There are nine Strategists (TOP MANAGEMENT), who, as individuals or in groups are concerned with and play a role in strategic management their role in strategic management is explained below:-

(1) Role of Board of Directors
The ultimate legal authority of an organisation vests in the board of directors. The owners of the organisation – shareholders, controlling agencies, government, financial institutions, holding company or the parent company-elect and appoint the directors on the board. The board is responsible to them for the governance of the organisation. As directors, the members of the board, are responsible for providing guidance and establishing the directives according to which the managers of the organisation can operate. The board exercises its authority according to the memorandum of association and articles of association of the company. Legally, they have to conform to the various provisions of the Companies Act, 1956. Apart from the legal framework, the board acts according to the policies, rules, procedures and conventions of the organisation.

The role of the board in strategic management is to guide the senior management in setting and accomplishing objectives, reviewing and evaluating 
organizational performance and appointing senior executives. However, there is no clarity regarding the exact role that the board should play in managing the affairs of the organisation. Much depends on the relative strength, in terms of power, held by the board and the chief executive. Where there is a high level of clarity regarding their respective rules, the relationship between the board and the chief executive is cordial and the functioning of the board is smooth. Where such clarity is less, problems occur.

As the board of directors operates as the representatives of stockholders so the board has also following major responsibilities:

1. To establish and update the company mission.
2. To elect the company’s top officers, the formost of whom is the CEO.
3. To establish the compensation level of the top officers, including their salaries and bonuses.
4. To determine the amount and timing of the dividends paid to stockholders.
5. To set broad company policy on such matters as labour – management relations, product or service lines of business and employee benefit packages.
6. To set company objectives and to authorize managers to implement the long-term strategies that the top officers and the board have found agreeable.
7. To mandate company compliance with legal and ethical dictates.

(2) Role of Chief Executives

The chief executive (CE) is the most important strategist who is responsible for all aspects of strategic management from formulation to evaluation of strategy. The CE is variously designated as managing director, executive director, president or general manager in business organizations. As the chief strategist, the CE plays a major role in strategic decision-making.
The functioning of the board critically depends on its relationship with the chief executive. Where there are differences of opinion between the respective perspectives of the role of the board and the chief executive, disagreements arise. The CE of an organisation plays the most crucial role in determining whether an organisation is successful or not.

The role of the CE in strategic management is the most important among the roles played by different strategists. He is the person who is chiefly responsible for the execution of functions which are of strategic importance to the organisation. In other words, a CE performs the strategic tasks; actions which are necessary to provide a direction to the organisation so that it achieves its purpose. He plays a pivotal role in setting the mission of the organisation, deciding the objectives and goals, formulating and implementing the strategy and, in general, seeing to it that the organisation does not deviate from its predetermined path designed to move it from the position it is in to where it wants to be.

The role modeling approaches attempt to describe the CE in terms of the different roles that they play in organisations. For instance, a CE may be considered as:
Chief architect of organizational purpose, strategist or planner;
Organisation leader, organizer or organisation builder; 
Chief administrator, implementer or coordinator; and
Communicator of organizational purpose, motivator, personal leader or mentor.

(3) Role of entrepreneurs
According to Drucker, “the entrepreneur always searches for change, responds to it and exploits it as an opportunity”. The entrepreneur has been usually considered 
as the person who starts a new business, is a venture capitalist, has a high level of achievement-motivation, and is naturally endowed with qualities of enthusiasm, idealism, sense of purpose, and independence of thought and action. However, not all these qualities are present in all entrepreneurs; nor are these found uniformly. An entrepreneur may also demonstrate these qualities in different measures at different stages of life. Contrary to the generally accepted view of entrepreneurship, entrepreneurs are not only to be found in small businesses or new ventures. They are also present in established and large businesses, in service institutions and also in the bureaucracy and government.

