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Investment Planning > Equity Investments & Managed Assets > Flashcards

Equity Investments & Managed Assets Flashcards

1
Q

What is common stock?

A

It represents units of ownership in a publicly traded corporation. Owners are entitled to vote (by proxy) on the selection of the board of directors and other important matters

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2
Q

What is a stocks par value?

A

The value of the stock written on the stock certificate or corporate charter.

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3
Q

What are blue-chip stocks?

A

Stocks issued by highly regarded, well-established companies. Usually the top companies in their respective fields.

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4
Q

What are growth stocks?

A

Stocks issued by companies that usually have sales and earnings growth rates exceeding those of the average company in their industry

These stocks usually don’t pay dividends, but instead reinvest their earnings back into the company

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5
Q

What are income stocks?

A

Stocks that pay regular, consistent dividends. Usually companies in the maturity phase of their lifecycle

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6
Q

What are value stocks?

A

Stocks that are undervalued.

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7
Q

What are cylindrical stocks?

A

Stocks of companies who tend to do well during market expansion and do poorly during market decline. Companies that deal in luxury items are a good example

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8
Q

What are defensive stocks?

A

Stocks that are relatively unaffected by the market, because their products are necessary for everyday life, like grocery stores.

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9
Q

What are the four risks of equity stocks?

A

Market risk: the fluctuation of the market changes the price of stocks

Interest rate risk: when interest rates go up, stocks go down.

Business risk: the way a business operates can affect stock

Financial risk: the way a business handles its financials can affect stock

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10
Q

What are the tax implications of stocks?

A

Short and long term capital gains on the difference between the cost basis and the selling price.

In the case that there was multiple purchases, the shareholder will either need to declare a specific lot (of 100 shares) or use the FIFO rule.

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11
Q

What are stock rights?

A

These are time limited rights to current stockholders to purchase more stock below market price during a stock split in order to maintain their current percentage of ownership

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12
Q

What is a warrant?

A

A long-term, customized call option used to purchase stock. Warrants guarantee the opportunity to buy stock at a fixed price during a particular period (for a small premium).

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13
Q

What are the differences between warrants and call options?

A

Warrant is issued by a corporation - a call is issued by an individual

Warrant is customized to fit the need of a corporation - a call includes standard, required terms

Warrant has a maturity date of several years - a call usually expires in 9 months

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14
Q

Who is a shareholder of record?

A

Any one listed on the share itself as the owner

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15
Q

What is the record date in relation to the dividend?

A

It is the first business day after the ex-dividend date, which is when trades are settled and reflected on the books

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16
Q

What is the ex-dividend date?

A

The date declared by which the stocks must have been purchased before in order to receive a dividend.

For instance, if a dividend is issued on Fri, Oct 2nd, then the ex-dividend date is Thurs Oct 1st and the stock must have been purchased on Wed Sept 30th.

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17
Q

What is dollar cost averaging?

A

Dollar-cost averaging refers to the practice of systematically investing equal amounts, spaced out over regular intervals, regardless of price.

The goal of dollar-cost averaging is to reduce the overall impact of volatility on the price of the target asset; as the price will likely vary each time one of the periodic investments is made, the investment is not as highly subject to volatility.

Dollar-cost averaging aims to avoid making the mistake of making one lump-sum investment that is poorly timed with regard to asset pricing.

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18
Q

What are Dividend Reinvestment Plans (DRIPs)?

A

Plans that allow stockholders to reinvest cash dividends in order to purchase more stock with little or no commission and often at a discount.

Tax-wise, DRIPs are treated the same as cash dividends except the amount of reinvested dividends adds to the tax basis

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19
Q

How are qualified and non-qualified cash dividends defined and taxed?

A

Qualified. Dividend must have been received from domestic corporation or qualified foreign corporation AND must have been held for 60 days prior to the ex-dividend date = long term capital gains

Non-qualified. Doesn’t meet the above or is a non-qualified entity = ordinary income

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20
Q

What is a stock dividend?

A

A dividend paid to shareholders in additional stocks rather than cash. Proportionally, all share holders stocks will increase the same percentage. The company’s retained earnings will decrease

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21
Q

What is a stock split?

A

The par value of the stock is reduced and the number of shares is increased proportionally.

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22
Q

What is a reverse stock split?

A

The number os shares is reduced and the cost per share is increased proportionally

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23
Q

What are mutual funds?

A

Mutual funds pool capital from many investors and invest in stocks, bonds, money market instruments, and other securities.

