process is to identify the goals and objectives f the investors. A systematic investment decision requires the formulation of a set of long-term or short-term goals which can serve as a guide for managerial decisions.
This step also includes the determination of the quantum of investment in different shares and debentures quoted in the capital market.
To determine the appropriate risk level:
The second step in the investment process is to determine the amount of risk that an investor is willing to assume to achieve the investment objective.
This step will largely determine the mix of assets to be held in the investment portfolio and an attempt will be made to quantify the risk and measurement of the same by applying appropriate tools.
To estimate the risk and return:
The third step in the investment process is to estimate the risk and return for the investors to take their decisions because risk and return go hand in hand. Investors must balance risk with return.
To form an optimal portfolio:
The fourth step in the investment process is to construct an optimal portfolio which includes an estimate of risk and return for individual securities and maintaining the relationship between securities, portfolios, and the like. An investment portfolio is the list of investment securities both common stock and bonds that an investor owns.
To make the analysis of the performance:
The fifth and last step in the investment process is to analyze the performance of the vendor company’s financial statement in order to take investment decisions.
To review the portfolio:
Investors should monitor the results of their portfolios for determining the goals and objectives and review the performance of the portfolios. This may provide some insights which will improve their security analysis and portfolio selection techniques.
Understanding of Investment
In order to accomplish the investment process an investor should have the following knowledge:-
Firstly, an investor must be aware of the risks associated with the investment.
Secondly, an investor must be aware that the investment requires the availability of surplus funds now or in the future.
Thirdly, an investor must possess knowledge of individual securities that are available.
Fourthly, an investor must have a method of analysis that will allow as to make an intelligent selection of securities.
Fifthly, an investor must be aware of the sources of information that will allow him to make a complete and intelligent analysis of an industry.
Sixthly, an investor must have sufficient knowledge of buying and selling of shares and other securities in the stock market.
Hey, have you heard about speculation?
The distinction between investment and speculation must be clear even though it is easier to state investment and what speculation is.
But it is very difficult to distinguish between investment and speculation because the main objective of both investment and speculation is to earn profit.
