Investing . . . Just The Basics
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Types of Investments Investment Risk Pyramid Investment Companies Investment Taxation Investment Objectives Investment Markets Types of Investments . . . just the basics Types of Investments Used for Speculation A Form of ‘Bets’ or ‘Hedges’ Small Fluctuations can Produce Large Changes in Contract Value Much Larger Risk Much Higher Returns – or – Risk of Losing Large Amounts date trade Arbitrage buyer Forex Strike Price contract exercise obligation exchange right Profit in Corporation Paid – through Dividends Dividends – not Guaranteed NO OBLIGATION to pay Can Retain Earnings More Risk Higher than average Returns price expiration 10% Contract Between Two Parties Return based on Movement of Financial Assets or Instruments Hedges 1,000,000 Shares 100,000 Shares Bond Certificate Debt Borrowed Money Paid – through Interest Interest – Guaranteed OBLIGATION to pay Bankrupt if Cannot Pay Less Risk Lower than average Returns Options Stock Certificate Ownership Puts / Calls Credit Swaps SELLING SHORT Investor borrows stock LONG BOND Down economy Profits decrease And immediately sells for cash Businesses do not borrow Later purchases stock Interest rates decrease to Repays stock debt Profits if stock decreased in value encourage borrowing Loses if stock increased in value Higher interest on existing bonds make value increase $ 100 Bad economy Profits decrease Borrowing decreases $ 60 Purchases stock $60 Keeps a $40 profit Jesse L. Livermore made $100 million short selling in the Great Stock Market Crash of 1929 Interest rates decrease Lower new bond interest Existing bond values increase PUT OPTION Remember ‘put down’ Buyer purchases the RIGHT to sell a security for a fixed price Buyer pays a fee Seller OBLIGATED to sell at the fixed price Small Fluctuations can Produce Large Changes in Contract Value Much Larger Risk Much Higher Returns – or – Risk of Losing Large Amounts Video example: http://www.investopedia.com/video /play/put-option#axzz1aU4TAfi6 Types of Investments Investment Risk Pyramid Investment Companies Investment Taxation Investment Objectives Investment Markets Investment Risk Pyramid . . . just the basics Investment Risk Pyramid High Risk Low Risk Investment Risk Pyramid High Risk Low Risk Cash and Cash Equivalents Investment Risk Pyramid High Risk Low Risk CDs, Notes, U.S. Treasury Bills Cash and Cash Equivalents Investment Risk Pyramid High Risk Low Risk Money Market / Bank Accounts CDs, Notes, U.S. Treasury Bills Cash and Cash Equivalents Investment Risk Pyramid High Risk Low Risk Government Bonds/Debt Money Market / Bank Accounts CDs, Notes, U.S. Treasury Bills Cash and Cash Equivalents Investment Risk Pyramid High Risk High Income Bonds/Debt Government Bonds/Debt Money Market / Bank Accounts CDs, Notes, U.S. Treasury Bills Cash and Cash Equivalents Low Risk Investment Risk Pyramid High Risk Large/Small Cap Stocks High Income Bonds/Debt Government Bonds/Debt Money Market / Bank Accounts CDs, Notes, U.S. Treasury Bills Cash and Cash Equivalents Low Risk Investment Risk Pyramid High Risk Low Risk Equity Mutual Funds Large/Small Cap Stocks High Income Bonds/Debt Government Bonds/Debt Money Market / Bank Accounts CDs, Notes, U.S. Treasury Bills Cash and Cash Equivalents Investment Risk Pyramid High Risk Real Estate Equity Mutual Funds Large/Small Cap Stocks High Income Bonds/Debt Government Bonds/Debt Money Market / Bank Accounts CDs, Notes, U.S. Treasury Bills Cash and Cash Equivalents Low Risk Investment Risk Pyramid High Risk Investing Real Estate Equity Mutual Funds Large/Small Cap Stocks High Income Bonds/Debt Government Bonds/Debt Money Market / Bank Accounts CDs, Notes, U.S. Treasury Bills Cash and Cash Equivalents Low Risk Investment Risk Pyramid High Risk Speculating Investing Real Estate Equity Mutual Funds Large/Small Cap Stocks High Income Bonds/Debt Government Bonds/Debt Money Market / Bank Accounts CDs, Notes, U.S. Treasury Bills Cash and Cash Equivalents Low Risk Investment Risk Pyramid High Risk Options Speculating Investing Real Estate Equity Mutual Funds Large/Small Cap Stocks High Income Bonds/Debt Government Bonds/Debt Money Market / Bank Accounts CDs, Notes, U.S. Treasury Bills Cash and Cash Equivalents Low Risk $30 ? - $5,000 0 Option to purchase at face value If BYU goes to the 2012 Sugar Bowl If BYU does not go Investment Risk Pyramid High Risk Hedge Funds Options Speculating Investing Real Estate Equity Mutual Funds Large/Small Cap Stocks High Income Bonds/Debt Government Bonds/Debt Money Market / Bank Accounts CDs, Notes, U.S. Treasury Bills Cash and Cash Equivalents Low Risk Investment Risk Pyramid High Risk Arbitrage Hedge Funds Options Speculating Investing Real Estate Equity Mutual Funds Large/Small Cap Stocks High Income Bonds/Debt Government Bonds/Debt Money Market / Bank Accounts CDs, Notes, U.S. Treasury Bills Cash and Cash Equivalents Low Risk