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FIN2303 > Chapter 11: Investing Fundamentals > Flashcards

Chapter 11: Investing Fundamentals Flashcards

1
Q

Types of investments

A
  • Money market securities
  • stocks
  • bonds
  • mutual funds
  • real estate
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2
Q

Money Market Securities

A
  • most provide interest income ( term - deposits, guaranteed investment certificates (GICs) , Canada savings bonds)
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3
Q

Primary Stock Markets

A

a market in which newly issued securities are traded. firms can raise fund by issuing new shares in the primary market

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4
Q

initial public offering (IPO)

A

first offering of a firms shares to the public is referred to as Initial public offering

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5
Q

Secondary Stock Markets

A

facilitates the trading of existing securities , which allows investors the opportunity to sell their shares to other investors at any time. Even if company isn’t issuing shares. Investors can still invest in the company.

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6
Q

Types of Stock Investors

A
  • institutional investors

- individual investors

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7
Q

Institutional investors

A

-professionals responsible for managing large pools of money, such as pension funds, on behalf of their clients. (also known as portfolio managers)

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8
Q

individual investors

A

commonly invest a portion of their income (funds) in securities. usually invest for around a year. however there are also some individuals who are day traders

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9
Q

day traders

A

investors who buy stocks and then sell them on the same day.

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10
Q

Return from Investing in stocks

A
  • stocks can offer return through dividends or stock price appreciation.
  • how often dividends are distributed depends on the age and stability of the company
  • investment in younger stocks has potential for higher return because they have no reach full potential, but also higher risk
  • growth stocks
  • value stocks
  • income stocks
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11
Q

growth stocks

A

shares of firms with substantial growth opportunities

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12
Q

value stocks

A
  • value stocks of firms that are currently undervalued by the market for reasons other than the performance of the businesses themselves.
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13
Q

income stocks

A
  • stocks that provide investors with periodic income in the form of large dividends. and therefore have lower potential for stock price appreciation
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14
Q

Common Stocks

A

a certificate issued by a firm to raise funds that represents partial ownership in the firm.
- elect board directors
-generally look for ROI from stock price appreciation
(rather than dividends)
-higher returns, higher risk

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15
Q

preferred Stocks

A

a certificate issued by a firm to raid funds that entitles shareholders to first priority to receive dividends

  • seeking regular income that comes from dividends
  • price of preferred stock is not as volatile as common stock and does not have as much potential to increase.
  • those who was risk free low returns
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16
Q

bonds

A

long term debt securities issued by government agencies or corporations

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17
Q

Return from investment in bonds

A

offer a return in the form of fixed interest (coupon) payments and bond price appreciation
- generate a specific amount of income each year.

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18
Q

mutual funds

A
  • mutual funds sell units to individuals and invest proceeds in a portfolio of investments that may include money market securities, stocks, bonds, and other investment types. managed by portfolio mangers
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19
Q

return from invest in mutual funds

A

investors who own mutual funds may earn a return from interest income, dividends, and the price appreciation of the invests in the fund.

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20
Q

Real Estate

A

could be biggest investment ever made

- the value of a home changers over time in response to supply and demand.

21
Q

Return on investment in real estate

A
  • can be rented to generate income in the form of rent payments
  • could earn a capital gain if they sell a rental property for a higher price than what they paid for.
22
Q

Investment return and risk

A

when individuals consider any particular investment, they must attempt to assess two characteristics:

  1. the potential return that will be earned on the investment
  2. the risk of the investment
23
Q

risk of investing

A
  • the risk of an investment comes from the uncertainty surrounding its return.
  • stock–> uncertain because its future dividend payments are not guaranteed and its future price (when you well the stock ) is uncertain
  • bond– uncertain because its coupon payments are not guaranteed and its future price (when you sell the bond) is uncertain when you sell the bond before it matures.
  • real estate- uncertain because rental income may not be paid and its value when you sell is uncertain.
24
Q

measuring an investments risk

A
  • investors measure the risk of investments to determine the degree of uncertainty surrounding their future returns
  • two common measures of investment risk are :
    • range of returns
    • standard deviation
25
Q

range of returns

A

returns of a specific investment over a given period (the smaller the range the less risky )

26
Q

standard deviation

A

measures the degree of volatility in an investment returns over time.