Entrepreneurs play a proactive role in strategic management. As initiators, they provide a sense of direction to the organisation, set objectives and formulate strategies to achieve them. They are the major implementers of strategies and also their evaluators. The strategic management process adopted by entrepreneurs is, generally, not based on a formal system and, usually, they play all the strategic roles simultaneously. Strategic decision-making is quick and the entrepreneurs generate a sense of purpose among their subordinates. 

(4) Role of Senior Manager
The senior (or top) management consists of managers at the highest level of the managerial hierarchy. Starting from the chief executive to the level of functional or profit centre heads, these managers are involved in various aspects of strategic management. Some of the members of the senior management act as directors on the board usually on a rotational basis. All of them serve on different top-level committees set up by the board to look after matters of strategic importance and other policy issues. Executive, committees, consisting of senior managers, are responsible for implementing strategies and plans, and for a periodic evaluation of performance. Ad hoc committee formed to deal with new projects has senior managers as project 
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managers. When assigned specific responsibilities, senior managers look after modernization, technology upgradation, diversification and expansion, plan implementation, and new product development. On the whole, senior managers perform a variety of roles by assisting the board and the chief executive in the formulation, implementation and evaluation of strategy.

(5) Role of SBU-level Executive.
The rationale for organizing structure according to the strategic business units (SBUs) is to manage a diversified company as a portfolio of businesses; each business having a clearly defined product-market segment and a unique strategy. The role that the SBU-level executives play is, therefore, important in strategic management. SBU-level executives, also known as either profit-centre heads or divisional heads, are considered as chief executives of a defined business unit for the purpose of strategic management. In practice, however, the concept of SBU is adapted to suit traditions, shared facilities and distribution channels, and manpower constraints.

With regard to strategic management, the SBU-level strategy formulation and implementation are the primary responsibilities of the SBU-level executives. Many public and private sector companies have adopted the SBU concept in some or the other form.

(6) Role of Corporate Planning Staff
The corporate planning staff play a supporting role in strategic management. They assist the management in all aspects of strategy formulation, implementation and evaluation. Besides these, they are responsible for the preparation and communication of strategic plans, and for conducting special studies and research pertaining to strategic management. The corporate planning department is not 
responsible for strategic management and, usually, does not initiate the process on its own. By providing administrative support, it fulfills its functions of assisting the introduction, working and maintenance of the strategic management system.
How corporate planning works at voltas
The basic function of the corporate planning cell (CPC) at Voltas Ltd. is to disseminate the concept of corporate planning and make planning a way of life in the company. The main objective of the CPC is to convert the existing budgeting system into a corporate planning system which deals with strategic issues. The CPC supports the corporate planning process by assisting the top management in the formulation of corporate plans and integrating the divisional plans with the corporate plan. Based on the company’s long-range plan, divisional strategic plans are made annually. The strategies for each division are explicitly stated by the CPC and communicated to the senior managers. After this, the CPC staff acts as a catalyst in the implementation process by helping the senior managers implement the plan. Evaluation is done quarterly by the corporate executive committee consisting of the president and six vice presidents in different functional areas. The staff at CPC is mainly drawn from within and they possess a few years’ line experience in different functional areas in the company.

