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Topic 1 - Introduction To Investing

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113 views26 pages

Topic 1 - Introduction To Investing

JJJJ

Uploaded by

Lim Wei Han
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Topic 1 –

Introduction to investing
What is an Investment?

• Investment: any vehicle into which funds can be


placed with the expectation that it will generate
positive income and/or that its value will be
preserved or increased
• Return: the reward for owning an investment
– Current income
– Increase in value

1-2
Types of Investments

• Securities or Property
– Securities: stocks, bonds, options
– Real Property: land, buildings
– Tangible Personal Property: gold, artwork, antiques

• Direct or Indirect
– Direct: investor directly acquires a claim or ownership
– Indirect: investor owns an interest in a professionally
managed collection of securities or properties

1-3
Types of Investments (cont'd)

• Debt, Equity or Derivative Securities


– Debt: investor lends funds in exchange for interest
income and repayment of loan in future (bonds)
– Equity: represents ongoing ownership in a business or
property (common stocks)
– Derivative Securities: neither debt nor equity; derive
value from an underlying asset (options)
• Low Risk or High Risk
– Risk: chance that actual investment returns will differ
from those expected

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Types of Investments (cont'd)

• Short-Term or Long-Term
– Short-Term: mature within one year
– Long-Term: maturities of longer than a year

• Domestic or Foreign
– Domestic: Malaysia-based companies
– Foreign: foreign-based companies

Copyright © 2014 Pearson Addison-Wesley. All rights reserved. 1-5


Suppliers and Demanders of
Funds

• Government
– Federal, state and local projects & operations
– Typically net demanders of funds (or deficit units)
• Business
– Investments in production of goods and services
– Typically net demanders of funds (or deficit units)
• Individuals (or households)
– Some need for loans (house, auto)
– Typically net suppliers of funds (or surplus units)

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Figure 1.1
The Investment Process

1-7
Types of Investors

• Individual Investors
– Invest for personal financial goals
(retirement, house)
• Institutional Investors
– Paid to manage other people’s money
– Trade large volumes of securities
– Include: banks, life insurance companies,
mutual funds and pension funds

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Table 1.1
Overview of Investment Vehicles

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Steps in Investing

• Step 1: Meeting Investment Prerequisites


a. Adequately provide for necessities of life, including
funds for meeting emergency cash needs
b. Adequate protection against losses from death,
illness and disability
• Step 2: Establishing Investment Goals
Examples include:
a. Accumulating retirement funds
b. Enhancing current income
c. Saving for major expenditures
d. Sheltering income from taxes

1-10
Steps in Investing (cont'd)

• Step 3: Adopting an Investment Plan


a. Develop a written investment plan
b. Specify target date and risk tolerance for each goal
• Step 4: Evaluating Investment Vehicles
a. Assess potential return and risk
b. Chapter 4 will cover risk in detail
• Step 5: Selecting Suitable Investments
a. Research and gather information on
specific investments
b. Make investment selections

Copyright © 2014 Pearson Addison-Wesley. All rights reserved. 1-11


Steps in Investing (cont'd)

• Step 6: Constructing a Diversified Portfolio


a. Use portfolio comprised of different investments
b. Diversification can increase returns or decrease risks
(Chapter 5 will cover diversification in detail)

• Step 7: Managing the Portfolio


a. Compare actual behavior with expected performance
b. Take corrective action when needed

1-12
Investing Decisions

• Types of Income for Individuals


– Active Income: income from working (wages,
salaries, pensions)
– Portfolio Income: income from investments (interest,
dividends, capital gains)
– Passive Income: income from special investments
(rents from real estate, royalties, limited partnerships)

1-13
Investing Decisions
Over Investor Life Cycle

• Investors tend to follow different investment


philosophies 人生观 as they move through
different stages of the life cycle.
• Youth Stage
– Twenties and thirties
– Growth-oriented investments
– Higher potential growth; Higher potential risk
– Stress capital gains over current income
• What are some examples of age-appropriate
investments?
– Common stocks, options or futures

1-14
Investing Decisions
Over Investor Life Cycle (cont'd)

• Middle-Aged Consolidation Stage


– Ages 45 to 60
– Family demands & responsibilities become important
(education expenses, retirement savings)
– Move toward less risky investments to preserve capital
– Transition to higher-quality securities with lower risk
• What are some examples of age-appropriate
investments?
– Low-risk growth and income stocks, preferred stocks,
convertible stocks, high-grade bonds

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Investing Decisions
Over Investor Life Cycle (cont'd)

• Retirement Stage
– Ages 60 and older
– Preservation of capital becomes primary goal
– Highly conservative investment portfolio
– Current income needed to supplement
retirement income
• What are some examples of age-
appropriate investments?
– Low-risk income stocks and mutual funds, government
bonds, quality corporate bonds, bank certificates of deposit

1-16
Investing in Different
Economic Environments

• Market Timing: process of identifying the current


state of the economy/market and assessing the
likelihood 可能性 of its continuing on its present
course
• Three Conditions of the U.S. Economy
– Recovery or expansion
• Corporate profits are up, which helps stock prices
• Growth-oriented and speculative stocks do well
– Decline or recession
• Values and returns on common stocks tend to fall
– Change in the general direction of the economy’s
movement

1-17
Figure 1.2 Different Stages
of an Economic/Market Cycle

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The Role of Short-Term Vehicles

• Liquidity: the ability of an investment to be


converted into cash quickly and with little or
no loss in value
• Primary use is for emergency cash reserve
or to save for a specific short-term
financial goal

1-19
The Advantages and Disadvantages
of Short-Term Vehicles

• Advantages
– High liquidity
– Low risks of default

• Disadvantages
– Low levels of return
– Loss of potential purchasing power
from inflation

1-20
Table 1.2 U.S Popular Short-Term
Investments or Vehicles (Part A)

1-21
Table 1.2 U.S Popular Short-Term
Investments or Vehicles (Part B)

1-22
Table 1.3 U.S Popular Short-Term
Investments or Vehicles (Part C)

1-23
Low-Risk, Short-term
investment in Malaysia
High-yield savings account

Using a savings account is one of the easiest, lowest-risk


ways to grow your money. But it’s also one of the slowest.
Basic savings accounts can provide returns of around
0.2% to 1.5%, which is hardly enough to beat inflation.

Here’s where high-yield savings accounts come in. They


offer much higher returns – if you are eligible. 

https://www.imoney.my/articles/low-risk-investments 1-24
Low-Risk, Short-term
investment in Malaysia
Here are a few examples:

https://www.imoney.my/articles/low-risk-investments
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Investment Suitability

• Short-Term vehicles or investments are used for:


– Savings
• Emphasis on safety and security instead
of high yield
– Investment
• Yield is often as important as safety
• Used as component of diversified portfolio
• Used as temporary outlet waiting for attractive permanent
investments

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