27
Q

subjective measures of risk

A

the use of range of returns and standard deviation is limited because these measures are not always accurate predictors of the future changes in an investments price. because of this investors rely on a subject measure by a professional (assessment may include an estimate of the firms monthly revenue.

28
Q

risk premium

A

an additional return beyond the risk-free rate you could earn from an investment. The higher the risk. The higher the premium..

29
Q

Return –risk trade-off among stocks

A
  • higher return if company tries to become more successful with less funds and riskier opportunities, higher risk because most do not work out.
  • smaller companies have higher potential therefore higher risk and return
  • larger more stable are lower risk and lower return
30
Q

return–risk trade off among bonds

A
  • return if you invest in a bond with higher interest payment. risk is that the company doesn’t have the funds to pay out that interest rate.
  • well established, financed firms, have lower rates but less risk
  • weaker firms have more risk but hire rates
31
Q

return–risk tradeoff among mutual funds

A

-prices of stocks van decline in any particular period.

32
Q

default

A

occurs when a company borrows money through the issuance of debt securities and does not pay either the interest or the principal.

33
Q

return-risk trade off among real estate investments

A
  • cannot find renters
  • property value may decline
  • risk varies with type of real estate
34
Q

diversification reducing risk

A
  • because the returns from many types of investments are uncertain, it is wise to allocate you money across various types of investments so that you are not completely dependent on any type.
35
Q

asset allocation

A

the process of allocating money across financial assets (such as mutual funds, stocks, bonds) with the objective of achieving a desired return while maintaining risk at a tolerable level.

36
Q

portfolio

A

reduce risk by investing in a portfolio, which is a set of multiple investments in different assets.

37
Q

insider information

A

non- public information known by employees and other professionals that is not known by outsiders. It is illegal to use insider information.

38
Q

factors that influence diversification benefits

A
  • risk is measured by volatility , the more volatile the returns the more uncertain the future return on the portfolio. You can measure this by– the volatility of returns on each individual investment within the portfolio and by the correlation of the returns among investments.
39
Q

correlation

A

a mathematical measure that describes how two securities’ prices move in relation to one another.

40
Q

volatility of each individual investment

A

the more subject to change returns of individuals investments in a portfolio, the more volatile the portfolio’s returns are time.

41
Q

if you have money to ivest

A

first priority is to satisfy liquid, short-term investments should be used.

42
Q

stocks

A

certificates the represent partial ownership of a firm. Firms issue shares to obtain funds to expand their business . Investors buy when they believe they will get a higher return on these stocks.

43
Q

Strategies to Diversifying

A
  • Diversification of stocks across industries (subjective to economic conditions)Portfolio can still be very susceptible to general economic conditions (i.e. market risk)–Diversification will not necessarily prevent losses, but it can limit the losses
  • diversification of stocks across countries. Diversifying among stocks based in different countries makes you less vulnerable to economic conditions in any one country
44
Q

Assets allocation strategies

A
  • including bonds in your portfolio
  • including income trust investments in you portfolio
  • real estate investment trust
45
Q

Assets allocation strategies :- including bonds in your portfolio

A

Returns are not highly correlated to stocks

Bond prices are inversely related to interest rates and are not directly influenced by stock market conditions

In general, the larger the proportion of your overall portfolio that is allocated to bonds, the lower your portfolio’s overall risk

46
Q

Assets allocation strategies :including income trust investments in you portfolio

A

a flow-through investment vehicle that generates income and capital gains for investors

47
Q

Assets allocation strategies : real estate investment trust

A

an income trust that pools funds from individuals and uses that money to invest in real estate

48
Q

Factors that affect you asset allocation decision

A
  • stage in life
  • degree of risk tolerance
  • expectations about economic conditions
49
Q

Learning from the investment mistakes of others

A
  • making decisions based on unrealistic goals
  • borrowing to invest
  • taking risks to recover losses from previous investments
  • focus on ethics: falling prey to online investment fraud

FIN2303 (11 decks)

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