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24
Q

Why are mutual funds considered open-ended investments?

A

Because there is no limit to the number of shares that can be sold to investors.

Mutual funds can only be purchased or exchanged through the mutual fund; they are not traded on exchanges.

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25
What is NAV and how is NAV fund price calculated?
Net Asset Value - this is how mutual funds are priced. They must be priced once per day and its usually done at the end of the day when the NYSE closes. NAV = assets (cash + current value of securities) - liabilities
26
How is the NAV per share calculated?
NAV per share = Fund's NAV / number of shares outstanding
27
What are front-end load (or class A) shares?
Commission is added onto the front of the shares. These are generally lower overall cost and better for long term horizons
28
What are back-end load (or B class) shares?
AKA contingent deferred sales charge (CDSC), the back-end load assesses shares if the investor sells them within a certain time of purchase
29
What are level-load (or C Class) shares?
This sales charge is asset based; it uses the 12b-1 fee as a sales charge
30
What are the 3 mutual operating expense categories?
Management fee: paid by the fund to the investment manager 12b-1 fee: used to compensate investment advisors for selling the fund Other expenses: administrative operations fees
31
What is the expense ratio of a mutual fund?
It is the annual operating expenses for the fund divided by the fund's average annual assets. These are the fund management fees present in "loaded" mutual funds that are present regardless of the returns - so be careful here
32
What are the significant differences between a bond fund and an individual bond?
Bond funds - have monthly payouts of interest - have no fixed payment - has no fixed maturity - have a yield based on current income relative to its net asset value
33
What are mulitsector bond funds?
Bond funds made up of three types of bonds: U.S. Government, High Yield, and Foreign Bonds. This is in an effort to maximize high yield income while minimizing volatility.
34
What is an important consideration to keep in mind about muni bond funds?
Although typically good for high income earners due to tax exemptions, munis can still be subject to AMT and could be disadvantageous to clients
35
Within growth (or capitalization) funds, what are the three general categories of market capitalization?
Small-Cap: companies with capitalization up to $2B Mid-Cap: companies with capitalization ranging between $2B and $10B Large-Cap: companies with capitalization over $10B
36
What are sector funds?
Funds which are invested in a specific area of industry or theme such as enegy, healthcare, etc.
37
What are index funds?
Funds that closely follow an index such as the S&P 500
38
What are asset allocation funds?
Mutual funds that focus on diversification by investing across various asset classes including bonds, equities, and money markets. Many asset allocation funds are target funds that target a specific goal (like retirement)
39
What are balanced funds?
These funds are a balance of preferred stocks, common stocks, and bonds designed to conserve principle, pay current income, and promote long-term growth
40
What are flexible portfolio funds?
Gives fund managers the ability to allocate 100% of the funds to stocks, bonds, or market instruments based on changes to the economy. These are broken out further into: - Lifestyle funds: a fund of funds (the fund invests in other funds) set to conservative, moderate, or growth risk - Lifecycle funds: funds aimed at a specific date, like retirement, that will reduce risk over time
41
What is the purpose of the precious metals fund?
It is a hedge against a weak economy.
42
What are the three ways mutual fund investors usually receive taxable annual income from their funds?
1. Ordinary taxable dividends 2. Exempt interest dividends 3. Capital gains
43
What are the three methods for calculating basis?
1. Specific ID method - most favored, least taxed, requires detailed records 2. Average Cost 3. FIFO - least favored, most taxed, IRS' default
44
How do you calculate cost basis?
It the total amount sold minus the cost of the investment + any fees/commissions + any reinvested dividends
45
What are closed-end investments?
Unlike mutual funds, closed-end funds sell a set number of shares at IPO which limits its capitalization. This means that they can be selling for discount, at a premium or at the value of the NAV based on supply and demand.
46
What are unit investment trusts?
This is an investment company whose units are sold on the secondary market, but not on major exchanges. They are generally passively managed, usually in bonds and have a fund expiration date. At the end of that date, all proceeds are given back to the investors and they are taxed
47
How do separately managed accounts differ from mutual funds?
In separately managed accounts, the portfolio manager purchases securities on behalf of the investor, not the fund itself. They are individual investment accounts offered by financial consultants who provide advisory services and are managed by independent money managers using an asset-based fee structure.
48
What is an Exchange Traded Fund (ETF)?
An index fund that can be bought and sold throughout the trading day. they usually have lower turnover of assets and lower annual expenses than mutual funds and as a result, are more tax efficient.
49
What is the point of index (or ETF) funds?
