Investment Process involves how an investor should make decision about what marketable securities to invest in, how extensive the investments should be, and when the investments should be made. A five step procedure for making these decisions is the basis of the investment process:
1. Set Investment policy: Investment policy involves determining the investor’s objectives and the amount of his or her investable wealth. Because there is a positive relationship between risk and return for sensible investment strategies, it is not appropriate for an investor to say that his or her objective is to “make a lot of money”.
what is appropriate is for an investor to state that his or her objective is to attempt to make a lot of money while recognizing that there is some chance that large losses may be incurred. Investment objectives should be stated in returns of both risk and return.
2. Perform security analysis: It involves examining several individual securities within the board categories of financial assets previously identified. One reason to examine securities is to identify those that seem mispriced. There are many approaches to security analysis. However, most of these approaches fall into one one of two classifications. The first classification is technical analysis, The second classification is fundamental analysis, those who use it are known aas fundamentalists, or fundamental analysts. These two approaches to security analysis,the focus will be first on common stocks and then on other types of financial assets.
3. Construct of Portfolio: Portfolio construction,involves identifying specific assets in which to onvest and determining how much to invest in each one. The issues of selectivity,timing,and diversification need to be addressed by the investor.
4. Portfolio Revision: Portfolio revision is concerned with the periodic repetition of the previous three steps. Over time the investor may change his or her investment objectives, which, in turn,would make the currently held portfolio less than optimal. The investor may create a new portfolio by selling certain securities and by purchasing other.
5. Evaluate performance of portfolio: Portfolio performance evaluation involves determining periodically how the portfolio is performing in term of the return earned and also the risk experienced by the investor. Thus appropriate measures of return and risk as well as relevant standard.