(7) Role of Consultants
Many organizations which do not have a corporate planning department owing to reasons of small size, infrequent requirements, financial constraints, etc. take the help of external consultants in strategic management. These consultants may be individuals, academicians or consultancy companies specializing in strategic management activities. According to Management Consultants Association of India, management consultancy is “a professional service performed by specially trained 
and experienced person to advise and assist managers and administrators to improve their performance and effectiveness and that of their organisation”. Among the many functions that management consultants perform, corporate strategy and planning is one of the important services offered. The main advantages in hiring consultants are getting an unbiased and objective opinion from a knowledgeable outsider, cost-effectiveness and using specialists skills.
(8) Role of Middle- level Managers
The major functions of middle-level managers relate to operational matters and, therefore, they rarely play an active role in strategic management. They may, at best, be involved as ‘sounding boards’ for departmental plans, as implementers of decisions taken above, followers of policy guidelines and passive receivers of communication regarding strategic plans. Basically involved in the implementation of functional strategies, the middle-level managers are rarely employed for other purposes in strategic management.
The importance of middle management cadres lies in the fact that they form the catchments areas for developing future strategists for the organisation.
(9) Role of Executive Assistant
The emergence of executive assistants in the managerial hierarchy is relatively a recent phenomenon. An executive assistant is a person who assists the chief executive in the performance of his duties in various ways. These ways could be to assist the chief executive in data collection and analysis, suggesting alternatives where decisions are required, preparing briefs of various proposals, projects and reports, help in public relations and liaison functions, coordinating activities with the internal staff and outsiders and acting as filters for information coming from different sources. The executive assistants assist the chief executive, they help to optimise 
their time utilisation. The requirements for an executive assistant, in terms of skills and attitudes, include a generalist orientation, a few years’ line experience, exposure to different functional areas, excellent written and oral communication ability, and a pleasing personality. The qualification required is, generally, an MBA or CA. The position of executive assistant offers a unique advantage to young managers as nowhere else can he or she gain a comprehensive view of the organisation which can help in career planning and development and rapid advancement to the senior levels of management.


Advantages of Mutual Fund

As an investor, you would like to get maximum returns on your investments, but you may not have the time to continuously study the stock market to keep track of them. You need a lot of time and knowledge to decide what to buy or when to sell. A lot of people take a chance and speculate, some get lucky, most don t. This is where mutual funds come in. Mutual funds offer you the following advantages :

Professional management. Qualified professionals manage your money, but they are not alone. They have a research team that continuously analyses the performance and prospects of companies. They also select suitable investments to achieve the objectives of the scheme. It is a continuous process that takes time and expertise which will add value to your investment. Fund managers are in a better position to manage your investments and get higher returns.

Diversification. The cliché, “don’t put all your eggs in one basket” really applies to the concept of intelligent investing. Diversification lowers your risk of loss by spreading your money across various industries and geographic regions. It is a rare occasion when all stocks decline at the same time and in the same proportion. Sector funds spread your investment across only one industry so they are less diversified and therefore generally more volatile.

More choice. Mutual funds offer a variety of schemes that will suit your needs over a lifetime. When you enter a new stage in your life, all you need to do is sit down with your financial advisor who will help you to rearrange your portfolio to suit your altered lifestyle.

Affordability. As a small investor, you may find that it is not possible to buy shares of larger corporations. Mutual funds generally buy and sell securities in large volumes which allow investors to benefit from lower trading costs. The smallest investor can get started on mutual funds because of the minimal investment requirements. You can invest with a minimum of Rs.500 in a Systematic Investment Plan on a regular basis.

Tax benefits. Investments held by investors for a period of 12 months or more qualify for capital gains and will be taxed accordingly. These investments also get the benefit of indexation.

Liquidity. With open-end funds, you can redeem all or part of your investment any time you wish and receive the current value of the shares. Funds are more liquid than most investments in shares, deposits and bonds. Moreover, the process is standardised, making it quick and efficient so that you can get your cash in hand as soon as possible.

Rupee-cost averaging. With rupee-cost averaging, you invest a specific rupee amount at regular intervals regardless of the investment’s unit price. As a result, your money buys more units when the price is low and fewer units when the price is high, which can mean a lower average cost per unit over time. Rupee-cost averaging allows you to discipline yourself by investing every month or quarter rather than making sporadic investments.

Transparency. The performance of a mutual fund is reviewed by various publications and rating agencies, making it easy for investors to compare fund to another. As a unitholder, you are provided with regular updates, for example daily NAVs, as well as information on the fund’s holdings and the fund manager’s strategy.

Regulations. All mutual funds are required to register with SEBI (Securities Exchange Board of India). They are obliged to follow strict regulations designed to protect investors. All operations are also regularly monitored by the SEBI.

