Chapter 10 - Investing Fundamentals Flashcards
Considerations for Choosing Types of Investments
- review personal balance sheet
- consider paying of loans
- ensure you have adequate liquidity
- Note that investments primarily focused on providing liquidity offer a relatively low return
Money Market Securities
-Provide interest income
-Low level of risk
-Savings alternatives include savings deposits, term deposits, guaranteed investment certificates (GICs), and money market funds.
Stocks - Primary,IPO, Secondary Market
-Primary market: a market in which newly issued securities are traded.
-Initial public offering: the first offering of a firm’s shares to the public.
-Secondary market: a market which facilities the trading of existing securities.
Types of Stock Investors
-Institutional investors: professionals responsible for managing large pools of money, such as pension funds, on behalf of their clients.
-Portfolio managers: employees of financial institutions who make investment decisions.
-Individual investors: individuals who invest funds in securities.
-Day traders: investors who buy stocks and then sell them on the same day.
Stocks - dividend and interest income, price of a share
-Shareholders can receive dividend income and also earn a return if the stock price increases.
-Price of a share of stock is determined by dividing the market value of the firm by the number of shares of stock outstanding (company’s stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders).
Equation on Slide 8
Stocks - earnings of a well or poorly managed firm
-The market price of a stock depends on the demand for the stock and supply of the stock.
-The earnings of a well-managed firm will usually increase, and so will its stock price.
-A poorly managed firm may have lower earnings, which could cause its stock price to decline.
Stocks - Common stock
Common stock: a certificate issued by a firm to raise funds that represents partial ownership in the firm.
Common stock investors:
Normally have the right to vote on key issues.
Elect the board of directors.
Seek a return on their investment from stock price appreciation, rather than receiving dividend income.
Stocks - Preferred stock
Preferred stock: a certificate issued by a firm to raise funds that entitles owners to first priority to receive dividend income.
Preferred stock investors:
Seek the regular income that comes from dividend payments.
Preferred stock price is not as volatile as the price of common stock.
Bonds
Long-term debt securities issued by government agencies or corporations.
Canadian Government bonds are issued by the Bank of Canada.
Corporate bonds are issued by corporations.
Pooled Investment Funds
-Pooled investment fund: an investment vehicle that pools together money from many investors and invests that money in a variety of stock, bonds, and other investment types.
-Attractive to investors who have limited funds and want to invest in a diversified portfolio.
- i.e. mutual funds
Pooled Investment Funds - Publicly traded indexes
Publicly traded indexes: securities whose values move in tandem with a particular stock index representing a set of stocks.
-Also known as exchange-traded funds (ETFs).
-By investing in an index, individual investors can ensure that their performance will come close to matching that index.
-Indexes can represent the market or specific sectors.
Real Estate
-Invest in real estate by buying a home, purchasing rental property, and/or land.
-Value of a home changes over time in response to supply and demand.
-Return depends on how the value of your home changes over the time and on your original down payment.
Real estate investment trust (REIT):
an income trust that owns, operates, or finances income-producing real estate such as office buildings, shopping malls, or apartment buildings.
-Traded on stock exchanges.
-Shares can be purchased with a small amount of money.
-Managed by skilled real estate professionals.
Investment Return - growth stocks, value stocks, income stocks
Return from investing in stocks
- Dividend income and stock price appreciation.
- Firms that pay high dividend income tend to be older, established firms that have less chance for substantial growth.
- Growth stocks: stocks of firms with substantial growth opportunities.
-> Higher uncertainty because more likely to fail or experience very weak performance.
- Value stocks: stocks of firms that are currently undervalued by the market for reasons other than the performance of the businesses themselves.
- Income stocks: stocks that provide investors with periodic income in the form of large dividends.
Return from investing in bonds
- Coupon income and bond price appreciation.
- Desirable for investors who want to have their investments generate a specific amount of interest income each year.
