CIE3M1 - Unit 2: Investing

What are the pros and cons of financial advisors?

What are the pros and cons of financial advisors?

Pros:

• Well informed person that can find the best plan that meet's your (clients) goals.

• Good for people that don't have time to research the market.

• Possible to act against poor advice given

Cons:

• Limited role as they cannot give advice on day-to-day money issues (spending habits)

• Can be expensive

Define the following terms:

• Positive Net Worth

• Negative Net Worth

• High Net Worth Individual (HNWI)

Positive Net Worth - When assets are greater than debts

Negative Net Worth - When debts are greater than assets

High Net Worth Individual (HNWI): A person with a very high level of liquid assets (easily accessible sources of cash), commonly viewed as over $1 million.

List some differences between Passive and Active Investing

Passive:

• A long-term perspective on money (position trading)

• Buy positions as soon as they have money

• Little to no research or analysis of the individual companies instead they focus on spreading their money across diversifying stocks

• Does not look at beating the “Benchmark” but looks at mimicking it through index investing

• Index Investing - involves buying index funds that directly copy an index since indices

• Focus on diversification and long-term

• EMH → Efficient market hypothesis - Eugene Fama (1960)

• Very low fees - since there is no need to analyze securities in the index

• Good transparency - because investors know at all times what stocks or bonds an investment contains

• Tax Efficiency → Because the index fund’s buy-and-hold style does not trigger large annual capital gains tax

Active:

• High fees to invest

• Monitoring the prices of your positions to find buying and selling opportunities

• Focus on short-term fluctuations in a stock price (alpha return)

• Looks at beating the “Benchmark”

• Focus on analysis and valuation at trying to achieve alpha

• Flexibility - because active managers, unlike passive ones, are not required to hold specific stocks or bonds.

• Hedging - the ability to use short sales, put options, and other strategies to insure against losses.

• Risk management - The ability to ghetto ut of specific holdings or market sectors when risks get too large 

• Tax management - including strategies tailored to the individual investor, like swelling money-losing investments to offset taxes on winners.

What are the four steps to generating wealth?

Earn income

Store and save

Invest wisely

Maintain and manage wealth

List some key ideas from teh documentary Billionaires Explained (Answers can vary)

• The Gilded Age → A period of economic growth as the United States jumped to the lead in industrialization ahead of Britain.

• There was also more philanthropic activities within this age, as there was less Governments intervention.

• Billionaires make the majority of their money from capital rather than labor 

• China is an economically prosperous country as the poverty rate is at the lowest it has ever been. 

• Labor income is taxed more than capital income

Define risk tolerance and the different levels (provide an example for each level)

Risk Tolerance - The readiness to bear the risk in order to achieve their objective.

Low Risk - Most secured option out of the three, and some examples would include government insured checking an savings account (GIC)

Medium Risk - Moderate level risk that has a chance to lose a bit of money, but also gain some as well. Examples include mutual bonds, real estate, and bonds.

High Risk - Extremely risk, but there is a chance of winning a lot as well. Examples include common stock and bonds.

Define these terms:

• Asset Mix

• Diversification

• Net Income

• Equities

Asset Mix - Breaking down a portfolio full of assets. These assets can include cash, fixed income and equities. All assets fulfilling a certain need.

Diversification - Investing in a variety of ways to minimize risk and maximize return.

Net Income - Money left after all mandatory deductions (tax and business expenses)

Equities - Interchangeable with stocks and shares

What is commonly understood about investing based on life cycle?

When Young

• When investing young, invest very risky as you have time to come back from the loss.

When Old

• When investing old invest in less risky things as you do not have time to earn the money back.

What are dividends, and how do they work?

Dividends are a form of payment to investors, and like all investments dividend payouts are determined by how successful the company is. Companies will use their profits to distribute an equal amount of payments to each investor, and

• Typically with fast growing companies, they do not give out dividends as it is more profitable them to reinvest their money back into the company. However with other larger companies, they will payout dividends.

