Cash-rich businesses in technology, banking and insurance (among many other sectors) earn their impressive incomes not only from the services and products that they sell but also the interest and capital gains they receive from their investment portfolios. Managing these cash flows is not a passive element of running the business; rather, it is an integral part of their financial strategies. Job candidates who have earned an MBA with an emphasis in finance will head to the front of the line for openings to manage these securities investments.
Maximizing Return, Managing Risk, and Diversification
The end goal of securities investments is to create portfolios that maximize return for shareholders. The concept of managing risk is essential to securities investments. Contrary to popular belief, however, managing risk is not only for risk aversion. Because they have studied the practice, finance MBAs know that avoiding risk will limit financial rewards and stagnate the opportunities that shareholders and other stakeholders expect.
Instead, managing risk should account for the goals and available funds of the investor. Conservative companies may not want to risk their principal for higher potential earnings. Investments that protect their principal funds are what their fund managers must focus on. Companies that seek higher returns will take on higher potential risk, understanding that they could lose the interest and capital gains they have already earned as well as the primary funds they invested.
Diversification is a strategy that fund managers use to mitigate the risk that a company takes on. Even with risk-tolerant companies, Modern Portfolio Theory (MPT) advocates diversification by investing in a range of security types, industries and maturity dates. With MPT, investors can take on additional risk without risking all of their funds.
Constraints and Ethics
When evaluating securities investment opportunities, it is imperative that investors and analysts take a holistic approach. Various constraints will affect each opportunity. Analysts must recognize and respect industry-specific (institutional) constraints.
For example, legal constraints could prohibit investing in companies that employ children or dump chemicals into the oceans. Even when other countries allow those practices, ethical restraints can dominate and prevent a socially responsible company from investing in areas where these questionable practices are legal.
The Securities Industry and Financial Markets Association’s (SIFMA) sponsored project, Impact, helps educate the public on the importance of financial markets, including the interesting analysis “Can Capital Markets Help the Environment.” Another well-known group, the Investment Adviser Association publishes their annual Evolution Revolution report on the profession and offers insight on the markets, custody and trends of their profession.
As Baby Boomers move further into retirement, there is a renewed focus on securities investment. Securities investments are critical to the success of companies and private clients alike; securities managers and directors frequently oversee millions (even billions) of dollars.
You can learn a great deal more in Southeastern Oklahoma State University’s MBA course on Securities Investments.
Learn more about the SOSU online MBA with an emphasis in Finance program.
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