ACFI702XIECh.

Investments Analysis

Chapter 1

Professor W. Xie

Investments Analysis

Chapter 1

Professor W. Xie

CHAPTER 1
THE INVESTMENT ENVIRONMENT
ACFI702 Spring 2014 Professor W. Xie Monday Jan. 27

Learning Goals
1. Understand the term investment and factors used to differentiate types of investments. 2. Describe the investment process and types of investors. 3. Discuss the principal types of investments. 4. Steps in Investing (Stocktrak group discussion), tax consideration and investing over life cycle. 5. Common types of short-term investment. 6. Describe the role of investments in some of the main finance related careers.

Investments Analysis

Chapter 1

Professor W. Xie

Investments Analysis

Chapter 1

Professor W. Xie

Key terms
Investment: any asset into which funds can be placed

Types of investments
Securities or Property Securities: stocks, bonds, options Real Property: land, buildings Tangible Personal Property: gold, artwork, antiques,

with the expectation that it will generate positive income and/or preserve or increase its value.
Return: the reward for owning an investment Income from investment Increase in value of investment

collectables
Direct or Indirect Direct: investor directly owns a claim on a security or

property. (Stocks, real property, savings bonds)

Indirect: investor owns an interest in a professionally

managed collection of securities or properties (mutual funds, pension funds)

ACFI702XIECh.1

Investments Analysis

Chapter 1

Professor W. Xie

Investments Analysis

Chapter 1

Professor W. Xie

Types of investments
Debt, Equity or Derivative Securities Debt: investor lends funds in exchange for interest

Types of investments
Short-Term or Long-Term Short-Term: mature within one year Long-Term: maturities of longer than a year

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: the uncertainty surrounding the return that a

Domestic or Foreign Domestic: U.S.-based companies Foreign: foreign-based companies

particular investment will generate

Investments Analysis

Chapter 1

Professor W. Xie

Investments Analysis

Chapter 1

Professor W. Xie

Structure of investment process: players

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

Structure of investment process

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Investments Analysis

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Professor W. Xie

Investments Analysis

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Types of investors
Individual Investors Invest for personal financial goals

Steps of investing
Discuss with your Stocktrak team members of the following six steps (starting from Step 2 of the textbook): 1. Establishing Investment Goals 2. Adopting an Investment Plan 3. Evaluating Investment Vehicles 4. Selecting Suitable Investments

(retirement, college, house, etc.)

Institutional Investors Paid to manage other peoples money Trade large volumes of securities Include: banks, life insurance companies, mutual funds,

Research and gather information on specific investments

pension funds

5. Constructing a Diversified Portfolio Use portfolio comprised of different investments Diversification can increase returns or decrease risks 6. Managing the Portfolio Compare actual behavior with expected performance Take corrective action when needed

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Investment vehicles
Short-term investments

Short-Term Investments
Liquidity: the ability of an investment to be converted into

Bank certificates of deposit, Treasury bills, commercial

paper, etc. Mostly for liquidity needs

Fixed Income Securities Bonds: treasury bonds, corporate bonds, etc. Preferred stock Common stock its a partial ownership of an actual firm It brings dividend income and capital gains

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.
Advantages High liquidity Low risks of default Disadvantages Low levels of return Loss of potential purchasing power from inflation

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Popular Short-Term Investments

Common Stock
Dividends: normally paid quarterly Capital gains: difference between selling price and buying

price (could be negativecapital loss!)

Example: purchased one share of Walmart at $45, held

for two quarters (dividends were $0.45 and $0.50), and sold at $55. Dividend income: $0.45+$0.50=$0.95 Capital gains: $55-$45=$10 (positive, good!) What about total return (in dollars and in percentage)? Check out Bonus HW0.

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Other Investment vehicles

Mutual funds: diversified and professionally managed Hedge funds: small number of wealthy investors pool

Careers in finance
Commercial banking make deposits, provide loans, trade credit, leasing, etc. work with individuals, corporate and institutional clients;

large amount of money to conduct high-risk investment

Derivative securities: payoff depends on (or is derived

require knowledge of investment environment

employs more people than any other part of financial

services industry
Corporate finance main goal: maximize firm value requires broad understanding of functional areas of a

from) the price of another (underlying) asset.

Options Futures

business
Other popular vehicles Real estate (direct and tangible) Other tangibles: precious metal, collectibles, etc.
manage cash and short-term investments raise and manage long-term financing sources (debt and

equity)
evaluate and undertake long-term investment projects

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Careers in finance
Financial planning work with individuals to formulate investment plans for

Careers in finance
Investment banking assists organizations in raising capital (such as issuing

reaching specific goals (such as retirement) able to clarify goals, assess risk and develop strategic plans that adapt to investment environment professionals in this area often acquire the Certified Financial Planner (CFP) certification
Insurance risk management for individuals and businesses asset management require actuarial knowledge and understanding of investment

stock and corporate bonds) The so-called Wall Street jobs

Investment management professionally managing money for clients passive management vs. active management Fund managers: analysis, selection, monitoring practitioners often have the Certified Financial Analyst

(CFA) certification