• With smaller companies they do not give out dividend payments, as again it is better to reinvest their money back into the company.

Define these terms:

• Early Start

• Measured Approach

• Simple Plan

• Balanced Portfolio

Early Start - Investors that start investing at an early age

Measured Approach - Individuals that analyze their financial situations and investment goals prior to constructing their portfolio

Simple Plan - Less complex plan so you can easily monitor and manage, and is more likely to achieve goals.

Balanced Portfolio - Buying and selling of portions of the portfolio to balance the risk with the return.

Produced Income vs Appreciation

Produced Income - Investments producing income in the form of annual, quarterly, monthly revenue.

Appreciation - These investments don’t produce income but their value grows significantly over time. (Antiques, homes, art, etc.)

What is the point in investing in property, and list some of the ways to invest.

The aim of investing in property is to build wealth through APPRECIATIOn. The idea is to buy when the market is not in a good spot, 2and sell when profits are high.

Strategies include:

• Buy and remodel a house (flip)

• Buy in inexpensive areas and waiting for appreciation

• Buy and rent property

Define these property terms:

• Market Value

• Buy to Sell Mortgage

• Capitalization Rate

• Operating Expenses

• Capital Gains

• Market Value: The amount that a current buyer is willing to pay and what a current seller is willing to sell their property for, based on how the subject property compares to other properties that recently sold in similar conditions. The opposite known as Below Market Value (BMV)

• Buy to Sell Mortgage: A mortgage designed for investors who are buying property that will be sold shortly 

• Capitalization Rate: The rate of potential return on an investment property; the higher the better

• Operating Expenses: The cost of the day-to-day administration of a property (or business)

• Capital Gains: The increase in value of a property from its purchase price, this can be short term or long term.

What is the 18 Year Real-Estate Cycle?

Founded by the economist Homer Hoyt, the 18 year property cycle is a concept that suggests the property market will boom, then be followed by a crash every 18 years - give or take a little.

Phase 1:

• When the market crashes, it will take about four years to recover (4 years of bear market)

Phase 2:

• Once those 4 years are up, the market will experience 6-7 years of modest growth/recovery phase. (Bull market)

What are some of the different types of properties you can purchase?

Commercial Property:

• Can offer higher rental return than residential property and longer leases.

• Capital growth is less likely

• Can be harder to obtain mortgage on these properties, but investments can be made (commercial property funds).

• Ex: Office buildings, restaurants, or even a warehouse.

Residential Property:

• Offers more predictable returns compared to commercial property both rental and resale (highly dependant on location)

• Easily valued more than commercial property, which can help in the selling process.

• Ex: properties people live in.

Define these key equity terms:

• Collateral

• Home Equity Loan

• Home Equity

Collateral - A property or asset that a lender can take if a borrower FAILS to pay back the loan

Home Equity Loan - A loan that uses equity in a property as a collateral. Essentially the difference between your mortgage and house value is used as collateral.

Home Equity - A property’s equity is (current property value) - (mortgage loan)

• If you owe $150,000 on your mortgage loan and your home is worth $200,000, you have $50,000 of equity in your home.

What’s the difference between Positive and Negative Equity?

Positive Equity: When the property value is greater than the amount of debt owed (mortgage loan).

Negative Equity: When the property value is less than the amount of debt owed. This is known to be under water.

How do Financial Institutions work out Home Equity?

Using a Loan to Value rate (LTV), which is when you divide remaining loan balance by current market value of the property.

• (loan balance)/(market value of property)

A low LTV is less than 80% and is seen as lower risk for further lending.

Example: if you buy a home valued at $100,000 for its appraised value, and make a $10,000 down payment, you will borrow $90,000. This results in an LTV ratio of 90%

What are shares/stocks?

