Investment Analysis Summer 2013 – Class Notes

Investments: Background and Issues

Investment - the current commitment of money or other resources in the expectation of reaping future benefits.
Real Assets versus Financial Assets Real Assets – Assets used to produce goods and services. Real assets are tangible assets that determine the productive capacity of an economy, that is, the goods and services its members can create. These include land, buildings, machines, and knowledge that can be used to produce goods and services. Other common examples of investments in Real Assets are paintings, antiques, precious metals and stones, classic cars etc. Higher carrying and storage costs, increased transaction fees and lower liquidity, are some common drawbacks of real assets in relation to financial assets.

– i.e. - land, buildings, equipment & knowledge – Functions to contribute directly to the productive capacity of the economy – Generate net income to the economy – Individual portfolios may include real assets, real estate and commodities (precious metals or agricultural products), through direct investment. • Financial Assets – Claims on real assets or the income generated by them. Financial Assets, or more commonly known as Securities, include stocks, bonds, unit trusts etc. In essence, financial assets or securities represent legal claim on future financial benefits. These are no more than sheets of paper and do not contribute directly to the productive capacity of the economy. Instead, these financial assets are the means by which individuals hold their claims on real assets and the income generated by these real assets – Stocks & bonds, issued by firms/governments, purchased by investors – Do not contribute directly to the productive capacity of the economy –