Functions of Secondary Market

The secondary market, is also called aftermarket, is the financial market in which previously issued financial instruments such as stockbonds,options, and futures are bought and sold. The important functions of secondary market are:

1. Economic Barometer:

A stock exchange is a reliable barometer to measure the economic condition of a country.


Secondary Market

Every major change in country and economy is reflected in the prices of shares. The rise or fall in the share prices indicates the boom or recession cycle of the economy. Stock exchange is also known as a pulse of economy or economic mirror which reflects the economic conditions of a country.

2. Pricing of Securities:

The stock market helps to value the securities on the basis of demand and supply factors. The securities of profitable and growth oriented companies are valued higher as there is more demand for such securities. The valuation of securities is useful for investors, government and creditors. The investors can know the value of their investment, the creditors can value the creditworthiness and government can impose taxes on value of securities.

3. Safety of Transactions:

In stock market only the listed securities are traded and stock exchange authorities include the companies names in the trade list only after verifying the soundness of company. The companies which are listed they also have to operate within the strict rules and regulations. This ensures safety of dealing through stock exchange.

4. Contributes to Economic Growth:

In stock exchange securities of various companies are bought and sold. This process of disinvestment and reinvestment helps to invest in most productive investment proposal and this leads to capital formation and economic growth.

5. Spreading of Equity Cult:

Stock exchange encourages people to invest in ownership securities by regulating new issues, better trading practices and by educating public about investment.

6. Providing Scope for Speculation:

To ensure liquidity and demand of supply of securities the stock exchange permits healthy speculation of securities.

7. Liquidity:

The main function of stock market is to provide ready market for sale and purchase of securities. The presence of stock exchange market gives assurance to investors that their investment can be converted into cash whenever they want. The investors can invest in long term investment projects without any hesitation, as because of stock exchange they can convert long term investment into short term and medium term.

8. Better Allocation of Capital:

The shares of profit making companies are quoted at higher prices and are actively traded so such companies can easily raise fresh capital from stock market. The general public hesitates to invest in securities of loss making companies. So stock exchange facilitates allocation of investor’s fund to profitable channels.

9. Promotes the Habits of Savings and Investment:

The stock market offers attractive opportunities of investment in various securities. These attractive opportunities encourage people to save more and invest in securities of corporate sector rather than investing in unproductive assets such as gold, silver, etc.

Role of SEBI in regulating/development of stock market

SEBI was established as a non-statutory board in 1988 and in January 1992 it was made a Statutory body. The main objectives of SEBI are
1)    To protect the interest of investors.
2)    To bring professionalism in the working of intermediaries in capital markets (brokers, mutual funds, stock exchanges, demat depositories etc.).
3)    To create a good financial climate, so that companies can raise long term funds through issue of securities (shares and debentures).
  1. Protection Of Investor’s Interest :-

SEBI frames rules and regulations to protect the interest of investors.

It monitors whether the rules and regulations are being followed by the concerned parties i.e., issuing companies, mutual funds, brokers and others. It handles investor grievances or complaints against brokers, securities issuing companies and others.

  1. Restriction On Insider Trading :-

SEBI restricts insider trading activity. It prohibits dealing, communication or counselling on matters relating to insider trading. SEBI’s regulation states that no insider (connected with the company) shall – either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange on the basis of any unpublished price sensitive information.

  1. Regulates Stock Brokers Activities :-

SEBI has also laid down regulations in respect of brokers and sub-broker. No brokers or sub-broker can buy, sell or deal in securities without being a registered member of SEBI. It has also made compulsory for brokers to maintain separate accounts for their clients and for themselves. They must also have their books audited and audit reports filed with SEBI.

  1. Regulates Merchant Banking :-

SEBI has laid down regulations in respect of merchant banking activities in India. The regulations are in respect of registration, code of conduct to be followed, submission of half-yearly results and so on

  1. Dematerialisation Of Shares :-

Demat of shares has been introduced in all the shares traded on secondary stock markets as well as those issued to public in prirriary markets. Even bonds and debentures are allowed in demat form.

