Investment Concepts

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Investment Concepts

• Chapter 16

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Investment Concepts

• Investors
• individuals who purchase investments with current
  savings in anticipation of relatively stable
  growth on average, or in the long term

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Investment Concepts

• Speculators
• individuals who search for mispriced securities
  in an effort to earn abnormal returns

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Investment Concepts

• Speculators
• gamble on whether the prices of financial assets
  believed to be mispriced will adjust accordingly
  in the market

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The Investment Process

• Investment objectives
• 1. Retirement planning

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The Investment Process

• Investment objectives
• 2. Supplement current income

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The Investment Process

• Investment objectives
• 3. Shelter current income from taxes

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The Investment Process

• Investment objectives
• 4. Achieve future goals

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The Investment Process

• Income securities
• preferred stock
• corporate bonds
• steady dividend or interest payments

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The Investment Process

• Investors attitude toward risk
• risk tolerance level
• an investors ability and willingness to
  tolerate, or accept, risk

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Implementation to Achieve Investment Objectives

• Transaction costs
• the costs associated with trading securities,
  which include the costs of time, effort, and
  phone calls, as well as brokerage commissions
  that are incurred

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Implementation to Achieve Investment Objectives

• Investment portfolio
• a combination of investment instruments

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Implementation to Achieve Investment Objectives

• Asset allocation
• the proportion of funds invested in various
  categories of assets, such as money market
  instruments, long-term debt, stocks, and real
  estate

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Implementation to Achieve Investment Objectives

• Monitoring the investment positions
• to make sure goals are met
• to adjust to changing economic and legal
  conditions
• to include new investment instruments

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Investment Alternatives

• Risk tolerance
• Time frame

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Securities Transactions

• Brokerage firms versus financial intermediaries
• broker
• agent (middleman) who helps investors trade
  financial instruments such as stocks, bonds, and
  derivatives
• investors directly provide funds to users of
  those funds

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Securities Transactions

• Brokerage firms versus financial intermediaries
• financial intermediaries
• banks and SLs
• manufacture financial products such as mortgages,
  automobile loans, NOW accounts, or pension funds
• allow savers to indirectly provide funds to
  borrowers

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Securities Transactions

• Brokerage firms
• full-service brokerage firm
• offers a variety of services to its clients,
  including research information, monthly
  publications that contain investment
  recommendations, advisory services, etc...

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Securities Transactions

• Brokerage firms
• discount brokerage firm
• offers clients only the basic services associated
  with trading securities
• trade execution and related reporting requirements

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Securities Transactions

• Trading securities
• trading quantities
• round lots
• multiples of 100 shares
• odd lots
• trades with shares that are not in multiples of
  100

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Securities Transactions

• Trading securities
• types of orders
• market order
• an order to execute a transaction at the best
  price available when the transaction reaches the
  market
• stop order
• an order that specifies the price at which an
  order to buy or sell at the market price (a
  market order) is initiated

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Securities Transactions

• Trading securities
• types of orders
• limit order
• an order to buy or sell a stock at no worse than
  a specified price
• day order (DO)
• instruction to cancel an order if the price
  conditions are not met by the end of the trading
  day

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Securities Transactions

• Trading securities
• types of orders
• good til cancelled (GTC)
• indicates an order is active until the price
  limitations are met or until the investor cancels
  it
• fill or kill order
• instructs the broker to cancel the order if it
  cannot be executed immediately

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Securities Transactions

• Trading securities
• evidence of ownership
• physical possession of shares registered in your
  name
• brokerage firm holds shares in street name
  (registered to the brokerage firm)

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Securities Transactions

• Trading securities
• security insurance
• provided by most brokerage firms
• SIPC limit of 500,000
• additional limits from private organizations

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Investment Information

• Value Line Investment Survey
• Moodys Investment Services
• Standard and Poors
• New York Times
• The Wall Street Journal

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Investment Information

• Barrons
• Investors Business Daily
• Business Week
• Forbes
• Fortune
• Money

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Investment Information

• Stock Quotes

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Investment Information

• Bond Quotes

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Investment Information

• Treasuries Quotes

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Computing Investment Returns

• Individual security

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Computing Investment Returns

• Holding period return (HPR)
• the return earned over the period of time an
  investment is held

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Computing Investment Returns

• Dividend yield
• the part of the total return associated with the
  dividends paid by the firm
• computed by dividing the amount of dividends paid
  by the stock price
• Capital gain (loss)
• change in the market value of a security

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Computing Investment Returns

• Annualized rate of return

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Computing Investment Returns

• Simple arithmetic average return
• computed by summing each return and then dividing
  by the number of returns
• does not consider compounding

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Computing Investment Returns

• Simple arithmetic average return

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Computing Investment Returns

• Geometric average return
• computed by taking the nth root of the growth
  multiple and subtracting 1.0
• takes into account compounding

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Computing Investment Returns

• Geometric average return

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Computing Investment Returns

• Computing the return on a portfolio

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IndexesMeasuring Market Returns

• Dow Jones Industrial Average (DJIA)
• 30 largest industrial firms in U. S.
• Standard Poors family of indexes
• SP 500, SP 400, SP Industrials
• Exchange indexes
• NYSE, AMEX, NASDAQ
• Russell 3,000
• Wilshire 5,000

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IndexesMeasuring Market Returns

• Market capitalization
• the total market value of a firms stock
• computed by multiplying the number of shares
  outstanding by the market price per share

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IndexesMeasuring Market Returns

• Bull market
• a rising stock market
• Bear market
• a falling stock market

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Alternative Investment Strategies

• Buy-and-hold strategy
• strategy allowing investors to purchase
  securities with the intent to hold them for a
  long period, perhaps a number of years

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Alternative Investment Strategies

• Margin trading
• type of trade that allows an investor to borrow
  from his or her broker some portion of the funds
  needed to purchase an investment

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Alternative Investment Strategies

• Margin requirement
• the minimum percent of the total purchase price
  an investor must have to buy stock (or other
  investments) on margin

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Alternative Investment Strategies

• Hypothecation agreement
• assigns securities as collateral for a margin loan

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Alternative Investment Strategies

• Broker loan rate
• the rate charged by brokers to borrow funds for
  margin trading

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Alternative Investment Strategies

• Actual margin
• the percentage of investors equity
• must meet the margin requirement when the stock
  is purchased

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Alternative Investment Strategies

• Actual margin

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Alternative Investment Strategies

• Margin call
• a call from the broker to add more funds to a
  margined account
• Maintenance margin
• the lowest actual margin the broker will permit
  margined investors to have at any time

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Alternative Investment Strategies

• Short selling
• type of trade that allows an investor to borrow
  the stock of another investor and then sell it,
  but with a promise to replace the stock at a
  later date
• cannot sell short on a downtick

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Alternative Investment Strategies

• Downtick
• a decrease in price from one trade to another

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Alternative Investment Strategies

• Uptick
• occurs when the price of the most recent trade is
  higher than the previous trade

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Alternative Investment Strategies

• Zero-plus tick
• occurs when the price of the latest trade equals
  the price of the previous trade, but exceeds the
  price from one trade earlier
• Shorting against the box
• occurs when an investor short sells a stock he or
  she also owns
• refers to having the securities in a strong, or
  safe deposit, box

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End of Chapter 16

• Investment Concepts