Investment Risk Pyramid High Risk Futures Arbitrage Hedge Funds Options Speculating Investing Real Estate Equity Mutual Funds Large/Small Cap Stocks High Income Bonds/Debt Government Bonds/Debt Money Market / Bank Accounts CDs, Notes, U.S. Treasury Bills Cash and Cash Equivalents Low Risk Investment Risk Pyramid High Risk Currency Trading Futures Arbitrage Hedge Funds Options Speculating Investing Real Estate Equity Mutual Funds Large/Small Cap Stocks High Income Bonds/Debt Government Bonds/Debt Money Market / Bank Accounts CDs, Notes, U.S. Treasury Bills Cash and Cash Equivalents Low Risk Investment Risk Pyramid High Risk Credit Swaps Currency Trading Futures Arbitrage Hedge Funds Options DERIVATIVES A contract that derives value from the movement of a financial asset Speculating Investing Real Estate Equity Mutual Funds Large/Small Cap Stocks High Income Bonds/Debt Government Bonds/Debt Money Market / Bank Accounts CDs, Notes, U.S. Treasury Bills Cash and Cash Equivalents Low Risk Investment Risk Pyramid High Risk Real Estate Flipping Credit Swaps Currency Trading Futures Arbitrage Hedge Funds Options Speculating Investing Real Estate Equity Mutual Funds Large/Small Cap Stocks High Income Bonds/Debt Government Bonds/Debt Money Market / Bank Accounts CDs, Notes, U.S. Treasury Bills Cash and Cash Equivalents Low Risk Investment Risk Pyramid High Risk Real Estate Flipping Credit Swaps Currency Trading Futures Arbitrage Hedge Funds Options Speculating Investing Real Estate Equity Mutual Funds Large/Small Cap Stocks High Income Bonds/Debt Government Bonds/Debt Money Market / Bank Accounts CDs, Notes, U.S. Treasury Bills Cash and Cash Equivalents Low Risk 12% Annual Return Past 10 Years Rising Dividends Each Quarter Same Management Team Millionaire Next Door Types of Investments Investment Risk Pyramid Investment Companies Investment Taxation Investment Objectives Investment Markets Investment Companies . . . just the basics Investment Companies $$$ -Commission -No Load Mutual Fund Shares Reinvested Components of Return Dividends Dividends Dividend Income Interest Capital Gain Income Cap Gains (losses) Realized Unrealized Stock - Google - Microsoft - Enron - AT&T - Fly by Night Inc. - Exxon Expenses Management Fee Custodial Fee Investment Companies $$$ -Commission -No Load Mutual Fund Shares Reinvested Components of Return Dividends Dividends Dividend Income Interest Capital Gain Income Cap Gains (losses) Realized Unrealized Stock - Google - Microsoft - Enron - AT&T - Fly by Night Inc. - Exxon Expenses Management Fee Custodial Fee Investment Companies $$$ -Commission -No Load Mutual Fund Shares Reinvested Components of Return Dividends Dividends Dividend Income Interest Capital Gain Income Cap Gains (losses) Realized Unrealized Stock - Google - Microsoft - Enron - AT&T - Fly by Night Inc. - Exxon Expenses Management Fee Custodial Fee Types of Investments Investment Risk Pyramid Investment Companies Investment Taxation Investment Objectives Investment Markets Investment Taxation . . . just the basics Investment Taxation Four Federal Taxes 1. 2. 3. 4. Income Tax • Ordinary income tax • Capital gains tax F.I.C.A. (Social Security Tax) Gift Tax Estate Tax Ordinary Tax Rates 10% 15% 28% 33% 35% Capital Gain Tax Rates 5% 0% 15% 2008 - 2011 Investment Taxation Four Federal Taxes 1. 2. 3. 4. Income Tax • Ordinary income tax • Capital gains tax F.I.C.A. (Social Security Tax) Gift Tax Estate Tax Ordinary Income Social Security Tax – 16% Capital Gain Income Capital Gains Tax – 15% Federal Income Tax – 25% State Income Tax – 7% TAX PAID EACH YEAR TAX PAID ONLY WHEN GAIN IS REALIZED Types of Investments Investment Risk Pyramid Investment Companies Investment Taxation Investment Objectives Investment Markets Investment Objectives . . . just the basics Investment Objectives Government Bond Funds Municipal Bond Funds Sector Funds (Health Care) Large Cap Growth Funds Emerging Market Funds International Stock Funds Real Estate Funds (R.E.I.T.s) Commodity Funds Hedge Funds Different types of investments whose performance reflects the investors’ goals based on their time horizon, risk tolerance and personal wishes Types of Investments Investment Risk Pyramid Investment Companies Investment Taxation Investment Objectives Investment Markets Investment Markets . . . just the basics Investment Markets EXCHANGE Auction Market – ‘Open Outcry’ Physical Location – Floor Traders – 18 Trading Posts New York Stock Exchange – NYSE – ‘The Big Board’ American Stock Exchange – AMEX Tokyo Stock Exchange London Stock Exchange OVER-THE-COUNTER Any securities trade not handled on an exchange The largest securities market Computer communications network – Links securities dealers Negotiated market – Broker dealers and ‘market makers’ Most all initial public offerings completed ‘over the counter’ NASDAQ – National Association of Securities Dealers Automated Quotations Three levels of reporting and tracking trades
