Real versus Financial Investments

Financial Investment: it involves investment in shares, debentures bonds and other securities.

Real Investment: It involves investment in land, building, gold and silver.

Extent of Liability:

All transactions do not qualify as financial investments. Some transactions involve the exchange of real property (house, land etc) for a financial consideration with no liability on the part of the supplier of property to provide return to the investor on the property whereas, financial investments involve the issue of a piece of paper in exchange for money evidencing the liability of the issuer (recipient of money) to provide return to the investor. The former are called the real investments and the latter are called the financial investments.


The party liable in financial investment transaction to provide returns may or may not meet his liability all the time. Even if he does, it might not be on time. So, uncertainty is there in financial investment. As real investment involves exchange of real property, once the transfer of property takes place the risk of uncertainty is minimum.


Another that distinguishes real investments from financial investments is liquidity. Liquidity refers to the convertibility of an asset in to money quickly, conveniently, and at little exchange cost. Real assets are less liquid than financial assets largely because of absence of organized markets and trading system. The same will be provided by stock exchanges for financial investments.

Investment Objectives:

The objective of investment is to invest in securities in such a way that one maximizes one’s returns and minimizes risks. An investor may have multiple objectives and one has to achieve a sound balance among them. Any one objective should not be given undue importance at the cost of the others.

The investment objectives of an investor may be (1) to receive stable current returns (2) to enjoy appreciation in the value of the investment (3) to enjoy tax shelter by making in tax exemption investments etc.

Investment Constraints:

1. Liquidity
2. Age
3. Time Horizon
4. Risk Tolerance
5. Tax Liability

The challenge in investment management therefore lies in choosing the appropriate investments and designing a unit that will meet the investment objectives of the investor subject to his constraints. To take on this challenge the first step will be to get acquainted with the different types of investments that are available in our financial market.

The investment Scene:

Securities and Exchange Board of India (SEBI)

The Securities and Exchange Board of India which was set up as an administrative body in April 1988 was given statutory status on 30.1.1992 by promulgation of SEBI ordinance which has since become an act of parliament.

The main objectives of SEBI are:

1. To protect the investors’ interest in securities
2. To regulate and develop the securities market.

The organization of SEBI has five departments (1) Primary market department (2) The issue management intermediaries department (3) The secondary market department (4) The institutional investment department (5) Advisory committee.

Listing: Registering of shares on stock exchange for trading on its floor.

Buyback: Under this arrangement companies are allowed to purchase the issued shares from the holder.

Market makers: market makers quote both sell and buy rates and accept buying and selling of shares at the quoted shares.

Jobber: A person who trades in shares and who is located at a particular trading post on the floor of the stock exchange. He buys and sells for a small difference in price.

Jobbers Margin: Jobbers margin is the difference between the price at which a jobber was prepared to buy.

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  • Gobinda Shah

    link between real investment and financial investment