FIN 310 CSUF Gorski - Fall 2022 Final

AMEX

American Stock Exchange; second most important exchange after NYSE with only 3% the volume of NYSE; around 60 countries have traded on AMEX

revenue bond

re-pays the bond from revenue projects, for example toll roads

NASDAQ

largest electronic stock exchange; around 400 countries have traded on NASDAQ; industry concentrated index (doesn't reflect a broader movement in the market); primarily a technology focused index born from the technology boom and the 1990's frenzy of investing in "Dot.com" companies

S&P 500

Standard & Poors 500 Stock Index, a broad based stock market index that tracks the performance of 500 of the largest companies in the US; broader index than the Dow because it is based on 500 Stock Index (broader may be better)

DJIA (dow)

Dow Jones Industrial Average, the oldest (1896) index and most widely known/ quoted; not an actual average but a sum of the component prices divided by a divisor, which changes with stock splits yo generate a consistent value for the index

common stock

a fraction ownership of a corporation which can be traded/ sold on public exchanges (common has a higher risk-return relationship than preferred stock)

- common stocks hasvoting rights and the payment of dividends fluctuate

growth stock

issued by companies that have sales and earnings growth well above industry average; usually are smaller companies that pay little to no dividends and place profits back into the company for growth (ex: Microsoft is a growth stock)

will

a legal document that describes how you want your property to be transferred to others called beneficiaries (beneficiaries can be people or organizations)

general obligation bond

backed by issuer to raise taxes in order to pay for infrastructure or other municipal projects (will dip into state and local taxes to pay back)

proxy

a legal agreement to allow someone else to vote for the stockholder at the meeting

capital gains

increased value of capital

networth (individual and estate)

- Individual (wealth/ value minus liabilities)

- Estate (value of estate minus estate's liabilities)

NYSE

New York Stock Exchange; started 1972; around 460 countries have traded on NYSE

traditional IRA

are like 401k's except there are lower contribution limits and no employer matching funds (requires earned income)

ROTH IRA

Is contributed into with post taxed money(Not deferred); withdrawals are TAX FREE (requires earned income)

series EE bond

a non-marketable, interest-bearing U.S. government savings bond; (pre 2005) buy at 50% par value, mature at full value; (post 2005) double par value in 20 years, mature at 30 years

mutual funds

- a pooled investment, managed by a professional fund manager who invests it in stocks, bonds, and other investments

- a way of holding investments such as stocks and bonds

- levels the field between small and large investors

indenture

the legal agreement between the bond issuer and bondholder; no one reads them because they are 100 pages long, but its intention is to protect the bondholder

debenture

(aka Unsecured Corporate Bond) not secured by collateral and has a hierarchy of holders to be paid back; higher risk bond but still safer than some stocks

probate

the legal process of distributing an estate's assets and validates a will to allow or any challenges to make sure this is indeed the final will before the orderly distribution of the assets or the individual who dies intestate (meaning without a valid will)

gift taxes

a tax on money or property that one living person or corporate entity gives to another

coupon rate

the annual rate of interest to be paid out on a bond, calculated as a % of the par value( ex: an 8% coupon interest rate on a $1,000 par value bond is $80.00 annually, usually paid semi-annually)

gift to heirs

Avoid probate and reduce taxable value of estate and are a good way to transfer property that grows in value; unlimited gifts tax exclusion to charity or gift payments for medical or educational expenses

capital appreciation

the portion of an investment where the gains in the market price exceed the original investment's purchase price or cost basis

stock splits

encouragement for small investors to invest in the company's stock; causes a stockholder to obtain an additional number of shares for the same value owned

dividends

a benefit of company profits

deductibles

the amount you pay for covered services before your insurance plan starts to pay

co-pays

a fixed amount you pay for a covered service after you've paid your deductible

par value

(aka denomination) the value of the face of the bond, usually $1,000

executor

the person or organization that is responsible for carrying out your wishes stated in your will

sinking fund

a reserve fund that builds up to pay off the bonds at maturity

IRA vs ROTH IRA

IRA: a tax-advantaged retirement account that may or may not be tax deductible depending on an individual's income level and whether they or their spouse is covered by a company retirement account

