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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
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
Investments Analysis
Chapter 1
Professor W. Xie
Investments Analysis
Chapter 1
Professor W. Xie
ACFI702XIECh.1
Investments Analysis
Chapter 1
Professor W. Xie
Investments Analysis
Chapter 1
Professor W. Xie
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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
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
Investments Analysis
Chapter 1
Professor W. Xie
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Investments Analysis
Chapter 1
Professor W. Xie
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Investment vehicles
Short-term investments
Short-Term Investments
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.
Advantages High liquidity Low risks of default Disadvantages Low levels of return Loss of potential purchasing power from inflation
ACFI702XIECh.1
Investments Analysis
Chapter 1
Professor W. Xie
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Investments Analysis
Chapter 1
Professor W. Xie
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Common Stock
Dividends: normally paid quarterly Capital gains: difference between selling price and buying
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.
Investments Analysis
Chapter 1
Professor W. Xie
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Investments Analysis
Chapter 1
Professor W. Xie
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Careers in finance
Commercial banking make deposits, provide loans, trade credit, leasing, etc. work with individuals, corporate and institutional clients;
services industry
Corporate finance main goal: maximize firm value requires broad understanding of functional areas of a
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
ACFI702XIECh.1
Investments Analysis
Chapter 1
Professor W. Xie
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Investments Analysis
Chapter 1
Professor W. Xie
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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
(CFA) certification