  1. Guidelines On Capital Issues :-

SEBI has framed necessary guidelines in connection with capital issues. The guidelines are applicable to :- First Public Issue of New Companies, First Public Issue by Existing Private / Closely held Companies, Public Issue by Existing Listed Companies.

  1. Regulates Working Of Mutual Funds :-

SEBI regulates the working of mutual funds. SEBI has laid down rules and regulations that are to be followed by mutual funds. SEBI may cancel the registration of a mutual fund, if it fails to comply with the regulations.

  1. Monitoring Of Stock Exchanges:-

To improve the working of stock markets, SEBI plays an important role in monitoring stock exchanges. Every recognised stock exchange has to furnish to SEBI annually with a report about its activities during the previous year.

  1. Secondary Market Policy :-

SEBI is responsible for all policy and regulatory issues for secondary market and new investments products. It is responsible for registration and monitoring of members of stock exchanges, administration of some of stock exchanges and monitoring of price movements and insider trading.  

10. Investors Grievances Redressal :-

SEBI has introduced an automated complaints handling system to deal with investor complaints. It assist investors who want to make complaints to SEBI against listed companies.

11. Institutional Investment Policy :-

SEBI looks after institutional investment policy with respect to domestic mutual funds and Foreign Institutional Investors (FIIs). It also looks after registration, regulation and monitoring of FIls and domestic mutual funds.

12. Takeovers And Mergers :-

To protect the interest of investors in case of takeovers and mergers SEBI has issued a set of guidelines. These guidelines are to be followed by corporations at the time of takeovers and mergers.

13. Reforms In Capital Market :-

SEBI has introduced many reforms in Capital Market. Some of them are :-

a)  Demat of shares

b)  PAN made compulsory.

c)  Buy back of shares allowed.

d)  Corporate Governance introduced

e)  Transparency rules in Brokers Transactions.

14. Other Functions :-

a)  It promotes investor’s education, and also training of intermediaries in securities market.

b)  It performs functions and exercise powers under provisions of Capital Issues (Control) Act 1947, Securities Contracts Act 1956 etc.

c)  It promotes and regulates self-regulatory organisations.

d)  It prohibits fraudulent and unfair trade practices in securities Market

e)  It promotes investors education and training in securities market.

Small-Scale Industries in India: Definition, Characteristic and Objectives

Small-Scale Industries in India: Definition, Characteristic and Objectives

In Indian economy small-scale and cottage industries occupy an important place, because of their employment potential and their contribution to total industrial output and exports.


Government of India has taken a number of steps to promote them. However, with the recent measures, small-scale and cottage industries facing both internal competition as well as external competition.

There is no clear distinction between small-scale and cottage industries. However it is generally believed that cottage industry is one which is carried on wholly or primarily with the help of the members of the family. As against this, small-scale industry employs hired labour.

Moreover industries are generally associated with agriculture and provide subsidiary employment in rural areas. As against this, small scale units are mainly located in urban areas as separate establishments.


The official definitions of a small scale unit are as follows:

(i) Small-Scale Industries:

These are the industrial undertakings having fixed investment in plant and machinery, whether held on ownership basis or lease basis or hire purchase basis not exceeding Rs. 1 crore.

(ii) Ancillary Industries:

These are industrial undertakings having fixed investment in plant and machinery not exceeding Rs. 1 crore engaged in or proposed to engage in,

(a) The manufacture of parts, components, sub-assemblies, tooling or intermediaries, or

(b) The rendering of services supplying 30 percent of their production or services as the case may be, to other units for production of other articles.

(iii) Tiny Units:

These refer to undertakings having fixed investment in plant and machinery not exceeding Rs. 23 lakhs. These also include undertakings providing services such as laundry, Xeroxing, repairs and maintenance of customer equipment and machinery, hatching and poultry etc. Located m towns with population less than 50,000.