Shares/stocks (used interchangeably) are partial ownership in a corporation or financial asset. There are 2 main types of shares Blue-chip Stock and Growth Stocks

Blue-Chip Stocks: (Low Risk)

• A stock of a successful company that has a market capitalization (total value of the company) in the billions.

• These are the types of companies that pay annual dividends.

• Considered to be high quality stocks that can hold their value. No immune from market downturns, but can recover much faster.

• Ex: GOOGL, AMZN, AAPL, and other big companies.

Growth Stocks: (High Risk)

• Stocks in a company that are growing exceedingly faster than average companies, and are expected to continue to grow.

• Rarely pay dividends as they rather invest in themselves again.

• Sell at a high P/E Ratio because investors believe their stock has a high earnings growth potential.

• Typically young/new companies in the technology industry as this is currently a booming industry

• Ex: TSLA, NVDA, NFLX, SHOP (all of these in their earlier stages)

How do stocks/shares work?

Companies wanting to raise money, and investors buying shares as they see potential in the company’s success.

• Some companies may opt out of stocks as it is not necessary to put up partial ownership in a company to the public.

Stocks are bought and sold on different stock exchanges such as NASDAQ and the NYSE. However, the company needs to go through an approval process before being listed, and once listed they will be described as quoted as their prices are quoted daily.

Who has a say in where the company is heading?

Other than the founders and higher executives in the company, investors that own a good chunk of the company’s stocks have a say in the direction the company is heading.

What are the different ways of buying stocks?

Through a stockbroker ($$$)- Having a well experienced investor provide advice on what to sell and buy.

Initial public offering (IPO) - Companies transitioning from private to public.

Invest in a fund - Investing in managed funds such as mutual funds, and is a great way to diversify investment portfolios and mitigates risks.

Employee stock option plan (Spotify, BMO) - Stocks given to people who work at a specific industry. Ex: Spotify giving out their stocks to their employees as a bonus.

Online share dealing platform (on-line brokerage) - Low-cost online, discount, or execution only stockbrokers allow investors to buy and sell shares simply, and usually without receiving any specific guidance or advice on investment.

What’s the difference between a bull market and a bear market?

Bull Market - Several months or years of rising stock prices by high sale volumes and a strong economy. AN ECONOMICALLY PROSPEROUS TIME PERIOD.

Bear Market - A decline in the stock market over a period of time, with falling prices and lesser sale volume. AN ECONOMICALLY POOR TIME PERIOD.

Why do share prices matter?

1) Investors focusing on capital growth will only make a profit if the share price of their stock increases. They may also lose money if the share price falls.

2) A Falling Share price can impact the reputation of a company and its management, and also on its ability to borrow money.

3) Public Traded Companies with a falling share price can become takeover targets for wealthy shareholders or rival companies

4) The Value of Pension savings pots linked to the stock market will fail if the underlying share prices fall. This is bad news for those nearing retirement.

5) When stock Markets in a country fall, foreign investors often remove money from that country altogether, reducing the value of its currency. 

What are 2 different types of managed funds strategies?

Index Funds: (Passive Investing) These funds aim to match the performance of a particular financial index, such as the FTSE 100.

Actively Managed Funds: (Active Investing) These aim to deliver higher than average returns. Active managers analyze, research, and forecast markets to make investment decisions on which securities to buy and hold, or sell off.

What is the “Optimal Portfolio”

When risk to reward combination yields the maximum returns possible.

What is the graduated tax rates?

A graduated rate income tax system consists of tax brackets where tax rates increase as income increases. These tax brackets are set by both federal government and by each province.

Define both federal and provincial tax bracket

Both are the graduated income tax rate. 5% of taxes go straight to the government, while the rest will go to the province. For example, Ontario has a 13% HST, so 5% of that goes to the government while the other 8% goes to the province.

What are some different plans you can register for?

TFSA - Tax Free Savings Account

RRSP - Registered Retirement Savings Plan

RESP - Registered Education Savings Plan

RRIF - Registered Retirement Income Fund

FHSA - First House Savings Account

What’s the difference between investment products and investment accounts?