ROTH: contributed into with post-taxed money/ not deferred, have a variety of investment options that you control anytime you choose, withdrawals are tax-free (requires earned income)

IPO

Initial public offering (aka stock launch); a public offering in which shares of a company are sold to institutional investors and usually also to retail investors; usually used when a company's ownership is transitioning from private ownership to public ownership

401k/ 457

these are tax-deferred saving plans in which private employers (401k), public employers (457), or both may contribute a portion of pre-tax income to a maximum of $20,500 or $27,000 if 50+ years old (61k-67.5k total); can take these plans with you through different employers or roll it over to your (Roth) IRA accounts

disability

an inability to manage financial affairs due to a medically determinable physical or mental impairment

tax deferred

With a tax-deferred investment, you pay federal income taxes when you withdraw money from your investment, instead of paying taxes up front; any earnings your contributions produce while invested are also tax deferred

common disaster clause

"couple dies, which spouse died first?"; will might specify different various/ random outcomes that might be the outcome of their death

Large, Mid, and Small Cap Companies

Small: market value below $2B

Mid: market value of $2B-$10B

Large: market value of $10B-$200B or more

T-Bill, T-Notes, T-Bonds

T-Bill: a short-term debt obligation paid by the US treasury with a maturity of one year or less

T-Notes: a marketable U.S. government debt security with a fixed interest rate and a maturity between two and 10 years

T-Bonds: risk-free (backed up by the US government); can mature from an earlier time of 3 months to 30 years; interest accumulated on federal debt is only exempted from state and local taxes

Why invest in stocks? Advantages/ disadvantages- How do you make money?

- Overtime common stocks outperform all other investments, stocks reduce risk through diversification, stocks are liquid, and the growth in your investments is determined by more than just interest rates

- Advantages: limited liability (your liability is the only limit of the amount of your investment), after all, debts are paid, stockholders have a claim on any income and assets, voting rights (stockholders can vote for the Board of Director/ vote in the proxy), can receive dividends

- Disadvantages: market risk value (stocks can go up and down)

Why invest in bonds? Advantages/ disadvantages- How do you make money?

- a loan to a corporation or a municipality or even the Federal Government where they get to use your money for a slated period of time, often giving you interest payments every 6 months until the bond matures (when the loan needs to be repaid.); you loan money, you get interest, and then generally get your initial investment back

- Advantages: carry fewer risks than stocks, provide steady income, safe investment when held to maturity, bondholder WILL be paid

- Disadvantages: Bonds reduce risk through diversification (basically bond prices rise when stock prices fall) so their value fluctuates, produce steady interest income, and can supplement a pension, safe invest if held to maturity

Why invest in REITS? Advantages/ disadvantages- How do you make money?

(Aka Real Estate Investment Trust) an investment vehicle similar to a mutual fund that specializes in real estate investments such as shopping centers, and rental properties, or that makes real estate loans

- Advantages: traded on major exchanges and most REITs have no predetermined life span, diversification in that they don't move closely with the general stock market, real estate investment for those who don't want to manage a property, more liquid than owning real estate property

- Disadvantages: must collect 75% or more of its income from real estate and must distribute 95% of income in dividends

Why Invest in Mutual Funds? Advantages/ disadvantages?

- Levels the field between small and large investors

- Advantages: diversification (all of your money can be diversified without buying a variety of individual stock), Professional Manager (benefit of a professional manager instead of going it alone on your research), minimal transaction fees, liquidity (easy to buy and sell), flexibility (8,000 different mutual funds available to fit your needs), service (bookkeeping, checking accounts automatic systems, like reinvestment of dividends, interest, and capital gains), avoidance of bad brokers

