Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
30 Cards in this Set
- Front
- Back
Investment
|
any asset into which funds can be placed with the expectation that it will generate positive income and/or preserve or increase its value
|
|
Return
|
the reward for owning an investment
Income from investment Increase in value of investment |
|
Securities or Property
|
- Securities: stocks, bonds, options
- Real Property: land, buildings - Tangible Personal Property: gold, artwork, antiques, collectables |
|
Direct or Indirect
|
- Direct: investor directly owns a claim on a security or property
- Indirect: investor owns an interest in a professionally managed collection of securities or properties |
|
Debt, Equity or Derivative Securities
|
- Debt: investor lends funds in exchange for interest income and repayment of loan in future (bonds)
- Equity: represents ongoing ownership in a business or property (common stocks) - Derivative Securities: neither debt nor equity; derive value from an underlying asset (options) |
|
Low Risk or High Risk
|
Risk: the uncertainty surrounding the return that a particular investment will generate
|
|
Short-Term or Long-Term
|
- Short-Term: mature within one year
- Long-Term: maturities of longer than a year |
|
Domestic or Foreign
|
- Domestic: U.S.-based companies
- Foreign: foreign-based companies |
|
Government
|
- Federal, state and local projects & operations
- Typically net demanders of funds |
|
Business
|
- Investments in production of goods and services
- Typically net demanders of funds |
|
Individuals
|
-Some need for loans (house, auto)
-Typically net suppliers of funds |
|
Individual Investors
|
Invest for personal financial goals (retirement, house)
|
|
Institutional Investors
|
- Paid to manage other people’s money
- Trade large volumes of securities -Include: banks, life insurance companies, mutual funds, pension funds |
|
Steps in Investing
|
Step 1: Meeting Investment Prerequisites
- Adequately provide for necessities of life, including funds for meeting emergency cash needs - Adequate protection against various common risks, such as death, illness, disability Step 2: Establishing Investment Goals Examples include: - Accumulating retirement funds - Enhancing income - Saving for major expenditures - Sheltering income from taxes Step 3: Adopting an Investment Plan - Develop a written investment plan - Specify target date and risk tolerance for each goal Step 4: Evaluating Investment Vehicles - Assess potential return and risk - Chapter 4 will cover risk in detail Step 5: Selecting Suitable Investments - Research and gather information on specific investments - Make investment selections Step 6: Constructing a Diversified Portfolio - Use portfolio comprised of different investments - Diversification can increase returns or decrease risks (Chapter 5 will cover diversification in detail) Step 7: Managing the Portfolio - Compare actual behavior with expected performance - Take corrective action when needed |
|
Tax Planning Involves:
|
- The desired return after-taxes
- Type of income received from investments - Timing of profit-taking and loss recognition |
|
Types of Income for Individuals
|
- Active Income: income from working (wages, salaries, pensions)
- Portfolio Income: income from investments (interest, dividends, capital gains) - Passive Income: income from special investments (rents from real estate, royalties, limited partnerships) |
|
Ordinary Income
|
- Active, portfolio, and passive income included
- Taxed at progressive tax rates (rates go up as income goes up) |
|
Capital Gains and Losses
|
- Capital Asset: property owned and used by taxpayer, including securities and personal residence
- Capital Gain: amount by which the proceeds from the sale of a capital asset are more than its original purchase price - Capital Loss: amount by which the proceeds from the sale of a capital asset are less than its original purchase price |
|
Taxation of Capital Gains
|
- Capital assets held less than one year: ordinary income tax rates
- Capital assets held more than one year: 15% (or 5 %) |
|
Taxation of Capital Losses
|
- Capital losses can be used to offset capital gains
- Up to $3,000 per year of capital losses can be used to offset ordinary income (such as wages) |
|
Tax-Advantaged Retirement Vehicles
|
- Allows taxes to be deferred until withdrawn in future
- Employer-sponsored plans Profit-sharing plans, thrift and savings plans, and 401(k) plans - Self-employed individual plans Keogh plans and SEP-IRAs - Individual plans Individual retirement arrangements (IRAs) and Roth IRAs |
|
Growth-oriented youth stage
|
- Twenties and thirties
- Growth-oriented investments - Higher potential growth; Higher potential risk -Stress capital gains over current income |
|
Middle-Aged Consolidation Stage
|
- Ages 45 to 60
- Family demands & responsibilities become important (education expenses, retirement savings) - Move toward less risky investments to preserve capital - Transition to higher-quality securities with lower risk |
|
Retirement Stage
|
- Ages 60 and older
- Preservation of capital becomes primary goal - Highly conservative investment portfolio - Income needed to supplement retirement income |
|
What are some investments for each stage?
|
- Growth-oriented: Common stocks, options or futures
- Middle-age: Low-risk growth and income stocks, preferred stocks, convertible stocks, high-grade bonds - Income-oriented: Low-risk income stocks and mutual funds, government bonds, quality corporate bonds, bank certificates of deposit |
|
Investments and the Business Cycle
|
- Investments are affected by conditions in the U.S. economy
- The business cycle reflects the current status of several common economic indicators: gross domestic product (GDP), industrial production, disposable income, unemployment rate - A strong economy is reflected by an expanding business cycle Stock prices tend to rise during expanding business cycles and fall during declining business cycles Bonds and other forms of fixed-income securities are also affected by the business cycle since their values are tied to interest rates, which are affected by economics conditions - Interest rates and bond prices move in opposite directions |
|
The Role of Short-Term Investments
|
- Liquidity: the ability of an investment to be converted into cash quickly and with little or no loss in value
- Primary use is for emergency cash reserve or to save for a specific short-term financial goal |
|
Advantages and Disadvantages of Short-Term Investments
|
Advantages
-High liquidity -Low risks of default Disadvantages - Low levels of return - Loss of potential purchasing power from inflation |
|
Careers in Finance
|
- Commercial banking – employs more people than any other part of financial services industry
- Investment banking – assists organizations in raising capital - Investment management – involves managing money for clients -practitioners often have the Certified Financial Analyst (CFA) certification example CFA questions appear at the end of each part of this text - Corporate finance – requires broad understanding of functional areas of a business - Financial planning – professionals in this area often acquire the Certified Financial Planner certification - Insurance – usually involves risk management or asset management |
|
Short-Term investments are used for:
|
- Savings:
Emphasis on safety and security instead of high yield - Investment: Yield is often as important as safety Used as component of diversified portfolio Used as temporary outlet waiting for attractive permanent investments |