Investment Products - The umbrella term for all the stocks, bonds, options, derivatives and other financial instruments that people put money into in hopes of earning profits.

Investment Accounts - Does not make you money, but it’s what you put into the account that makes you the money.

• Ex: TFSA, RRSP and plans which reap benefits through interest.

What is a GIC?

GIC or Guaranteed Investment Certificate is a deposit instrument that builds interest on your principle amount over a specified term.

• Interest rates can vary or be fixed

• Specified term of 1, 3, 5 years, so can be a short or long investment

• Can be locked in or cashable

• Usually pay low interest rates

• Meant for Low Risk Investors

What are Mutual Funds?

A mutual fund is an investment vehicle consisting of a portfolio of stocks, bonds, or other securities, overseen by a professional money manager. This manager typically manages a group of peoples’ money.

• Not guaranteed

• Cashable

• Contains all risk levels (low, medium and high)

  • Higher risk = Higher rewars

• Management fees that must be paid to the professional manager.

• Long term investments

What are stocks?

Stocks are a market investment in which you are buying a share of ownership in a company.

• Cashable

• Requires more research if you are managing it yourself

• Can be managed by a manager

• Higher risk

• Fees to purchase and sell stocks

• Two types of stocks:

  • Blue-Chip Stock

  • Growth Stock

What is an RRSP

A Registered Retirement Savings Plan (RRSP) is a retirement savings and investing vehicle for employees and the self-employed in Canada. Pre-tax money is placed into an RRSP and grows tax-free until withdrawal, at which time it is taxed at the marginal rate.

• Tax deductible and tax sheltered growth

• Has many perks such as home buyers plan and life long learners plan (LLP)

  • Home Buyers Plan - Allows withdrawal of $35,000 that must be repaid within the next 15 years

  • LLP - Allows withdrawals of up to $10,000 per year of a total of $20,000 that must be repaid within 10 years.

• Can hold GIC, mutual funds and stocks

• Contribution room increases every year you work, and if it is unused, the room just carries forward.

What is a RRIF?

A RRIF (Registered Retirement Income Fund) is what your RRSP converts into when you reach retirement and require income.

• Tax sheltered growth

• Allows withdrawals to not be taxed at source, but will be added as income on your tax returns.

• Can hold GICs, mutual funds and stocks

• Dec 31 of the year you turn 71 is when you transition from an RRSP to a RRIF

What is an RESP?

A savings plan that a parent or guardian starts for their child’s or children’s post-secondary education. Parents can start putting money into it right when their child is born.

• Tax sheltered growth

• Provides government grants and bonds to be used for post-secondary education

• Lifetime max contribution: $50,000 per beneficiary (kid)

• Lifetime max grans: $7,200

• When withdrawn taxed at the hands of teh beneficiary if they go to school

What can be done with an RESP if the beneficiary does not attend post-secondary education after graduating from high-school?

1. Transfer the funds to the parent’s RRSP. However, grants are lost.

2. Parents can close the account, however, they will lose the grant money and carry out a 20%. penalty on the money made through investments and the money will be taxed.

3. Can transfer funds to siblings. However, grants are capped at $7,200.

4. Can wait until the child wants to go to post-secondary. An RESP can stay open until the end of the year the child turns 35.

5. (Worst option) Donate the money to whichever charity of your choosing, and can provide tax benefits to the parents.

What is a TFSA?

It is not commonly known to be a savings account, but rather an investment vehicle. The idea of the TFSA is the grow these investments.

• Allows tax-free growth and never taxed even during withdrawal.

• Can contribute a max of $6,500 per year starting the year you turn 18.

• Max contribution room is always changing. As of now (Nov 13, 2023) the max contribution room when you turn 18 is $81,500.

• Contribution room is never lost

• If you exceed contribution room, there is a 1% penalty per month.