(iv) Small-Scale Service Establishments:

These mean enterprises engaged in personal or household services in rural areas and town with population not exceeding 50000 and having fixed investment in plant and machinery not exceeding Rs. 25 lakhs.

(v) Household Industries:

These cover artisans skilled craftsman and technicians who can work in their own houses if their work requires less than 300 square feet space, less than 1 Kw power, less than 5 workers and no pollution is caused. Handicrafts, toys, dolls, small plastic and paper products electronic and electrical gadgets are some examples of these industries.

Characteristics of Small-Scale Industries:

(i) Ownership:

Ownership of small scale unit is with one individual in sole-proprietorship or it can be with a few individuals in partnership.

(ii) Management and control:

A small-scale unit is normally a one man show and even in case of partnership the activities are mainly carried out by the active partner and the rest are generally sleeping partners. These units are managed in a personalised fashion. The owner is activity involved in all the decisions concerning business.

(iii) Area of operation:

The area of operation of small units is generally localised catering to the local or regional demand. The overall resources at the disposal of small scale units are limited and as a result of this, it is forced to confine its activities to the local level.

(iv) Technology:

Small industries are fairly labour intensive with comparatively smaller capital investment than the larger units. Therefore, these units are more suited for economics where capital is scarce and there is abundant supply of labour.

(v) Gestation period:

Gestation period is that period after which teething problems are over and return on investment starts. Gestation period of small scale unit is less as compared to large scale unit.

(vi) Flexibility:

Small scale units as compared to large scale units are more change susceptible and highly reactive and responsive to socio-economic conditions.

They are more flexible to adopt changes like new method of production, introduction of new products etc.

(vii) Resources:

Small scale units use local or indigenous resources and as such can be located anywhere subject to the availability of these resources like labour and raw materials.

(viii) Dispersal of units:

Small scale units use local resources and can be dispersed over a wide territory. The development of small scale units in rural and backward areas promotes more balanced regional development and can prevent the influx of job seekers from rural areas to cities.

Objectives of Small Scale Industries:

The objectives of small scale industries are:

1. To create more employment opportunities with less investment.

2. To remove economic backwardness of rural and less developed regions of the economy.

3. To reduce regional imbalances.

4. To mobilise and ensure optimum utilisation of unexploited resources of the country.

5. To improve standard of living of people.

6. To ensure equitable distribution of income and wealth.

7. To solve unemployment problem.

8. To attain self-reliance.

9. To adopt latest technology aimed at producing better quality products at lower costs.

Scope and objectives/importance of Portfolio Management

The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance.

Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other tradeoffs encountered in the attempt to maximize return at a given appetite for risk.

Portfolio management is the professional asset management of various securities (shares, bonds and other securities) and other assets (e.g., real estate) in order to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations, charities, educational establishments etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds.


Scope of Portfolio Management:

1. Investment Alternatives,

2. Functioning of financial system,

3. Investment Analysis,

4. Risk Analysis,

5. Theories and Approaches of PM,

6. Financial Markets,

7. Role of market regulators,

8. Portfolio Evaluation.

b. Need/Objectives/Importance of Portfolio Management: (8marks)

I. Basic Objectives:

i. Maximizing Returns &

ii. Minimizing Risks

II. Subsidiary Objectives:

i. Capital Appreciation,

ii. Safety of the investment,

iii. Liquidity,

iv. Diversification,

v. Favorable Tax status,

vi. Purchasing Power Maintenance,

vii. Marketability.

Difference between Speculation and Investment

What is the Difference between Speculation and Investment?

It is well nigh impossible to define the term ‘speculation’ with any precision. Investment and speculation are somewhat different and yet similar because speculation requires an investment and investments are at least somewhat speculative.


Investment usually involves putting money into an asset which is not necessarily marketable in the short run in order to enjoy a series of returns the investment is expected to yield. On the other hand, speculation is usually a more short-run phenomenon.


