Question

Why is it important that a debt or equity investor understands how their security ranks compared to other securities

Answer 1

It is very important for an investor to understand the relativity of his Security with others for many reasons, some of which are listed below

Risk - An investor should first determine his risk taking ability while going for equity or debt market and then analyses risk involved in the security he is going to invest. He should properly read through the skills of leadership team, strength of the company, impact of any contingency, pending law suits, impact of strike by its workers etc. This will give him some idea whether or not to invest in such a security.

Returns - Investor should focus to maximize his / her return by meaningful investing the money. By analyzing with peer securities he / she would know whether he is generating returns in proportion to risk involved and are the assets underperforming or over performing relative to other assets. Therefore can churn out his portfolio strategy to gain maximum with similar risk appetite.

Volatility - This investor should look at volatility levels as well. A risk averse invest or might be looking for higher return with higher risk which comes through volatility. Investor should compare whether his getting enough returns to compensate proportionate losses and how other securities fairing. Do he need to switch over his funds?

Duration - Investor should also look at the duration and returns of the same. This will help me choosing right security.