Midterm Topics - Part 1 Flashcards
Investor can be:
(1) Individual
(2) Government
(3) Pension fund
(4) Corporation
An individual who purchases small amount of securities for themselves, as opposed to an institutional investor.
Individual Investor
Individual investors are also called_____
Retail investors or small investors
Individual investor invests to earn a return from savings due to their______
Deferred consumption
Individual investors want a rate of return that _____ them for the time, the expected inflation rate, and return’s uncertainty.
compensates
Putting money into something with expectation of profit.
Investment
In finance, investment means purchasing a financial product or another value item with an expectation of _______
Favorable future returns
Investment is the commitment of funds saved from ______ with the hope that some benefits will be received.
Current consumption
Two concept of investment
(1) Economic Investment
(2)Financial Investment
the addition of the capital stock of the society - goods that are used in the production of other goods.
Economic Investment
puts resources into something that may yield benefits over its initial cost.
Economic investment
Plants and machines, Inventories, Human capital/labor, tuition reimbursement are example of ______
Economic Investment
Allocates monetary resources to assets expected to yield gains or returns over a period of time.
Financial Investment
A commitment of funds to derive future income in the form of interest, dividends, rent premiums, pension benefits, and the appreciation of the value of their principal capital
Financial Investment
This type of investment may or may not yield a return.
Financial Investment
Stocks, bonds, real estate, fixed deposits, insurance, etc are examples of _______
Financial investment
Practice of engaging in risky financial transactions in an attempt to profit from short or medium term fluctuations in the market value of tradable good such as financial instrument, rather than attempting to profit from the underlying financial attributes embodied in the instrument, such as capital gains, interest or dividends.
Speculation
Many speculators pay little attention to _______ of security and instead focus purely on ______
Fundamental value; price movements
Speculators tend to buy assets to expect a profit from _______
Subsequent price changes and sales
The role of speculators are:
- to absorb the excess risk that other participants do not want
- provide liquidity in the marketplace by buying or selling when no participants from other categories are available.
Investment or Speculation:
Currency Trading
Reason:
Almost always speculation.
Trader is betting that the currency they have bought will bot fall in value against the currency they used to buy it
Investment or Speculation:
Buying Shares
Reason:
Depends whether Investment or Speculation.
It is an investment of you believe that the company’s future earning per share justify the price you are paying for the shares.
It is a speculation in the belief that the price will soon rise and you can sell them for more than you paid them shortly.
Investment or Speculation:
Trading Commodities
Reason:
Almost always just speculation.
Commodities are not investment as they do not generate revenue.
Traders cannot buy Commodities for their yields or intrinsic value.
Commodities are just usually purchased for their usefulness or speculative purposes.
Investment or Speculation:
Buying property.
Reason:
Depends whether Investment or speculation.
It is an investment if you believe that the property’s returns can generate in the form of rent.
It is speculation if you are more concerned with what you believe your properties will be worth.
Four Elements of Investments
(1) Return
(2) Risk
(3) Time
(4) Liquidity
Includes current income, and capital gains or losses, which arise from the increase or decrease of security price.
Returns
The chance of loss due to variability of returns on investment. This cannot be measured, but it can be minimized or maximized.
Risk
Offers several different courses of action.
Determines the conditions and the period depending on an investor’s objectives.
Time
Refers to the ability of an investment to be converted into cash as and when required.
Liquidity
Three Primary Investment Objectives
(1) Security
(2) Liquidity
(3) Yield
Refers to security of capital
Security
Cash readily available for emergencies or opportunities. Assets can be easily converted to cash.
Liquidity
Refers to return, profit, reward earned from the investment.
Yield
Eight Investment Attributes
(1) Rate of Return
(2) Risk
(3) Marketability
(4) Taxes
(5) Convenience
(6) Safety
(7) Liquidity
(8) Duration
The net gain or loss of an investment over a specified time period, expressed as a percentage of the investment’s initial cost.
Rate of return
Any uncertainty with respect to your investments that has the potential to negatively impact your financial welfare.
Risk
It can be transacted quickly. It refers to saleability, how easily or quickly a security can be bought or sold in a secondary market.
Marketability
Is the profit earned from investment such as real estate, and stock sales. Dividends from bonds are also some examples.
Investment income
Investment income is ____ at a different rate tan earned income.
Taxed
Is the profit from it interest payments, dividends, capital gains, and any other profits made through an investment vehicle.
Investment income
It ensures that you have enough money to pay for your needs and wants without having to rely on someone else or having to work in your old age. People invest with the view to build their wealth.
Convenience
Funds should be invested in safe ventures so that adequate rate of return can be achieved and maintain your capital grow modestly and still be liquid enough to convert to cash.
Safety
The ability to convert an asset into cash easily without losing money against the market price.
Liquidity
Is the time period where one expects to hold an investment for a specific period.
The longer the time horizon, the more aggressive or riskier a portfolio an investor can build.
Duration/Investment Time horizon
