THE CONCEPT OF INVESTMENT AND INVESTMENT PROCESS

People either canalize their money to consump­tion or retain it for the future, and their desire to use their savings to obtain extra income gave

DOI: 10.4018/978-1-4666-6268-1.ch026

birth to the concept of investment.

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Basically, there are two investment options in which savings can be directed: financial assets and real assets (Strong, 2007, pp. 2-3). Financial assets are intangible such as bonds, stocks or derived products, but real assets refer to tangible things such as estates, machines, and buildings. While real assets are income-creating properties, financial assets are the properties providing the income shared among the investors (Bodie, Kane, & Marcus, 1996, p. 11). In this regard, invest­ments are further divided into two categories; real investments and financial investments. While real investments include tangible assets such as estates, machines, or factories, financial investments refer instead to intangible properties which provide holding or sharing rights such as stocks or bonds (Sharpe & Alexander, 1990, p. 1; Karan, 2004, p. 3). Today, financial investment rates have reached very high levels, so increasing investment alterna­tives have brought about the necessity of making better informed investment decisions.

Most investment decisions have three charac­teristics in common (Dixit & Pindyck, 1994, p.

• Investments cannot be taken back either partly or completely. In other words, the startup cost of an investment, at least part­ly, is sunk cost and it cannot be reclaimed.

• There is uncertainty concerning to the pro­spective gains. Thus, the best thing to do is to take all the alternative outcomes (the maximum and minimum profit and loss) into consideration hypercritically.

• The investors can make the investment whenever they want. They can delay the investment decision to collect more infor­mation about the future.

The procedures investors must follow in order to make decisions about their investments is called the investment process. From a portfolio perspec­tive, this process includes three steps (Stowe, Robinson, Pinto, & McLeavey, 2002, pp. 5-6):

• Planning: In this initial stage, the investor clearly defines the investment purposes (in­cluding the outcomes concerning to both risks and profits) and constraints (both in­ternal and external).

• Process: The portfolio manager associ­ates the investment strategies with the ex­pectations on portfolio selection (portfolio selection decision), and the portfolio de­cisions are put into effect (the decison of portfolio’s putting into effect).

• Feedback: The created portfolios are eval­uated to determine if they reach the desired goals or not. If not, the necessary arrange­ments are completed.

Basically, the investment process can be con­ducted under two categories: securities analysis and portfolio management. The rational investor seeks to gain the maximum profit with minumum risk. Minimizing the risk is possible through a correct portfolio choice and management.