Chapter 10: Fundamentals of Investing

Question 1

What is a non registered investmnet?

Answer 1

Investment where there are taxes on investment income or capital gains

Question 2

RRSP

Answer 2

Registered Retirement savings plan

• investor can contribute without tax on investment income or capital gains

Question 3

TSFA

Answer 3

Tax Free Savings account

• investment vehicle where investor can contribute without being taxed on investment income or capital gains
• contributions are not tax deductible
  
  • money borrowed to invest is not tax deductible

Question 4

Increasing short term savings

Answer 4

funds to be used in 5 years

only enough money in chequings to pay bills, transfer surplus

Question 5

Long term savings

Answer 5

• goal is to have money grow
• involves risk and votality
• • votality - is accepted since market is the only way to achieve the result

Question 6

Asking yourself questions for your goals for investment?

Answer 6

• what to use on? how much needed?
• how obtained?
• how long does this take?
• how much risk?
• reasonable goals, wiling to sacrifice current composition?
• possible economic and personal conditions could alter your investment goals?
  
  • what will happen if you don’t reach your goal?

Question 7

Rule of 72

Answer 7

72/ % of growth = how long it takes in years to double your money.

Question 8

Before evaluating any investment you must assess

Answer 8

risk

Question 9

risk tolerance

Answer 9

• the amount of psychological pain you’re willing to suffer for your investments
• eg) you could lose part of or all of your principal, the purchasing power can decrease, and you may not receive the returns you expected
• not insured by CDIC (canadian deposit insurance corporation)

Question 10

Safest investments include

Answer 10

savings account

gov’t savings bonds

canadian treasury bills

Guaranteed Investment Certificates (GICs)

Term deposits

Certain negotiable gov’t and corporate bonds

Question 11

Speculative risk

Answer 11

a high risk investment with hopes of large profit

Question 12

Higher potential income investments include

Answer 12

speculative stocks

certain bonds

commodities

options

precious metals or stones

mutual funds

real estate

collectibles

Question 13

Business Risk

Answer 13

business is less profitable then thought

Question 14

inflation risk

Answer 14

Return on investment will not keep up with inflation

Question 15

Interest rate risk

Answer 15

changes in the interest rates in the economy, bought at a lower price

Question 16

Market Risk

Answer 16

Values fluctuate because of behaviour of investors in marketplace.

Question 17

Global Investment RIsk

Answer 17

investing in foreign bonds

should be evaluated just like domestic bonds, and are affected by the changes in the currency exchange rate

Question 18

Harry Markowitz - paper about efficient frontier

Answer 18

Said that a portfolio that has low risk and high reward is impossible

Question 19

What is liquidity?

Answer 19

The ability to buy or sell an investment quickly without substantially affecting the investment’s value

Question 20

Risk vs. return fact / tip

Answer 20

Risk is more than chance that investments go down in value,

risk in that if you don’t invest for growth, you’ll face an even bigger risk

Question 21

Money you need sooner should be invested in…

Answer 21

lower risk investments

Question 22

Example for RIsk tolerance - your risk tolerance will change over the life of your investment

Answer 22

You become less tolerant of a change in value of your RRSP as you approach retirement. So your investment strategy is likely to become increasingly more conservative

Question 23

Investment Growth

Answer 23

• investments will increase in value
  
  • common stock (electronics, technology, energy, and health care)
  • growth stocks (apple, facebook, etc)
  • bonds, mutual funds, and real estate
    *

Question 24

INvestment Liquidity

Answer 24

• ability to buy or sellf an investment qucikly without substantially affecting the investment’s value
• ex) chequings and savings accounts

Question 25

Stock or Equity financing

Answer 25

• equity capital - money that a business obtains from its owners
• for a corporation, this is provided by share holders
• a stock is a certificate that shows the amount of the company that you own
• corporations are under no legal obligations to pay dividends - distribution of money stocks or other proprety that a corporation pays to shareholders

Question 26

two basic types of stocks

Answer 26

• common stocks
• preferred stocks

Question 27

Corporate and Government Bonds

Answer 27

corporate bond - a corporation’s written pledge to repay a specified amount of money along with interest.

government bond - written pledge of a gov’t or a municipality to repay a specified sum of money, along with interest.

• Bondholders receive periodic interest payments and the principal they lent is repaid at maturity (1-30 years)

Question 28

Mutual Funds

Answer 28

• main purpose is to reduce risk, money is pooled and invested by a professional fund manager (stock broker)

Question 29

Segregated Funds

Answer 29

• investment alternative in form of annuity because it provides insurance
• sold by life insurance companies
• bought and sold at any time
  *

Question 30

real estate as an investment alternative

Answer 30

• most important factor = location
• price competitively?
• type of ifnancing?
• how much are taxes?
• condition of nearby houses?
  *