Security analysis

Investment decision is a part of our economic life. Everybody takes such decisions in different contexts and at different times. Some are able to reap more profits through them; while others simply lose their money. Attempts should therefore be made to understand and know the way sound investment decision can be taken in order to improve the chances of making profits through them. Thus, investment decision making is an important area worth probing further.

Unfortunately, for long, investment decision making was regarded only art. As art is personal and subjective, it was difficult to provide a general framework with in which one could operate. Only, recently it has been developed which helps us to understand and know the way investment decision can be attempted. Recognizing is art contents, this body of literature works on the thinking that a systematic, general framework can be suggested for those involved in investment decisions that can then modify that according to their requirements. It has, therefore, been recognized that investment decision making is both an art as well as science. This is indeed an on-going process in which decision maker attempts to update him regarding the risk return characteristic of securities. These characteristic keep-on changing and investor go on attempting to understand their impact on his decisions. The conceivable investment opportunities were discussed and explained in many ways. The investment decision maker takes them into account in order to decide which securities should be bought or held or sold by him. A very simple investment decision rule is here applicable: buy a security that has highest return per unit of risk or lowest risk per unit of return. And, sell the security which doesn’t satisfy the above requirements.

The above investment decision rule to buy/sell securities is highly simple but it is very difficult to apply in straight forward fashion in actual practice. This is because there are large number of factors which affects both risk and return in the real world situation. Thus, security which had highest return per unit of risk at one point of considered to be a good buy might turn into a less attractive proposition and could be considered later on as a possible candidate for disinvestment. Such a situation might arise due to change in the management of the concerned company or changes in the government policy at economy level making it less attractive. The opposite might also be possible.
Investment decision making being continuous in nature should be attempted systematically.