Flashcards in Chapter 11: Investing Fundamentals Deck (49)
Types of investments
- Money market securities
Money Market Securities
- most provide interest income ( term - deposits, guaranteed investment certificates (GICs) , Canada savings bonds)
Primary Stock Markets
a market in which newly issued securities are traded. firms can raise fund by issuing new shares in the primary market
initial public offering (IPO)
first offering of a firms shares to the public is referred to as Initial public offering
Secondary Stock Markets
facilitates the trading of existing securities , which allows investors the opportunity to sell their shares to other investors at any time. Even if company isn't issuing shares. Investors can still invest in the company.
Types of Stock Investors
- institutional investors
- individual investors
-professionals responsible for managing large pools of money, such as pension funds, on behalf of their clients. (also known as portfolio managers)
commonly invest a portion of their income (funds) in securities. usually invest for around a year. however there are also some individuals who are day traders
investors who buy stocks and then sell them on the same day.
Return from Investing in stocks
- stocks can offer return through dividends or stock price appreciation.
- how often dividends are distributed depends on the age and stability of the company
-investment in younger stocks has potential for higher return because they have no reach full potential, but also higher risk
- income stocks
shares of firms with substantial growth opportunities
- value stocks of firms that are currently undervalued by the market for reasons other than the performance of the businesses themselves.
- stocks that provide investors with periodic income in the form of large dividends. and therefore have lower potential for stock price appreciation
a certificate issued by a firm to raise funds that represents partial ownership in the firm.
- elect board directors
-generally look for ROI from stock price appreciation
(rather than dividends)
-higher returns, higher risk
a certificate issued by a firm to raid funds that entitles shareholders to first priority to receive dividends
- seeking regular income that comes from dividends
-price of preferred stock is not as volatile as common stock and does not have as much potential to increase.
-those who was risk free low returns
long term debt securities issued by government agencies or corporations
Return from investment in bonds
offer a return in the form of fixed interest (coupon) payments and bond price appreciation
- generate a specific amount of income each year.
- mutual funds sell units to individuals and invest proceeds in a portfolio of investments that may include money market securities, stocks, bonds, and other investment types. managed by portfolio mangers
return from invest in mutual funds
investors who own mutual funds may earn a return from interest income, dividends, and the price appreciation of the invests in the fund.
could be biggest investment ever made
- the value of a home changers over time in response to supply and demand.
Return on investment in real estate
- can be rented to generate income in the form of rent payments
- could earn a capital gain if they sell a rental property for a higher price than what they paid for.
Investment return and risk
when individuals consider any particular investment, they must attempt to assess two characteristics:
1. the potential return that will be earned on the investment
2. the risk of the investment
risk of investing
- the risk of an investment comes from the uncertainty surrounding its return.
-stock--> uncertain because its future dividend payments are not guaranteed and its future price (when you well the stock ) is uncertain
-bond-- uncertain because its coupon payments are not guaranteed and its future price (when you sell the bond) is uncertain when you sell the bond before it matures.
- real estate- uncertain because rental income may not be paid and its value when you sell is uncertain.
measuring an investments risk
- investors measure the risk of investments to determine the degree of uncertainty surrounding their future returns
-two common measures of investment risk are :
-range of returns
- standard deviation
range of returns
returns of a specific investment over a given period (the smaller the range the less risky )
measures the degree of volatility in an investment returns over time.
subjective measures of risk
the use of range of returns and standard deviation is limited because these measures are not always accurate predictors of the future changes in an investments price. because of this investors rely on a subject measure by a professional (assessment may include an estimate of the firms monthly revenue.
an additional return beyond the risk-free rate you could earn from an investment. The higher the risk. The higher the premium..
Return --risk trade-off among stocks
- higher return if company tries to become more successful with less funds and riskier opportunities, higher risk because most do not work out.
- smaller companies have higher potential therefore higher risk and return
-larger more stable are lower risk and lower return