- Disadvantages: Lower than market performance (80% on average of mutual funds underperform the market; has to pay administrative and broker fees that you would be able to keep to a minimum owning a stock), mutual fund expense ratios (Management Expense=Fund Managers/Other Staff & Research Analysis), distribution fees, shareholder services, gross expense ratio (Combination of all-should be under 1%; ex: So if you have $10,000 invested at 1%-You'll pay $100 a year), Costs, Taxes (with stocks a buy and hold strategy holds off capital gains until you sell, frequent capital gains disbursements

Trusts/ Types/ Advantages/ disadvantages:

Trust

- Living: created when a person is alive and transfers assets to beneficiaries while still alive to avoid probate

- Testamentary: will set up right after death according to one's last will and testament

- Revocable: created while a person is still living and can be changed as long as the person is still alive; tries to bypass probate for the transfer of assets after death

- Irrevocable: will can't be altered after created, even if still alive; allows benefactor to take assets out of one's taxable estate and makes assets no longer taxable

What's an Unlimited Marital Deduction?

a provision in the U.S. Federal Estate and Gift Tax Law that allows an individual to transfer an unrestricted amount of assets to their spouse at any time, including at the death of the transferor, free from tax

Interest Rates- How do they affect Stocks/ Bonds? Mortgages?

- Stocks/ Bonds: higher interest rates means that the market for stocks/ bonds declines in value

- Mortgages: higher interest rates mean more mortgage-related fees each month

How does Social Security work? Eligibility/ benefits

- is not an investment but really purchasing mandatory insurance that provides for you and your family in the event of: Death, Disability, Health Problems, Retirement

-Eligibility: You must have 40 total credits or quarters (10 years):

- You obtain one credit per $1,220 in covered earnings or $4,800 maximum per year

- Earning beyond 40 credits won't increase your SS Benefits

Benefits determined by:

- Number of years of earning

- Average level of earnings

- Adjustment for inflation

- Attempt to replace 42% of earnings (adjusted to lower/ higher income brackets)

Women and Money-Statistics

1.) Women generally earn less money and are less likely to have pensions or qualify for lower social security benefits.

2.) 90% of all women will take sole responsibility for their financial decisions at some point.

3.) Women live on average 7 years longer than men.

4.) 45% of all unmarried women (divorced, widowed, or never married) who are 65 years or older get 90% of their income from social security about $15,209 a year (men $25,409)

5.) Only 28% of women over 65 receive a pension vs. 45% of men and men receive twice the pension amount.

6.) Women tend to be more conservative with their investments which earn less.

7.) Out of the 12% of all elderly people who live in poverty, 75% are women.

8.) 80% of all widows living in poverty now, were not living in poverty when their husbands died.

9.) more single women (21-34) 53% said they were living paycheck to paycheck as opposed to single men 42%.

Annual Gift Tax Exclusion

the amount of money that one person may transfer to another as a gift without incurring a gift tax or affecting the unified credit; this year in 2022 it is $16,000

What are the common clauses when writing a will?

1.) Introductory statement: whose will it is and revokes any prior wills

2.) Payment of debt and taxes

3.) Disposition of property: who receives what and what happens to the estate after all payments

4.) Appointment clause: names executor and guardians of children under 18

5.) Common Disaster clause : identifies which spouse is assumed to die first when both dies simultaneously

6.) Attestation and witness clause: dates and validates the will with a signing before two or more witnesses

7.) Codicil: an attachment that alters or amends portions of the will

8.) Letter of last instructions: letter to surviving spouse that provides information and directions with respect to the execution of the will

Requirement of a valid will

1.) Must be mentally competent when the will is written

2.) Cannot be under the influence of another person

3.) The will must conform to the laws of the state

Financial Life Stages

Stage 1: "Accumulation of Wealth" (age 0-54)

Stage 2: "Approaching Retirement" (age 55-64)

Stage 3: "The Retirement Years" (age 65+)

Estate Planning

1.) Determine the Value of Your Estate

2.) Choose Your Heirs and What They Will Receive

3.) Determine Cash Needs of the Estate

a.) Funeral Costs

b.) Taxes

c.) Outstanding Debt

4. Select and Implement Estate Planning Techniques