Investments Chapter 1

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Investments Chapter 1
2012-09-26 20:49:26

The Role and Scope of Investments
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  1. Investment
    any vehicle into which funds can be placed & expected to generate income and/or its value to increase.
  2. Returns
    • the rewards from investing. Current
    • income and/or increased value.
  3. Securities
    • - represent debt or ownership or legal right to buy/sell an ownership
    • interest.
  4. Property
    - investments in real property or tangible personal property.
  5. Real property –
    land, buildings, and that which is permanently affixed to the land.
  6. Tangible Personal property
    items like gold, art antiques, collectibles.
  7. Direct Investments
    investor directly acquires a claim on a property/security.
  8. Indirect Investment
    investment made in a portfolio.
  9. Portfolio
    collection of securities/properties constructed to meet 1 or more investment goals.
  10. Debt
    funds lent in exchange for interest income and promised repayment of a loan.
  11. Equity
    - represents ongoing ownership in a business or property. Ie commonstock.
  12. Derivative securities –
    neither debt nor equity, get value from an underlying security orasset, like options.
  13. Options
    - buys chance to buy/sell another security/asset at a specified priceduring a given time period.
  14. Risk
    - the chance that actual investment returns will differ fromexpected.
  15. Low risk investments - safe.
    High risk investments - speculative.
  16. Speculation
    - the purchase of high risk investment vehicles that offer highlyuncertain returns and future value.
  17. Short term Investment -
    mature within 1 year.
  18. Long term investment
    • mature in longer than a years, or w/no
    • maturity at all.
  19. Domestic Investments
    - debt, equity & derivative securities of US based companies.
  20. Foreign Investments - 
    debt, equity & derivative securities of foreign based companies.
  21. Financial Markets -
    forums where suppliers/demanders of funds make transactions.
  22. Securities Market -
    the dominant financial market in the US. Stock markets, bond markets & options markets.
  23. Common feature of markets –
    the price of an investment vehicle results from an equilibrium between the forces of supply and demand. Changes in supply & demand may result in a new equilibrium or “marketprice”.
  24. Participants in the investment process:
    Government, Business, Individuals
  25. Participants in the investment process: Government
    spend $ on Capital Expenditures (construction of schools,   public housing, roads, etc.), and Operating Needs ($ to keep the government running). Net Demanders of Funds (demands more $ than it supplies).
  26. Participants in the investment process: Business
    spend $ to support operations. They supply $ when they have excess cash, but are also Net Demanders of funds.
  27. Participants in the Investment Process: Individuals
    demands for loans for autos and houses. Supply via savings accounts, investments, buying insurance, retirement contributions, buying properties. Net Suppliers of Funds.
  28. Institutional Investors
    – professionals paid to manage other ppl's $.
  29. Short Term Vehicles-
    Savingsinstruments that live 1 yr or less. Have Liquidity; can be converted into cash quickly.
  30. Common Stock - 
    equityinvestment that represents ownership in a corporation.
  31. Capital Gains
    - the amount by which the sale price of an asset exceeds its originalpurchase price.
  32. Fixed Income Securities
    -fixed preiodic return.
  33. Bonds
    - Long term debt instruments issued by corporations and governmentsthat have a known interest return plus the bond's face value atmaturity.
  34. Preferred Stock 
    -has stated dividend rate, payment is given preference over commonstock dividends of the same firm.
  35. Convertible Security
    – a fixed income bond/preferred stock with a feature permittingconversion into a specified number of shares of common stock.
  36. Money Market Mutual Funds
    – invest solely in short term vehicles.
  37. Options-
    securities that give the investor the opportunity to sell or buyanother security at a specified price over a given period of time.3 common types – puts, calls, warrants.
  38. Futures-
    legally binding obligation, sellers to make delivery, buyers to takdelivery of a specidied commodity or financial instrument on aspecific date at a specific price.
  39. Real Estate -
    entities likehomes, land, income properties that have returns in form of rental income, tax write offs, capital gains.
  40. Tangibles
    – assets other than real estate that can be seen or touched. Gold,gems, collectibles.
  41. Tax Advantaged Investments
    – Investment vehicles & strategies for legally reducing taxes.
