Fundamentals of Investing, Investment Analysis, & Principles of Investment Finance Chapter 1 The Investment EnvironmentThis series of Investment Lectures . The Investment Environment Securities Markets and Transactions Investment Information and Securities Transactions Return and Risk Modern Portfolio Concepts Common Stocks Analyzing Common Stocks ONOAP ON Stock Valuation + 9. Market Efficiency and Behavioral Finance + 10. Fixed-Income Securities * 11. Bond ValuationInvestments and the Investment Process (1 of 7) * The goal of investing is to grow your money to achieve long- term financial goals. — Investment: any asset into which you place funds with the expectation that it will generate positive income and/or increase its value — Portfolio: a collection of different investments — Return: reward from investing = Income from investment = Increase in value of investment + Attributes of Investments - The Structure of the Investment ProcessInvestments and the Investment Process (2 of 7) + Attributes of Investments t _ Securities or Property = Securities: investments issued by firms, governments, or other organizations that represent a financial claim on the issuer's resources = Liquidity: the ability to buy and sell quickly = Property: real assets that are typically less liquid than securities — Real property: land, buildings, and things permanently affixed to the land — Tangible personal property: such as gold, artwork, antiques, and collectibles — Direct or Indirect = Direct Investment: investor directly acquires a claim/ownership = Indirect Investment: investor indirectly acquires a claim/ownership via a professional investment managerFigure 1.1 Direct Stock Ownership by Households United States Canada Australia Japan Germany ‘Sweden United Kingdom Fintand FranceInvestments and the Investment Process (3 of 7) + Attributes of Investments — Debt, Equity, or Derivative Securities = Debt: investor lends funds in exchange for interest income and repayment of loan in future (bonds) = Equity: ongoing ownership in a business or property (common stocks) = Derivative Securities: neither debt nor equity; derive value from an underlying asset (options) — Low- or High-Risk Investments k: uncertainty surrounding the return that a particular investment will generate — Low-risk: more predictable, lower average return — High-risk: less predictable, higher average return = Diversification: holding different types of assets in an investment portfolioInvestments and the Investment Process (4 of 7) * Attributes of Investments — Short- or Long-Term Investments = Short-Term: maturities of one year or less = Long-Term: maturities of longer than one year — Domestic or Foreign = Domestic: securities issued by domestic companies = Foreign: securities issued by foreign companiesInvestments and the Investment Process (5 of 7) * The Structure of the Investment Process — Suppliers and Demanders of Funds = Households — Some need for loans (house, auto) — Ivoically net suppliers of funds = Government — Federal, state and local projects & operations — Ivoically net demanders of funds = Businesses: — Investments in production of goods and services — Ivpically net demanders of fundsInvestments and the Investment Process (6 of 7) * The Structure of the Investment Process — Bringing Together Suppliers and Demanders of Funds = Financial Institutions: organizations, such as banks, mutual funds, and insurance companies, that pool the resources of households and other savers and use those funds to make loans and to invest in securities. = Financial Markets: markets in which suppliers and demanders of funds trade financial assets, typically with the assistance of intermediaries such as securities brokers and dealersFigure 1.2 The Investment ProcessInvestments and the Investment Process (7 of 7) * The Structure of the Investment Process — Types of Investors = Individual Investors: individuals that manage their own funds to achieve their financial goals = Institutional Investors: investment professionals who earn their living by managing other people’s money — Professionals that trade large volumes of securities for individuals, as well as for businesses and governments — Includes banks, life insurance companies, mutual funds, pension funds, and hedge fundsTypes of Investments (1 of 5) * Investors have a large variety of investments to choose from to achieve their investment goals. —Short-Term Investments —Common Stock —Fixed-Income Securities —Mutual Funds —Exchange-Traded Funds —Hedge Funds —Derivatives Securities —Other Popular InvestmentsTypes of Investments (2 of 5) » Short-term Investments — Investments with lives of 1 year or less and little risk = US Treasury Bills — Provide high liquidity * Common Stock — Represents an ownership share of a corporation — Return comes through dividends and capital gains + Fixed-income Securities — Bonds are long-term debt instruments issued by corporations and governments — Convertible securities are special fixed-income securities that can be converted into stock — Preferred Stock represents an ownership claim, but has no maturity and pays a fixed dividendTypes of Investments (3 of 5) * Mutual funds — Portfolio of stocks, bonds, or other assets purchased with a pool of funds contributed by many different investors and managed by an investment company on behalf of its clients — Allow investors to construct diversified portfolios without investing a lot of money — Money market mutual funds, or money funds, are mutual funds that invest solely in short-term investments. + Exchange-traded funds (ETFs) —Like mutual funds, except ETF shares trade on exchanges, so investors can buy and sell them at any time that exchanges are open for trading + Hedge Funds — Funds that pool resources from different investors, but usually have higher minimum investments and are less regulated than mutual fundsTypes of Investments (4 of 5) ° Derivatives —Securities that derive their value from some underlying asset (e.g., a share of stock ora commodity) —Include options and futures contracts “Options: securities that give the investor an opportunity to buy or sell an underlying asset at a specified price for a limited time. =Futures: legally binding contracts stipulating that the seller will make delivery and the buyer will take delivery of an asset at a specific date and price.Types of Investments (5 of 5) * Other Popular Investments —Tax-advantaged investments: investments that provide higher after-tax returns by reducing the taxes investors must pay. «Municipal bonds —Real estate: assets such as residential homes, raw land, and income property (warehouses, office and apartment buildings, and condominiums). = Potential returns in the form of rental income, tax write-offs, and capital gains. —Tangibles: investment assets, other than real estate, that can be seen or touched. Purchased in anticipation of price increases. = Gold or other precious metals = CollectiblesTable 1.1 Major Types of Investments (1 of 2) Common stock Fixed-income securities Mutual funds Exchange- traded funds beeedle lh Lea Savings instruments with lives of 1 year or less. Used to warehouse idle funds and to provide liquidity. Equity investments that represent ‘ownership in a corporation. Investments that make fixed cash payments at regular intervals. Companies that pool money from many investors and invest funds in a diversified portfolio of securities. Investment funds, typically index funds, that are exchange listed and, therefore, exchange traded. Deposit accounts, U.S. Treasury bills (T-bills), Certificates of deposit (CDs), Commercial paper, Money market mutual funds Bonds, Convertible securities, Preferred stock Large-cap funds, Growth funds ‘Stock index funds, Bond index funds One een) Riet=ed Ch.1 Chs 6-9 Chs 10. 11 Web Ch. 16 Ch. 12 Ch. 12Table 1.1 Major Types of Investments (2 of 2) irks id id Prec) betes Hedge funds Derivative securities, Other popular investments Alternative investments, usually in pools of underlying securities, available only to sophisticated investors, such as institutions and individuals with significant assets. Securities that are neither debt nor equity but are structured to exhibit the characteristics of the underlying assets from which they derive their value. Various other investments that are widely used by investors. Long and short equities, funds of funds Options, Futures Tax-advantaged investments Real estate Tangibles Ch. 12 Ch. 14 Ch. 15 Web Ch. 17 Web Ch. 18 Web Ch. 18Making Your Investment Plan (1 of 7) Developing a well thought-out investment plan encourages you to follow a disciplined approach to managing money that will help you to avoid many common investment mistakes. A good investment plan is a reminder of goals and a strategic roadmap to guide investment decisions over a lifetime. — Writing an Investment Policy Statement — Considering personal taxes — Investing over the life cycle — Investing over the business cycle