• You will also be penalized if you breach your accumulative limit.

• Can hold GICs, mutual funds and stocks

What is an RDSP?

A savings plan meant for people with disabilities.

• Must have a disability tax credit

• Has tax sheltered growth

• Government provides grants and bond based on household income

• Max lifetime contribution $200,000

• Max grants to earn is $70,000

• Max bonds are $20,000

• Hefty clawbacks and taxes if withdrawn before the age of 60

What is an FHSA?

An FHSA is a new savings account newly created in January 2023. This account is for all first home buyers to save up for a new house, or a downpayment on the house.

• Tax sheltered way for Canadians to save up to buy a home

• Max lifetime contribution of $40,000

• Government will lose $725 million in tax revenue

What are the 3 ways of investing?

Long and holding investment —> Holding out a stock

Option Trading —> Buying or selling stocks at a certain price or date

Day Trading —> Trading as a profession

What are some pros and cons of each way of investing?

Logan and Holding Investment:

• Pro

  • Long time spam

  • Possible dividends paid to you

  • Low commission fees

• Cons

  • May need a lot of money to capitalize on certain situation

  • Can only buy or sell stocks

  • Recurring patterns in the prices of the stocks

  • Can take time to make profit

Option Trading:

• Pro

  • Does Not require as much money at times 

  • Make quick money 

  • Have the choice to own company/share

• Cons 

  • May require a lot of money in account 

  • Could be risk spending on direction of stock price 

  • Lose money quickly if not managed daily/weekly 

Day Trading:

• Pro

  • Make quick money

  • Does not require that much money to get started

• Cons

  • Can lose a lot of money

  • Very time investing

What are mutual funds, and what is the primary way a manager would mange your funds?

Mutual Funds

• Type of investment vehicle consisting of a portfolio of stocks, bonds or securities.

• Managers will manage funds from a multitude of people, and invest with the total money collected.

• The fund providers (you) will not have to worry about managing the portfolio.

Fund managers will diversify the funds into many different booming industries.

Ex:

• 45% in Tech industries

• 30% in industrial industries

• 10% in health care

• 2% in oil

• 12% in slave trade

• 1% in other industries

What is an ETF?

An exchange-traded fund (ETF) is a basket of securities that tracks an underlying index. ETFs can contain investments such as stocks and bonds.

• Lower MER —> Management Expense Ratio

What are bonds?

Government backed investments, and profits can vary depending on how the economy is doing.

• If interest rates go up then bonds prices tend to fall, and vice versa.

• If companies are not in need to scavenge money, the economy will experience less expansion.

  • This will slow the economy down, and cause the country to go into a recession

  • The high income earners have been spending more thus the economy shares more stability in comparison toward Canada. 

• It is best to buy bonds when the yield/interest rates are high

What should you research when doing fundamental research?

Company Profile

Debt

Cash Flow

Price to Earnings Ratio (P/E Ratio) —> Share price to earnings

• The lower the P/E ratio the better

What is short selling?

Short selling is when you bet on the fall of a company.

• This involves a process where you borrow stocks at a certain price, then once the stock begins to fall you actually buy the stock. Your profit will be (borrowed cost) - (purchased cost) = Profit.

What are some current tactics people use to flip houses?

Renovating a run down house to increase the value.

• This involves the process of purchasing a really cheap house in which the quality is really low. Then renovating the interior and exterior to increase the value and quality of the house.

Increase the number of renters. (Garden Homes and Laneway Homes)

• People will take an approach of increasing the number of rooms available in a property to increase the amount of renters. They will even go as far as remodelling alley-way garages into houses.

• Garden Homes - Using other parts of the property to increase structures within the property.

• Laneway Homes - Renovating the garage in a laneway into a home.

What was the main idea of the Game Stop reading?

What is the main idea of the Milton Friedman article?

Friedman took

What is Galbraith’s theory?