Speculators tend to buy assets with the expectation that a profit can be earned from a subsequent price change and sale. Accordingly, they buy marketable assets which they do not plan to own for very long.

Probably the best way to make a distinction between investment and speculation is by considering the role of expectations. Investments are usually made with the expectation that a certain stream of income or a certain price which has existed will not change in the future. Speculations, on the other hand, are usually based on the expectation that some change will occur. An expected change is a basis for speculation but not for an investment.

Speculation involves a higher level of risk and a more uncertain expectation of returns but in many cases the investors are also in the same boat. The investor who thinks that the market fluctuations of his investments are not of interest to him because he is buying solely for income can very well be compared with the ostrich burying its head in the ground during danger and feeling himself secure.

The trained speculator takes action only when the probabilities are higher in his favour. Though the speculator should not swing with each fresh current but this does not imply inflexible behaviour on his part. When the evidence builds up unmistakably against his view, he must be able to change it without becoming disorganized. His notions of prestige must not attach irrationality to his opinions.

For the speculator, pride of opinion is the costliest luxury. In fact, the speculator must have the courage to make decisions when the general atmosphere is one of panic, despair, or great optimism and yet go against the current. The crowds is wildly bullish at tops and in a panic at bottom, and these emotions are highly contagious.

The truth of the matter is that everything we do in this world is a speculation, whether we regard it as such or not, and the man who comes out in the open and uses his judgment to forecast the probable course of events, and then acts on it, is the one who would reap the returns of his endeavour.

This is a peculiar psychology that makes many investors avoid certain sound stocks or bonds because their broker speaks of “speculative possibilities”. These investors judge safety by yield. If a security pays beyond certain percentage it is classed as “speculative”, and is not for them.

What is the solution of the problem of investing primarily for income and yet relating the very important and useful quality of ready marketability without loss? It is best solved by never making an investment that does not appear after investigation, to be an equally good speculation.

It follows that speculative investment may be undertaken with the expectation of success only by those specialists who are able, out of their knowledge and experience, to weigh carefully the possible outcomes.

Furthermore, because of the great risk, what is expected by the speculator is not that he will not make errors of judgment, but that his substantial resources and superior judgment will permit him on balance to expect to maximize aggregate gains.

Another point often raised is, “can the man of limited mean afford to speculate?” The reply to that question depends on what is inferred by the word ‘speculate’. If one means to buy rapidly fluctuating stocks on margin in the hope of getting aboard the right one, the answer is emphatically “No”! But if one’s idea of speculation is the right one that is, to buy sound stocks for cash after a careful study of factors apt to affect their future prices, it is certainly good policy. Indeed, no man ever becomes wealthy without speculating in something.

There is no such thing as something for nothing. Those who come to the stock market with visions of easy money are apt to leave it sadder, if not wiser. We get out of things what we put into them, and brains and money used in an honest effort to secure reasonable income on profits in the stock market generally receive a just reward.

In a sense, all purchase and ownership of securities are speculative. However, there are important differences between speculation and investment. Here we will contrast the behavior characteristics between an investor a speculator.

First, we want to identify the characteristics of an investor:

1. An investor is interested in long-term holding of a security he buys. The minimum holding period is one year.

2. An investor is only willing to take up moderate risk. Usually, he buys securities issued by established companies.

3. An investor is interested in current return in the form of interest income or dividend as well as possibilities of capital appreciation.

4. An investor expects a moderate rate of return in exchange for moderate risk assumed.

5. An investor’s decision to buy is arrived at through careful analysis of the past performance and future prospects of the issuing company and the industry it is in. The analysis may be performed by the investor or by someone he believes in.

6. An investor uses his own money to buy securities.

Characteristics of an investor

Having identified the behavior characteristics of an investor, we now turn to identify those of a speculator:

1. A speculator is usually interested in short-term holdings, holding a security for maybe a couple of days, weeks, or months.

