Investment Vehicle Characteristics Flashcards
Equity Securities
- ownership
- most common form is common stock
Common Stock Rights
- voting rights (BOD, m&a, recapitalization, CANNOT vote for Officers)
- right to receive dividends if and only if company has declared dividend
- preemptive right (right not be be diluted, have right to maintain % ownership)
Date on which you must be on company books as shareholder to receive dividend
Date of Record
First day stock trades without right to dividend
Ex dividend date
What date does a company not determine?
Ex-dividend date, determined by industry settlement cycle
Investment objective of buying Common Stock
- growth (capital appreciation)
- income
Preferred Stock Characteristics
- fixed dividend just like a bond
Investment objective of buying Preferred Stock
- fixed income
American Depository Receipts (ADR)
- US domestic security issued and regulated in US
- facilities domestic trading of foreign securities
- subject to currency risk
Restricted Stock
- comes from private placement (restricted for 6 months or until registered)
- employees stock plans
Debt Securities Issuers
- Corporate
- Government
- Municipalities
Debt Securities Owners
Creditors
Par Value
- Face value
- amount received when bond matures
- principal
- all mean $1k
Fixed Income Risks
- DRIP
- default (aka credit risk)
- repurchase
- inflation (inverse relationship)
- purchasing power
Current Yield
Annual Income / Market Price
Yield Ladder
- discount = YMCA
- premium = ACMY
More Volatile
- Zero Coupon (MOST OF ALL)
- Long Term vs Short Term? (Long term)
- Same Maturity? Lowest Coupon is MOST VOLATILE
Zero Coupon Bond
- doesn’t pay fixed income
- buy at very deep discounts
- since absolute lowest coupon, means its the most volatile
Preferred Stock
- pays fixed interest, subject to interest rates
Pooled Investment Companies
- UIT
- Open-Ended Management (Mutual Fund)
- Closed-Ended Management
- Exchange Traded Funds
pooled investors money together
all have clearly defined investment objective found in prospectus
can have fractional shares
When issuing new shares to the public
- prospectuses (IPO)
- securities act of 1933 (regulates UITs)
UITs/Opened Ended Mutual Funds
Continuously issue new shares, aka continuous primary offering
- sell shares back to issuer (redeemable)
Primary Market Regulating Act
Securities Act of 1933
Secondary Market Regulating Act
Securities Exchange Act of 1934
Net Asset Value
- add up all fund values
- minus out liabilities
= total net asset value - divided by number of outstanding shares
counted twice a day
Open-Ended/ETF
- still represent pool of investments
- issued to the public once, then secondary market (traded every day)
- price fluctuates during day, buy at market price
- still has NAV, can trade at discount or premium
Open-Ended Sales Charge
- total cost is NAV + sales charge (max 8.5%)
ETFs differ from open-ended
- Because they track an index
- doesn’t need active management of portfolio
- low management fees
- passive management
REITs
- not mutual funds or investment companies
- typically receives rental income or mortgage income
- trade on open market
- very big for income investors
US Government Securities
- safest (capital preservation)
- bills (1,3,6,12 mo)
- notes (1-10 yrs)
- bonds (10-30 yrs)
- bill knows bonds
- TIPS (adjusted for inflation/CPI)
- still subject to interest rate risks
- RIP
TIPS
- adjusted semi annually
- adjusted based on CPI
- coupon rate is fixed
- principal is adjusted
Yankee Bonds
- issued by foreign company paid in US Dollars
Brady Bonds
- gather foreign debt from 3rd world countries.
- Issued debt in US
Municipal Securities
- General obligation - backed by taxes
- revenue bonds - backed by revenue
- interest on bonds is tax exempt (no federal taxes on INCOME, no state tax if resident of state issued
- pay tax on capital gains
- most suitable for highest tax brackets
Tax Equivalent Yield
muni yield / (1-tax bracket) = corporate bond required yield
Cash and Cash Equivalents
- money market securities - not FDIC insured, (market place for ST, high quality, debt instruments) general safe, income, but not insured, used as a parking garage.
- demand deposit (checking account - no int)
- CD - no income, pays it out at end
Derivatives
- options - security
- forwards - not security
- futures - not security
Options
- contract, right to buy or sale
- calls, puts
Call Options
- buyer is bullish, gives buyer right to buy.
- seller is bearish, obligated to sell if buyer exercises right.
Put Options
- buyer is bearish, buyer has right to sell
- seller is bullish, seller has obligation to buy
Hedges (Option Strategy)
- used to hedge a stock position (already owns)
- used to protect or (never both) generate income.
- always BUY protection
- always SELL for income
- if risk is down, buy put for protection, sell call for income
Futures Contract
- Option on commodities
- standard contracts
- Chicago and New York exchanges
- buy = consumer (lock in price to buy)
- sell = producer (lock in price to sell)
Forward Contracts
- not standardized, not on exchange
- institution to institution
- unregulated/unregistered
- swaps is another name for forwards
- NOT FOR RETAIL CUSTOMERS
Alternative Investments
- limited partnerships
- Hedge Funds
- Structured Investment
Limited Partnerships
- one general partner (manages, active)
- limited partner (no management)
- limited partners have no liability
- passive investment
- best reason to enter is it is a viable business
- highly ILLIQUID
Hedge Funds
- pooled investment
- loosely regulated, unregistered fund, investment company
- can use options to speculate on different market movements
- can borrow on margin
Structured Investment
- Equity Linked Note (ELN)
- debt instrument linked to an equity (index)
- get regular income
- principal linked to return of equity index
Insurance Based Products
- Annuities
- Life Insurance
Fixed Annuity
- purely insurance product
- guaranteed and fixed contract
- no investment risk
- subject to purchasing power risks
- not meant for young investors
Variable Annuity
- security product
- no guaranteed return
- investment vehicle for retirement not at retirement (investments grow tax-deferred, penalty for early withdrawal)
- investment in mutual fund inside insurance wrapper (separate account)
- money invested is already taxed not taxed again (taxed LIFO on withdrawals as ordinary income)
- hedge against inflation
Index Annuities (Equity Based)
- variable annuity tied to equity index
- has participation rate, what they receive of return of index
- has cap on amount that can be earned
- cannot be negative, guaranteed against loss
Life Insurance
- needs analysis (suitability)
- traditional whole life
- variable life
- variable universal life
- universal life
Need Analysis
- death benefit needed for insurance are
- what death benefit is needed for situation
Whole Life Insurance
- everything is guaranteed (DB, cash value, etc)
Variable Life Insurance
- minimum guaranteed death benefit
- no guarantee on investment return or cash value
- 2 accounts, separate and general
- suitable for younger
Variable Universal Insurance
- NO guarantee
- only uses separate account
Whole and Variable Premiums
- fixed premium
Universal Insurance Premiums
- flex premium
