Features of financial investments
The logical result of market reforms in Ukraine is to develop the securities market. An extensive infrastructure of financial markets (exchanges, OTC stock system, institutional investors, depository network, etc.) that simplifies operations with financial instruments and necessitates mastering the principles of sustainable management of the investment portfolio.
Enterprises can make financial investments in the form of investments in statutory funds associated enterprises profitable money market instruments (deposits at banks) and marketable securities. Typically, the composition of the investment portfolio is dominated by business investment in securities (stocks, bonds, savings certificates, investment certificates, etc.). Depending term investments (one year or more), they can appear as part of long-term and current financial investments.
Compared to real investments financial investments are characterized by high liquidity and the flexibility of operational management. However, financial investments typically provide less inflation protection and a lower yield than investment real objects.
Moreover, in the case of portfolio investment, limited real impact on the profitability of individual investors' financial instruments. In this case, you can only influence on the total yield of the investment portfolio by reinvesting the funds in more profitable securities.
The above advantages and disadvantages of investments determine the specific use entities who are not professional participants of the financial market. Typically, financial investment company succeed when the investment climate in the country is not conducive to the development of real investment or as a separate time periods in which reduced domestic investment needs. A greater degree of financial investment interest to financial managers as a reserve currency assets to support technical solvency.
In the management of financial investments following tasks:
- Ensure the reliability of investments;
- Increased return on investment;
- Increasing the market value of investments;
- Ensuring the liquidity of financial investments.
The reliability of financial investments affect systematic (market) and unsystematic (portfolio) risks. Despite the fact that the political instability and recession systematic risk investments very high protection against it almost does not exist. Conversely, portfolio risk can be reduced by means of diversification and insurance. Specific methods of internal financial risk insurance include the formation of a special insurance provision of highly reliable securities.
Increase the profitability of investments can be achieved by skilful maneuvering between risk and yield securities included in the investment portfolio of securities, the current rate of return which is reasonable for investors and consistent with the objective of forming its portfolio.
The market value of the securities portfolio depends on the overall situation of the stock market and the relationship between supply and demand of certain financial instruments. According to the theory of asymmetric information, the market price of securities increases when investors receive information on increasing its investment activity, increase the value of dividends, preparing the next issue of shares and so on.
Providing liquidity of investments is an important precondition for inflation protection investments and their timely transformation in cash assets. Liquidity on bonds and savings certificates related to the period of repayment, and the shares and investment certificates depends on the demand for the stock market. To maintain high liquidity investment portfolio should assess in more detail as investment securities portfolio and include only those instruments, liquidity is not in doubt.
Thus, the main purpose of financial investments is to provide the optimal balance between profitability, risk and liquidity of the securities in accordance with the selected type of investment portfolio.
Under the investment portfolio means a series of instruments selected for investment in accordance with the strategic guidelines of the investor. Classification of types of investment portfolio by various characteristics shown in Fig. 8.7.
Depending on the purpose of investment income can be identified portfolio portfolio portfolio growth and minimize risks associated with investing.
Portfolio growth provides investors focus on increasing its market value by including financial instruments whose market price tends to a constant (or sustainable) growth. It is clear that the risk associated with the portfolio is very high.
Portfolio income is formed by securities provide investors with high current income. This list is also quite risky.
Portfolio risk minimization formed by those financial instruments that primarily provide reliable inflation protection and high liquidity at a low level of income.
Depending on the degree of goal invest investment portfolio can be:
- Balanced (formed from financial instruments fully consistent with the objectives of its formation);
- Unbalanced (included in the portfolio of instruments conflict with the goals of its formation);
- Unbalanced (portfolio, which was previously balanced, but due to changes in market conditions is not relevant to the purpose of investing).
Depending on the investment strategy investment portfolio can be aggressive (high-risk), weighed (moderate or serednoryzykovanym) and conservative (nyzkoryzykovanym).
To reduce portfolio risk may be due to portfolio diversification by types of securities and their issuers, maturity, sectors and regions. In the practice of international financial management in the implementation of portfolio diversification in terms of their treatment most widely used two alternative methods:
1. stepwise method (method "ladder") is the uniform distribution of investments among different securities deadline. Freed funds from short-term financial instruments invested in longer-term securities. The result ensured ease of management and control, the amount of investment resources in circulation. The disadvantages of the method include stepped impossibility of rapid changes in the structure of the investment portfolio. Accordingly, there is a risk of loss of profits from the game on exchange of securities.
2. Polar method (method "bar") is the concentration of investments in securities polar term. The bulk of the funds invested in securities with very short term (for liquidity) and securities with a very long term (for income), and only a small portion of the investment portfolio is formed by the medium-term financial instruments.
Regardless of the strategy and tactics of investment portfolio management during its formation should follow the basic principles of financial management.
First, the investment portfolio must match the available financial resources. The choice of investment instruments confined to the possible funding, which does not affect the financial stability of the company.
Second, the operational management of the portfolio should be based on the principle of security of its manageability. If in the case of investments in real limiting factor is human resources for investment projects, in the case of investing in financial instruments manageability portfolio mainly depends on the possibility of tracking changes of securities and reinvestment of available operating funds in more profitable investment vehicle.
Thirdly, the extra investment portfolio management should take into account the strategic targets of investment policy: the limit of financial resources to finance investment of money included in the portfolio, limits of securities by maturity.
Fourth, justifying the appropriateness of financial investments, financial manager must consider not only their profitability but also the ability to reverse transformation at the ready means of payment. For enterprises equally profitable as sacrifice profitability for the full assurance of liquidity and solvency, and try to maximize profits at any price, despite the risk of insolvency.
According to this principle of handling financial investment companies can use independently or trust (trust) portfolio management.
Independent investment portfolio management is used in the high qualification of the company and sufficient awareness of the situation on the stock market. The investor may itself carry out sporadic access to the securities market or use the services of brokers.
Trust (trust) investment portfolio management is the transfer of institutional investors (investment companies and funds, trust companies, banks) a number of administrative functions: the settlement of the security, storage, mediation in the pledge, accounting, representation of interests on the shareholders' meeting etc.
Trust management can be carried out on the basis of agency (based on previous customer orders) or full representation (without prior approval of securities transactions now-owner).
The general scheme of operational investment portfolio management company shown in Fig. 8.8. The main objective of the management of financial investments is the primary balance in current payments company with a share of financial assets in cash. Management portfolio is done by gradual restructuring of financial assets, which provides:
- Maintaining a portfolio of the most profitable and marketable securities;
- The use of revenues from investments to compensate for current expenses;
- Reinvestment of net profit into new securities and real projects.
In order to reduce direct losses and an increase in current income from securities in times of cyclical changes in interest rate in the financial markets need time to adjust the size and composition of the investment portfolio of the company.