CHAPTER 12: INVESTMENT MANAGEMENT

• SAFETY CUSHION

  Some companies store substantial amounts of cash and short-term interest-earning investment (i.e., certificate of deposits) to be able to operate for a year even without any revenue. This investment is a safety cushion to ensure that the company can continue to operate even in the face of extreme adversity.
• CYCLICAL CASH NEEDS

  Some companies operate in seasonal business environments that need cyclical inventory build-up and large amounts of cash, followed by voluminous sales and cash collection. The same may apply to an individual.
• INVESTMENT FOR A RETURN

  Another reason that investors invest is simply to earn money. However, most companies engage in only a small amount of investment solely for the purpose of earning a return through the receipt of dividends (profit distribution for equity shares) or interest income on notes, bonds, or income arising from the appreciation of investment value.
• INVESTMENT FOR INFLUENCE

  Companies can invest in other companies for many reasons other than to earn a return. Some reasons are to ensure a supply of raw materials, to gain access to a company's research or technology, to diversify product offerings, or to influence the board of directors over the conduct of that company's operations. Still, the intended outcome of investment in other companies is to enhance the overall value of the investing firm.
• INVESTMENT FOR CONTROL

  A company or an individual purchases equity shares of another company large enough to be able to control its operating, investing, and financing decisions of the latter. This is done with a view of expanding operations or creating operational efficiencies or maybe increasing its control over key markets in the industry.
• INVEST EARLY AS POSSIBLE

  The sooner you can start investing, the quicker you can start taking save. Compound interest is the return you earn on your returns, which can help your earnings grow exponentially over time.
• HOW MUCH YOU SHOULD INVEST

  How much you decide to invest will depend largely on your financial goals. As a general rule of thumb, experts suggest eventually investing 10% to 15% of your income each year.
• DIVERSIFICATION

  Another way to manage risk in your portfolio is through diversification, building a portfolio with a broad mix of investments across assets, helping you avoid putting all your eggs in one basket.
• REBALANCING

  Your portfolio can change over time, shifting your asset allocation and outperform, you may discover that you now hold a greater portion of your portfolio in stocks than you had intended.
• TIMING

  It refers to purchasing an asset just before it is likely to increase in value and selling the asset just before it is likely to decrease in value. This decision assumes, of course, that the prices of assets follow some pattern and that the investor can accurately forecast the change in prices.