  42. Steps in Investing
    • 1. Meeting Investment Prerequisites
    • 2. Establish Investment Goals
    • 3. Adopting an Investment Plan
    • 4. Evaluating Investment Vehicles
    • 5. Selecting Suitable Investments
    • 6. Constructing a Diversified Portfolio
    • 7. Managing the Portfolio
  43. Sources of Taxes –
    Federal income tax, state income tax, city income tax, state &local sales & property taxes.
  44. Income taxes
    have the most impact on security investments.
  45. Property taxes
    have the most impact on real estate & property investments.
  46. Active Income:
    wages, bonuses, pension, alimony; noninvestment income.
  47. Portfolio Income:
    interest, dividends, capital gains.
  48. Passive Income
    income from real estate, limited partnerships, tax advantaged investments.
  49. Key Features of all types:
    limit the amount of deductions that can be taken.
  50. Portfolio & Passive:
    limited to amount of income derived from those sources, they cant bemixed or combined with each other.
  51. Ordinary Income tax rates are
  52. Capital Asset
    – property owned/used by a taxpayer for personal reasons, pleasureor investments.
  53. Capital Gain-
    profit when capital asset is sold.
  54. Capital Gains Taxes: 2 different rates depending on the holding period.
    • 1. If held more than 12 mo. And w/in the 25%-35% tax bracket, it's 15%.
    • If held more than 12 mo. And tax bracket is 15% or less, it's 5%.
    • 2. If held less than 12 mo., the capital gain is added to other sources of income, and the total is taxed.
  55. Capital Loss
    –capital asset sold for less than original purchase price. 3K oflosses can be applied to ordinary income per year.
  56. Tax Planning 
    – strategies to defer and minimize taxes over thelong run.
  57. Market Timing 
    – process of identifying the current state of theeconomy/market and assessing the liklihood of its continuing on its present course.
  58. Stocks & the Business Cycle 
    – common stocks, etc. are highlyresponsive to conditions in the economy.
  59. Bonds & Interest Rates
    – move in opposite directions.
  60. The Role of Short Term Vehicles
    • – to provide a pool of reserves to use for emergencies, or to accumulate funds for some specific purpose. Interest can be earned 2 ways:
    • 1. Stated Rate of interest, ie savings account.
    • 2. Discount Basis – bought at a price below its redemption amount, and the difference is the interest earned, ie US Treasury Bills.
  61. passbook savings accounts
    – savings account offered by bank, that pays a low rate of interest and has no minimum balance.
  62. NOW (negotiated order of withdrawal) accounts
    – a bank checking account that pays interest; has no legal minimum balance, but many banks impose their own.
  63. money market deposit accounts (MMDA's)
    – a bank deposit account with limited check writing priviliges; has no legal min bal, but many banks impose their own.
  64. asset management accounts
    comprehensive deposit account that combines checking, investing, and borrowing activities; automatically “sweeps” excess balances into short-term investments and borrows to meet shortages.
  65. Series EE Savings Bonds 
    –accrual type securities; interest is paid when the bond is cashed, onor before maturity, rather than periodically over the life of thebond. Sold at a discount, 50% of face value. Pay variable rate ofinterest tied to US Treasury security market yields and calculatedevery 6 mo. In May & Nov.
  66. US Treasury Bills (T-Bills) –
    obligations of the US Treasury, sold on a discount basis, w/varyingshort term maturieies; regarded as the safest of all investments.
  67. Nongovernment Short-Term Securities
    – higher yields than deposit accounts, EE bonds and T-bills w/similar maturieies due to slightly higher risk.
  68. Certificates of Deposit (CD's)
    – savings instruments where funds must stay on deposit for aspecified period; w/drawals before maturity incur interestpenalties.
  69. Brokered CD's
    – CD's soldby stockbrokers, slightly higher yields than other CDs and typicallycan be sold before maturity w/out incurring a penalty.
  70. Commercial Paper –
    short-term, unsecured promissory notes issued by corporations withvery high credit standings.
  71. Banker's Acceptances
    -short-term low risk, from bank guarantees of business transactions,sold at a discount from their face value, yield slightly below CDsand commercial paper. Typically used by importers/exporters, foreignbanks.
  72. Money Market Mutual Funds
    -mutual fund that pools the capital of a large number of investorsand uses it to invest exclusively in high yield, short term securities.
  73. Investment Suitability 
    – consider availability, safety, liquidity, and yield.