Investment (Essay Sample)

Investments
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Institution:
Introduction
The report herewith details the investment of the start capital of AED 400,000. The aim of investment is in the garnering of the maximum amount of profit with minimal probability of risk and this is what one delves to accomplish as espoused in the report. The commencement of investment was on September 2013 and involved a diverse portfolio. The calculations are based on standard recognized practices and give the correct figures and estimates on the investment patterns and expected patterns.
The onset involves the understanding of investment. This is the use of seed asset to acquire possible returns. These profits can be in the form of revenues, interests and dividends. One purchases a diversified range of material based on the level of risk and returns involved. The arrayed list of one’s investments is oft referred to as one’s investment portfolio. This report espouses the various steps in investment, their relevance and the investments chosen based on these steps. The calculations and decision premises are expounded on in this report ( Ramaswamy, 2012)
Step 1: Having Investments Financial Foundation and Expected Conditions.
Having the amount of AED 400,000, it can be assumed that one has the financial background set for a dip into the investment world. One needs to ascertain that there are no pre-existing high interest debts that would suck upon the said investment and serve to dwindle the profits or the rates of return on the investment (Hagin, 2013). One tries to regulate the expenditure. The expenditure should strive to be lower than the investment’s returns as to ensure continuity in the profits and revenues from the said investment.
Before investment, one should have built strategies in the case of a fail in the investment too. The fail safe should be in way of having some emergency funds that can be used to get one-self back up. The money would mainly be for one’s upkeep in the form of living expenses that are easily accessible for use and not tied up with the investment portfolio.
Step 2: Setting and Analysis of Investment Targets and Goals.
The reasons behind my investment are espoused here with the aim of explaining the aim of the investment at hand. The duration and the expected amount of returns are the key focus here. My goal is to have recouped on a third of the investment within a trimester. This would be a third of AED 400,000. This is to the tune of AED 133333.33. Another aim in the long term would be to have coupled enough returns to be a comfortable retiree in the next 23 years whilst having a college fund for the expected offspring ( Ramaswamy, 2012). The goal is not to become a business mogul or billionaire, but have the ability to afford the finer items in life on a controlled level without too much strain to one’s finances.
Step 3: Investment Plan Adoption
The adoption of an investment plan is based on the investment goals and the budget at hand. In this case the budget is the amount AED 400,000. The objectives were the recoupment of a third of the investment within a three month period and the long run plan of retirement in twenty three years to a comfortable suburban life. The investment plan adoption relies heavily on the volatility of the investment option. This is its shifts in performance in the business cycle as compared to the benchmarks. There is also the matter of its alignment to the investment objectives and the expenses and fees associated with the investments. All this is in comparison with the other available investment options. The investments available are stocks, bonds and alternatives. These are the main options. The alternatives include derivatives, real estate and precious metals.
Step 4: Analysis of Investment Options/Vehicles
The choice of investment vehicles is based on the returns on investment and the risk entailed in the investment. One should invest in what one has a full understanding of its workings (Hagin, 2013). The risk is the lack of certainty on the returns by the investment. The main types of vehicles as per the objectives are common stock, short term investment vehicles and speculative investment tools.
Short term investment vehicles have a life-span of one year whence they mature. They offer the lowest risks and include certificates of deposit, treasury bills, bankers’ acceptances and commercial paper. The certificate of deposit acts as debt instrument that has a specific date of maturity and interest rate. It is issued by a bank and indicates the deposition f a specific amount of money. The risks involved are the penalties in early withdrawal and their non-tradability. They can only be traded when in bulk from large money market investors. Treasury bills are other securities issued by the government showing obligation. They also have a one year or less of maturity. They incur interest which is accrued. The other form of revenue incurred is from the discount in the issuing of the t-bill. There is thus a difference in the nominal value and the discounted price which is paid on maturity. The best part of this is that they are free of risk as their yield is fixed. The challenge faced would be in that they are auctioned on a highest bidder basis and thus might be expensive. Their high liquidity is part of the snare of the treasury bills as they are never out of demand. They are thus tradable but prices vary according to the interest rates on the market. There are also non-competitive bills which are issued at an average of the competitive bills.
Commercial paper represents a promissory note issued by a corporation. It is the private sector version of the Treasury bill. It is however unsecured and short term. It is a way for the corporation to borrow from the investors in a much cheaper way than bank loans. It is issued at a discount either directly or through an intermediary to the investor. It most often has a maturity of 30 to 60 days and offers more risk compared to the t-bill. The risk lies wherein the corporation can default and it also offers hardship in tradability. There exists market illiquidity in this case and thus their resale is a problem. Another vehicle would be the repurchase agreement. This is a form of short-term loan whence a security exists as collateral. The repo has a short maturity having one for even a single day. The overnight is referred to as an overnight repo and if for longer, term repo.
There are also fixed income securities named thus because of a fixed return up to a certain date. They are further split into preferred stocks and long term debt securities. The long term debt securities have the characteristic of having a maturity longer than one year. They also have interest rates. They are relatively riskless and considered safe assets. Bonds are the most popular of this form. This is a loan taken by an entity which is obligated to pay an interest on the refund. The generated income is constant whatever the market conditions. To determine the returns, one calculates from the par value, maturity rate and coupon rate. Another vehicle is the preferred stocks. They are also called equity security as they have the benefit of paying dividends and having unrestricted life. The dividend is fore known and fixed. It is therefore more of the risk free options in investment. It differs from bonds in the infinity of its flows unless the stock is callable. The common stock would be another vehicle in long term investments. It is but a share ownership in the interests of the firm. It is stock equity in the company. They give one voting rights in the company general meetings. They are also entitled to dividends and in the event of bankruptcy, they garner the residual assets. They are a mode for the company to raise money to divest in other ventures or build on the existing ones. This vehicle should be chosen with precision and care with emphasis on the long term prospects of the company.
Speculative investment vehicles are also on hand. They offer high returns with high risks too. The aim is to purchase whence the prices are lowest and sell them when the prices are highest thus garnering maximum profit. This is the only avenue of revenue generation in these securities. They are categorized as options, futures and commodities like precious metals, coffee and grains. These are what are usually categorized as the alternatives in the portfolio. Options are contracts that endow the owner with the right of sale or purchase of the asset at a given date to or from a given entity not specified or specified. It is thus not completely risk free as it depends on the supply and demand in the options market. Futures define mutual agreement to trade on a particular day and price in a particular financial asset. They both define who the seller is and who the buyer is.
In summary, the portfolio can include savings accounts, money market accounts, certificates of deposit, bonds, stocks, real estate, mutual funds and precious metals such as gold and silver. The savings accounts have the advantage of low minimum balance and liquidity. They however have limited access and a very low interest rate. The money market accounts are similar but with higher minimum balances and higher interest rates. Real estate is illiquid and capital intensive making it a hard option unlike precious metals which are untaxed, not affected by inflation and very liquid.
Step 5: Choice of Suitable Investments
The choice of the budgeted AED 400,000 is for a portfolio not keen on risk but wealth creation. The portfolio in a pie chat would thus be:


This representation is whence stocks have a 55% stake, bonds a 32% stake, the alternatives have a 5% stake and finally a cash stake of 8%. This translates to 220000, 128000, 20000 and 32000 dirhams respectively. 1 dirham is equivalent to 0.27 USD. This therefo...