Part of passive portfolio management, index funds aim to match the long-term performance of a target index such as the S&P 500
50
What is a hedge fund?
An unregistered, privately offered, managed pool of capital for wealthy investors. They are actively managed funds which invest in a broad range of investments, commodes, shares, debt and works of art to try an exploit inefficiencies in the market.
51
How are hedge funds usually operated?
They are structured as a partnership with the general partner acting as the investment manager and the limited partners being the investors.
52
What is the test for hedge fund investors to be "sophisticated"?
They should be an accredited investor, having a minimum annual income and net worth with considerable investment knowledge.
53
What are Funds of Funds (FOF)?
This is a hedge fund that consists of several hedge funds - usually 10-30 hedge funds, used to diversify. But this also means extra management fees.
54
What are Guaranteed Investment Contracts (GIC)?
These are like CDs but only offered by insurance companies and not banks. As such, they are not insured by the FDIC which carries a bit more risk. Participating GICs give a variable interest rate - good if you think interest rates will increase. Non-participating GICs offer a fixed rate - good if you think the interest rates are going down.
55
What is value averaging?
A variation of dollar cost averaging. Instead of investing the same, set amount each month, value averaging aims to increase the portfolio by a set amount each month which means that the amount invested will vary.
56
What is share averaging?
A variation on DCA - the purchase of a set amount of shares each period.
57
What is the starting point in selecting funds for a client?
Defining the client objectives. These can be current income, capital appreciation, capital preservation or a combination. If there are multiple objectives, then they must be prioritized.
58
When selecting a client's investments, what other factor must be considered alongside the client's objectives?
Risk tolerance
59
Where should investment strategies be listed and what should I look for?
In the prospectus - look for risky or costly investment strategies
60
A client's objective must be consistent with their...
Risk tolerance
61
The greater the amount of concentration, the greater the amount of...
risk
62
Why is it important to check the prospectus to see how much flexibility a fund manager has in changing allocations?
With flexibility, the manager could change the allocation of assets (stocks, cash, bonds, US, international, etc) and inadvertently misalign the client's desired risk/goals
63
What is a bear and bull market?
Bear is a down market Bull is an up market
64
What is fund management continuity?
This is concern/potential for a star fund manager to move on and put the previously good earning record at risk.
65
What is risk-adjusted performance?
The opposite of absolute performance. Understand that fantastic returns can look good at initial glance. But if the manager took huge risks to get those returns, it might be a fund to stay away from given the risk tolerance of a client
66
What is portfolio turnover?
The lesser of total purchases or sales divided by average monthly assets. I high turnover can cause high commissions and additional market impact costs that are beyond the expense ratio. Generally, a high turnover is not good
67
What are cases that a new fund may still be something worth investing in?
Perhaps when the fund is opened by a manager with a good track record. It could be assumed that the manager would apply their know-how and resources to that new fund.
68
What are tax considerations with mutual funds?
While it shouldn't be the only consideration, just remember that taxes do eat away at the overall client earnings. Use of non-AMT muni bonds and qualified dividend funds will be tax efficient.
69
What are factors that are evidence that a fund company is putting its customer first?
Low fund expenses Closing high earning popular funds because they are too hard to manage Depth and clarity of advertising is top notch Investment policies and restrictions are in favor of long-term investing A manager who invests in their own fund Low investment personnel turnover indicates positive culture
70
What are factors which might indicate an investment company is putting themselves first?
Bringing in "hot funds" or chasing the popular market Advertising short-term funds Closing funds to roll them into better performing funds to hide poor returns Large bonuses for executives
71
What are some potential pitfalls with mutual funds?
New funds with great records - using hot issues in the fund to increase its overall performance Top-ranked funds - many funds can be "top ranked," but in what category?
71
What are some potential pitfalls with mutual funds?
New funds with great records - using hot issues in the fund to increase its overall performance Top-ranked funds - many funds can be "top ranked," but in what category? Fund performance and loads - all can chip away at the overall return Taxes - chip away at the overall return Disappearing underachievers - merged with good performers Misleading 10-yr performance - look at year-by-year with 10 year to ensure all performance didn't happen at one time
72
What are the general ROTs for selecting mutual funds types of growth, income, safety of principle, and immediate liquidity?
Growth: stocks Income: bonds Safety of Principle: Government bonds Liquidity: money market

Investment Planning (8 decks)

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