finance unit 3

fixed income investments

Mutual funds and ETFs

traded on stock exchange

ETFs

capitalization weighting

weighted based on market cap size

equal weighting

all stocks weighted equally

ETF and stock similarities

trade on stock exchange, bought and sold throughout trading day, purchased through brokerage account

ETF and stock differences

etf share has basket of securities based on market index or sector, built in diversification with ETFs and less volatility

mutual funds and ETF similarities

pool money from investors to buy investments, diversification, variety of investments

stocks

trade on stock market, high volatility with some stocks, personal diversification

ETFs

traded on stock exchange, bought and sold through trading day, diverse, variety and less volatility, directly track and follow an index. PASSIVE

mutual funds

not traded on stock market, diversification, wide variety of investments, bought and sold once per day, actively managed. ACTIVE

mutual fund and etf differences

MF bought and sold once per day and actively managed. ETF actively bought and sold, passively manged

MER

higher on mutual fund because actively managed

Costs of buying and selling MF

management and operational fees, minimum investment amount

costs of buying and selling ETFs

trading fees, brokerage commisions

Passive

ETFs- replicated performance of index

Active

MF- actively managed by managers each day

tips for choosing your ETF or MF

fund size, age, costs, past performance, current news

morning star ratings conditions

min 3 years established, min 20 funds, rating based on risk and return

Bonds

loans to financial institutions in exchange for interest and principal returned, conservative income, low risk, more liquid

GIC

loans to financial institution in exchange for principal + interest, low risk, less liquid, higher rate of guaranteed return

T bills

sold at discount, issued by govt, short term investment

commercial paper

issued by financial institution or corporation, alternative for bank borrowing by large corps

laddering your investments

have investments mature at different times

lowest to highest risk

t bills, GIC, commercial paper, bonds

zero coupon bond (strip bond)

coupon stripped from principal and interest is sold seperately

default risk

chance that bond issuer will go bankrupt and unable to pay back obligations

currency risk

possibility of losing money due to unfavorable currency exchange rate

interest rate risk

the fixed rate of interest may be unfavorable compared to current risk

inflation rate risk

the interest does not equal the inflation

high risk bond rating

CCC

low risk bond rating

AAA

stages of saving and investing

put and take account, beginning to invest, systematic investing, strategic investing, speculate investing

put and take account

regular spending account

beginning to invest

low risk investments

systematic investing

investing on regular and planned basis

strategic investing

balancing loss and gains through diversification

speculative investing

high risk investing

tips for new investors

choose low risk, diversify, blue chip to start

dollar cost averaging

investing on regularly scheduled basis regardless of price, risk of high trading fees

couch potato investing (index investing)

purchase a few index MF/ETF that follow a benchmark and offer diversification, re-balance once a year