Investment Objectives and Suitable Investments Flashcards
Long term growth
“Longer time horizon; greater volatility”
Common stock - corporate ownership, can outpace inflation
Growth stock - high beta, little to no dividend, good hedge against inflation
ADR - ownership (equity) foreign company that trades in US markets and in US dollars must be SEC registered, subject to market/exchange rate risk
Growth fund - consist of common stocks with high strong upside potential, risk determined by type of company (large,mid, small cap) large cap= least volatility, least growth small cap= most volatility/most growth potential)
Stock fund
Index fund -mirrors an index (s&p 500) low expense
Stock ETF - mirrors an index but trade in secondary market. Unlike mutual funds shares are priced and traded in real time on the secondary market
Growth and Income
“Less volatility; reduced earnings
Mix of stocks and bonds
Balanced fund - managed portfolio that consists of both stocks and bonds provides growth and income
Convertible bond - convertible into fixed number of common shares, offers lower interest rate than non convertible bonds, parity influenced by value of underlying stock- investors who want income and potential long term growth from the possible convertible common stock
REIT (real estate investment trust) - portfolio consisting of income producing properties/ and or mortgages, distributes 90% of net income to investors, dividends taxed as ordinary income, not considered investment company - investors seeking high income yield
Income
“Least volatility”
Income fund - managed portfolio consisting primarily of bonds, preferred stock and possibly high dividend paying common stocks , less volatile than growth funds
Bonds and Bond Funds
Preferred Stock - pays fixed dividend but not share in earnings growth, received dividends before common, no voting rights, subject to inflation
Utility Stock - company has stable earnings/ stock is less risky than most stocks (low beta) high dividend payout- for older retired investors
Safety
“Low Credit rusk “
U.S. Treasury Note & Bond - low risk of default, low interest payments, subject to inflation and interest rate risk, notes mature from 2-10 years, bonds mature 10+ years, interest income is expense state and local tax (subject to federal)
Gov agency mortgage backed securities- pass through debt certificates that make monthly payments of both interest and principal(fully taxable) which are derived from residential mortgage payments, issued by federal agencies or gov. Sponsored enterprises at AAA rating, due to prepayment risk- investor seeking safety monthly income
Investment grade corporate and municipal debt
(BBB or higher)
Short term capital preservation
“Money market instruments”
Money market mutual fund - a portfolio consisting of short term debt (one year or less to maturity) with low yields, very safe and liquidable including commercial paper, bankers acceptance, short term negotiable CD’s, and repurchase agreements
T-Bill - short term and liquid (money market instrument, safe investment with low yield, matures up to one year
Bankers Acceptance - A short-term credit security issued by companies, but payment of which is guaranteed by a bank
Commercial Paper - Short term, non-guaranteed debt with a maturity no more than nine months in length.
Municipal note- safe and liquid short term municipal debt (money market instrument), pays federally tax expended interest, offers low yield) examples include (RAN, TAN, BAN, GAN) - for investors in high tax bracket investing in short term needs
Tax advantaged investments
“High tax bracket”
Tax Exempt income (municipal bond)
◾️Municipal Bond- pays federally tax exempt interest, price fluctuation influenced by length of maturity and interest rate, types of muni bonds are general obligation bonds which have lower credit risk than revenue bonds and revenue bonds which have high credit risk the G.O. Bonds, due to taxation pays lower coupon than comparable corporate bond
Tax deferral (annuities, IRA and retirement plans, education savings plans)
◾️Variable annuity- investment contract with insurance company, risk assumed by annuitant, can be setup to provide periodic payments for life, income grows tax deferred until payout, risk and return is based on the investment chosen in deprecate account - for investors seeking tax deferred retirement savings or potential of lifetime payments
◾️Fixed annuity - investment contract with insurance company, risk assumed by insurance company, may provide fixed payments for life, income grows tax deferred until payout, investment return is fixed rate- investors seeking lifetime income payments after retirement, with understanding that fixed rate of return may not keep up with inflation
◾️Traditional IRA - a tax deferred investment account; may be funded by persons with earned income, withdrawals are taxed as ordinary income, penalty is assessed for early withdrawal RMD applies if failed by 70 1/2 - not meant to be started once investor is already retired
◾️Roth IRA -a tax free investment account available to persons with earned income (not available for high income persons), qualified withdrawals are tax free, RMD does not apply - not meant to be started once investor is already retired
◾️Coverdell education savings account - tax free investment account to help pay a child’s education expenses, income limits imposed on contributors, withdrawals are tax free if used for qualified education expenses (any level of education), penalties assessed if funds are not used for education, change of beneficiary is allowed
◾️529 college savings plan - tax free investment to help pay for college + expenses, no income limits are imposed on contributors, withdrawals tax free if used for college, penalties and taxes assed if funds are not used for education, change of beneficiary allowed
Tax Credits/deductions (DPPs/limited partnership)
◾️distributes passive income and passive losses to its partners, may provide tax deductions and tax credits, offers limited liability to limited partners, illiquid and subject to adverse effects of tax law changes - investors who are able to afford significant risks and commit capital for long term
Aggressive growth or Income
“High risk, high reward”
High-Yield Bond (junk bond) - high risk bond with a speculative rating, offers a higher coupon, includes income (adjustment) bond
Sector fund - managed portfolio that invests in one specific industry or geographic area, the least diversified type of fund, high risk with high potential return - seeking higher return
CMO support/companion Tranche - has the most prepayment risk, variability in payments, unpredictable maturity- investor willing to take on a high degree of prepayment risk due to changing interest rates in exchange for higher yield
Business Development Company (BDC - unregistered closed end investment company that invests in developing companies (often private companies and startups that are not available to average investor), more volatile than most mutual funds, with high potential reward- suitable for investors who can withstand short term volatility, also seeking high dividends
Wildcatting Limited Partnership (DPP)
Raw Land Limited Partnership (DPP)
Small/micro cap stocks and funds
Speculation
“Active, short-term speculation”
Option strategies
Leveraged ETF
Short Stock