2. A speculator is willing to assume high risks. Usually he buys volatile issues (meaning wide price fluctuation) or lower grade securities.

3. A speculator is primarily interested in price appreciation. Current income in the form of interest or dividends is considered insignificant.

4. He expects a high rate of return in exchange for the risk assumed.

5. The desire to buy is usually based on intuition, rumours, charts, or market analysis which concerns itself with the analysis of the stock market itself.

6. A speculator usually borrows money from brokerage firms using his securities as collateral. The purpose is to either semi-investors or semi-speculators in different degrees.

From a social stand point speculation must be differentiated from investment on different grounds. Directly, it is of no significance to society whether a given purchase (transfer of ownership of capital) is speculative or non-speculative.

So far as the social capital fund is concerned, the same amount of capital is being employed all the time. Indirectly, there must be distinction, for there can be devastating repercussions of the resultant profits or losses.

If social definition of a speculation is to be created it must apparently include the four functions of speculation as a process: 1. smoothening of the price fluctuation process; 2. maintenance of temporary equilibrium between capital supply and demand; 3. consideration of future business prospects in determining the business value of existing capital funds; and 4.equating the risk to return in the infinitely varied utilisations of the social capital fund.

The several differences between speculation and investment which have the doubtful merits of public support, may be summarised as under:

From the foregoing discussion it follows that speculation needs no defence. Sometimes it may run riot and end in disaster, but that is due to its abuse. In fact, good investment management is difficult to distinguish at times from what appears to be speculative activity, and vice versa.

However, it would be foolish to suppose from this that speculators are imbued with any idea that on them the responsibility rests of rectifying the injustice of a stagnant market. Their motives may be as selfish as those of any other businessmen, but the speculators of a market are there to act when opportunity arises and their presence is a benefit.

The speculator who attempts to corner a market is menace. His aim is to create an artificial value; that in itself is bad. But speculation when undertaken with a full sense of market responsibilities, of market reputation and of market traditions, falls into a distinctly different category.

In fact, speculation may be a service and has its place in the scheme of economics, when the adjustment of prices in responding to the law of supply and demand may be so slow that we would constantly be in a state of “slack-water”. In fact, there are days when buying in the market is in homeopathic doses; consumers will not give the lead lest prices should drop still further.

When the professional speculators take a stand they buy in quantities that at once affect the market, and the timid consumer also comes in and fills his forward as well as his immediate requirements. Those who have delayed are ready to pay any reasonable advance on the last quotation.

Everyone is buoyant, everyone is happy again; the speculator has performed his good work. There are some who argue that it is all a matter of degree. If there were no speculators, then there would be nothing to make the consumer’s purchase appear too insignificant to influence the market; that the speculator is a parasite whose buying dwarfs the legitimate trading to such an extent that nothing short of exaggerated buying will react on prices.

Let us accept a market without speculation, a market on miniature scale, one that by constant demand has reached prices that have stimulated production so that there is now a surplus offering. Of course, prices should recede, but what would really happen in that case is that the producers would combine to maintain the price. Competition, it is argued, is enough to check the evil of price agreements; but competition is only another of the blessings that can be abused, and it is kept in bounds by the righting arm of speculation.

Some will concede all this, but argue that it only establishes the place of the speculator to come in at the two extremes of the statistical position, whereas he is known to be operating almost daily, at any rate much often than during extremes of a statistical position.

That is true, but the law of supply and demand is not the whole of marketing. Prices must fluctuate by variations of credit, and credit alters from moment to moment. The changes are mere fractional changes, and the professional operator is the medium through whom these niceties of the price are introduced. Speculator does not get excessive reward for his invaluable services.

His only reward is derived from the differences on the amount he is prepared to risk. Of course, his real task is small. If he is dealing in some commodity the risk is that the price may go up or down contrary to his expectations. There is no chance of the value disappearing entirely or that it may rise without affording him an opportunity to cut his loss. Thus the remuneration is ample, but not excessive.