Investments Chapter 1

any vehicle into which funds can be placed & expected to generate income and/or its value to increase.

• the rewards from investing. Current
• income and/or increased value.

• - represent debt or ownership or legal right to buy/sell an ownership
• interest.

- investments in real property or tangible personal property.

land, buildings, and that which is permanently affixed to the land.

items like gold, art antiques, collectibles.

investor directly acquires a claim on a property/security.

investment made in a portfolio.

collection of securities/properties constructed to meet 1 or more investment goals.

funds lent in exchange for interest income and promised repayment of a loan.

- represents ongoing ownership in a business or property. Ie commonstock.

neither debt nor equity, get value from an underlying security orasset, like options.

- buys chance to buy/sell another security/asset at a specified priceduring a given time period.

- the chance that actual investment returns will differ fromexpected.

High risk investments - speculative.

- the purchase of high risk investment vehicles that offer highlyuncertain returns and future value.

mature within 1 year.

• mature in longer than a years, or w/no
• maturity at all.

- debt, equity & derivative securities of US based companies.

debt, equity & derivative securities of foreign based companies.

forums where suppliers/demanders of funds make transactions.

the dominant financial market in the US. Stock markets, bond markets & options markets.

the price of an investment vehicle results from an equilibrium between the forces of supply and demand. Changes in supply & demand may result in a new equilibrium or “marketprice”.

Government, Business, Individuals

spend $ on Capital Expenditures (construction of schools,   public housing, roads, etc.), and Operating Needs ($ to keep the government running). Net Demanders of Funds (demands more $ than it supplies).

spend $ to support operations. They supply $ when they have excess cash, but are also Net Demanders of funds.

demands for loans for autos and houses. Supply via savings accounts, investments, buying insurance, retirement contributions, buying properties. Net Suppliers of Funds.

– professionals paid to manage other ppl's $.

Savingsinstruments that live 1 yr or less. Have Liquidity; can be converted into cash quickly.

equityinvestment that represents ownership in a corporation.

- the amount by which the sale price of an asset exceeds its originalpurchase price.

-fixed preiodic return.

- Long term debt instruments issued by corporations and governmentsthat have a known interest return plus the bond's face value atmaturity.

-has stated dividend rate, payment is given preference over commonstock dividends of the same firm.

– a fixed income bond/preferred stock with a feature permittingconversion into a specified number of shares of common stock.

– invest solely in short term vehicles.

securities that give the investor the opportunity to sell or buyanother security at a specified price over a given period of time.3 common types – puts, calls, warrants.

legally binding obligation, sellers to make delivery, buyers to takdelivery of a specidied commodity or financial instrument on aspecific date at a specific price.

entities likehomes, land, income properties that have returns in form of rental income, tax write offs, capital gains.

– assets other than real estate that can be seen or touched. Gold,gems, collectibles.

– Investment vehicles & strategies for legally reducing taxes.

• 1. Meeting Investment Prerequisites
• 2. Establish Investment Goals
• 3. Adopting an Investment Plan
• 4. Evaluating Investment Vehicles
• 5. Selecting Suitable Investments
• 6. Constructing a Diversified Portfolio
• 7. Managing the Portfolio

Federal income tax, state income tax, city income tax, state &local sales & property taxes.

have the most impact on security investments.

have the most impact on real estate & property investments.

wages, bonuses, pension, alimony; noninvestment income.

interest, dividends, capital gains.

income from real estate, limited partnerships, tax advantaged investments.

limit the amount of deductions that can be taken.

limited to amount of income derived from those sources, they cant bemixed or combined with each other.

progressive.

– property owned/used by a taxpayer for personal reasons, pleasureor investments.

profit when capital asset is sold.

• 1. If held more than 12 mo. And w/in the 25%-35% tax bracket, it's 15%.
• If held more than 12 mo. And tax bracket is 15% or less, it's 5%.
• 2. If held less than 12 mo., the capital gain is added to other sources of income, and the total is taxed.

–capital asset sold for less than original purchase price. 3K oflosses can be applied to ordinary income per year.

– strategies to defer and minimize taxes over thelong run.

– process of identifying the current state of theeconomy/market and assessing the liklihood of its continuing on its present course.

– common stocks, etc. are highlyresponsive to conditions in the economy.

– move in opposite directions.

• – to provide a pool of reserves to use for emergencies, or to accumulate funds for some specific purpose. Interest can be earned 2 ways:
• 1. Stated Rate of interest, ie savings account.
• 2. Discount Basis – bought at a price below its redemption amount, and the difference is the interest earned, ie US Treasury Bills.

– savings account offered by bank, that pays a low rate of interest and has no minimum balance.

– a bank checking account that pays interest; has no legal minimum balance, but many banks impose their own.

– a bank deposit account with limited check writing priviliges; has no legal min bal, but many banks impose their own.

comprehensive deposit account that combines checking, investing, and borrowing activities; automatically “sweeps” excess balances into short-term investments and borrows to meet shortages.

–accrual type securities; interest is paid when the bond is cashed, onor before maturity, rather than periodically over the life of thebond. Sold at a discount, 50% of face value. Pay variable rate ofinterest tied to US Treasury security market yields and calculatedevery 6 mo. In May & Nov.

obligations of the US Treasury, sold on a discount basis, w/varyingshort term maturieies; regarded as the safest of all investments.

– higher yields than deposit accounts, EE bonds and T-bills w/similar maturieies due to slightly higher risk.

– savings instruments where funds must stay on deposit for aspecified period; w/drawals before maturity incur interestpenalties.

– CD's soldby stockbrokers, slightly higher yields than other CDs and typicallycan be sold before maturity w/out incurring a penalty.

short-term, unsecured promissory notes issued by corporations withvery high credit standings.

-short-term low risk, from bank guarantees of business transactions,sold at a discount from their face value, yield slightly below CDsand commercial paper. Typically used by importers/exporters, foreignbanks.

-mutual fund that pools the capital of a large number of investorsand uses it to invest exclusively in high yield, short term securities.

– consider availability, safety, liquidity, and yield.