Module 6: Investments Flashcards
After-tax return
The return on investments after applicable income taxes are subtracted. An investment with a before-tax return of 8% would have an after-tax
return of 6.08% for an individual in the 24% bracket. This is calculated by
[.08 (1 – .24)].
Aggressive growth fund
A mutual fund that invests primarily in the stocks of
companies that plow all or most of their earnings back into the company,
producing little current income but growth in the value of the company and the
stock.
Asset allocation fund
A mutual fund that invests in different types of assets to create a diversified portfolio of investments, including such items as foreign and
U.S. stocks and bonds, real estate, precious metals, and currencies. The point of these funds is to minimize volatility in the overall portfolio while attaining
favorable returns
Asset allocation strategy
Pertains to investments. It is a strategy of
diversification aimed at reducing variability of return from a portfolio of
investments. The point of asset allocation is to invest in different types of assets
that move in different ways from others in the portfolio.
Asset combination fund
A mutual fund that combines different types of assets,
such as stocks and bonds, within one fund. Types of these funds include balanced
funds, lifestyle funds, and lifecycle funds
Balanced mutual fund
A mutual fund that invests in stocks, preferred stocks,
and bonds. Investment objectives are security of principal, reasonable current
income, and reasonable long-term capital appreciation.
Beta.
A measure of the volatility of an asset relative to the volatility of an index. Beta measures only systematic risk A Beta of 1 indicates price activity is strongly correlated with market. Less than 1 means less volatile than market. Greater than 1 means more volatility.
Blue-chip stock
Stock that is issued by major, well-established companies. Bluechip stocks have long records of earnings growth and dividend payments in both
good and poor economic conditions.
Bond
A debt of the issuer that is a legal obligation to pay principal and interest
when due.
Bond mutual fund
A mutual fund that invests in bonds. Funds of this type may
invest in short-term, intermediate-term, or long-term maturity bonds. They may
also specialize in bonds of a specific type of issuer; for example, they may invest
only in corporate bonds, only in municipal bonds, or only in Treasury securities.
Broker
Securities: An individual who buys and sells securities (stocks and bonds)
for investors.
Business risk
Investment risk that addresses the uncertainty of investment
returns resulting from the nature of a business or the industry in which it
operates. Examples include the uncertainty relating to future earnings,
competition, and management of the business.
Capital gain.
An excess of the sale price of a capital asset—such as a stock, a
bond, a personal automobile, or a home—over its basis (generally its purchase
price).
Capital loss.
An excess of the basis in a capital asset over its sale price. Some
capital losses are tax deductible, but personal losses are typically not deductible
(such as a loss on the sale of a personal automobile).
Closed-end investment company
A company that invests in diversified
portfolios of investments on behalf of investors, but which has fixed
capitalization. The company issues a fixed number of shares, and by purchasing shares of the company, an investor presumably will share in the gains or losses
experienced by the underlying portfolio of investments. When the portfolio
performs well, the investor’s shares in the company generally will increase in
value; when the portfolio does poorly, the shares generally will decrease in value.
The investor must buy or sell shares in the market; they are not purchasable or
redeemable by the investment company. As a result, changes in the value of the
portfolio are not the only determinant of changes in the price of the shares; share
price is also determined by market conditions and investor sentiment.
Commercial paper
Short-term promissory notes issued by major, wellestablished corporations. Commercial paper is issued in large denominations
Concentration
Pertains to investment strategies. Concentration is the opposite of
diversification; it involves investing in a single security, industry, or type of
security.
Conversion privilege.
Pertains to bonds and preferred stock. The corporate issuer
may include a provision enabling bond or preferred stockholders to exchange
their securities for a certain number of common stock shares at a specified price
Core/satellite asset allocation.
An asset allocation approach that divides a
portfolio into two components: (1) a core for 70% to 80% of the portfolio that
typically contains indexed mutual funds or broad-based exchange-traded funds,
and (2) a satellite for the remainder of the portfolio to increase returns and/or
provide additional diversification to the portfolio.
Credit risk
The risk that a bond (or a preferred stock) will be downgraded due to
excessive business risk and/or financial risk.
Currency risk
Also called exchange rate risk, it is the risk of diminishing both
principal and return on a foreign investment because of unforeseen changes in the
relative values of U.S. and foreign currencies. It is considered a type of
nondiversifiable (i.e., systematic) risk.
Default risk
When a firm cannot meet its obligations, it is in danger of
defaulting. Default risk tends to be highest among businesses without enough
profitable sales, especially when they also have excessive debt.
Discount bond
A bond selling below its par value.
Diverisification
investment strategy that involves investing in many different securties to reduce risk; the opposite of concentration
Dollar cost averaging
investment strategy that involves purchasing same $ amount of security
Duration
A measure of sensitivity of a bond’s price to a 1% change in interest rates
Earnings per share
EPS is the company’s net income (profit) for the year divided by # of shares outstanding
Equity
Equity represents ownership. For tangible real estate, it is the difference between the amount of mortgage and its market price.
Equity income mutual fund
A mf that invests primarily in equity securities of companies that pay above avg dividends
Event risk
The possibility that a security will be affected by unanticipated and damaging event
Exchange rate risk
AKA currency risk
s the risk that changes in the relative value of certain currencies will reduce the value of investments denominated in a foreign currency.
Exchange-traded funds (ETFs).
A basic of securities (usually stocks) that track indexes or specific sectors of the stock or bond market (some can be tied to commodities) low cost and tax efficient
Exchange-traded notes (ETNs)
Unsecured debt securities usually issued by large commercial or investment banks. ETNs have a fixed maturity, w/ maturities of 30 yrs. not being unusual. Often track and index or benchmark, or commodity.
Expense ratio
A fund’s annual expenses divided by its avg net assets. Passive index funds and ETFs have lower expense ratios than actively managed funds.
Fannie Mae
a public corporation that issues mortgage-backed securities collateralized by a pool of mortgages made by lenders
Financial Industry Regulatory Authority (FINRA)
July 2007, FINRA combined regulatory functions of NASD and the regulation, enforcement, and arbitration operations of NYSE. largest non-gov’t regulator of US securities firms.
Financial leverage
Use of borrowed funds to enhance gain on an investment. Also increases potential variability of return (investment risk)
Financial Risk
Has to do with amount of debt a firm has (balance sheet) . A firm that is highly leveraged (large amts of debts) has greater financial risk that a firm with little or no debt
Fixed-income security
Investment that promises a stated amount of income, either in form of periodic payments (interest) or a stated ending payout (deep discount bonds) Tend to be subject to interest rate risk and purchasing power risk.
Freddie Mac
Security sold by Freddie Mac. collateralized pools of conventional residential mortgages. guarantees payment of principal and interest on these securities.
Fundamental analysis
An in-depth examination of many variables, unique to the issuer of the security and its industry and overall economic factors that impact the intrinsic value of a security.
