BMAN 341 - Ch. 13 Investment Fundamentals

Savings

Accumulation of excess funds by intentionally spending less than you earn

Investing

Putting saved money to compund so it make you more money.

Securities

Assets suitable for investment, like stocks, bonds, mutual funds, and real estate

Stocks

Shares of ownership in an organization

Bonds

A debt instrument issued by an organization that promises repayment at a specific time and the right to receive regular interest payments during the life of it

Portfolio

Collection of multiple investments in different assets chosen to meet your investment goals

Where to get money to invest?

How does savings differ from investing?

What are the two parts of an investors total return?

What average investment returns from stock market returns do you anticipate in the future?

Investment Risk

the uncertainty that the yield on an investment will differ from what is expected

Capital Gain

Increase in the value of an initial investment (less cost) realized upon the sale of the investment

Financial Risk (business risk)

the possibility that the investment will fail to pay any return to the investor

Total Return

the income an investment generates from a combination of current income and capital gains

Risk Premium

the difference between the desired return on an investment and the current T-bill rate

Conservative Investor

Preservation of capital

Moderate Investor

Accept risk as a part of investing

Aggressive Investor

Risk seeker

Fiduciary Standard

an investment advisor who must act in your best interest even at cost to them follows

Suitability Standard

an investment advisor who factors in their own well-being into their recommendations

Random (or unsystematic) risk

Stems from the success of the specific investment chosen such as one company’s stock

Diversification

Buying many company’s stock reduces random risk

Market (or systematic) Risk

risk from investing at all or in a particular market or asset

Return on Investment is at the price that…

assumes a well-diversified portfolio

Business Failure

Inflation (Deflation) Risk

Time Horizon

Regulatory Risk

Business Cycle Risk

Economic cyclicality can affect some stocks and not others

Market Volatility

Individual stocks can have high price swings

Global Investment Risk

Global diversification is good but exposes you to unknowns

Liquidity Risk

Individual stocks, mutual funds versus real estate. Risk of not being able to convert investments to cash to pay debts

Marketability Risk

Reinvestment Risk

Risk of not being able to reinvest cash flow to keep your business

How do transaction costs, leverage, and income taxes increase or decrease investment returns

Securities Markets

Bear Markets

Sustained periods lowering values

Bull Markets

Sustained periods of rising values

Market Corrections

Short-term reductions when prices have been rising for a time with prices quickly rebounding