Copyright © Cengage Learning. All rights reserved Traditional Investment Alternatives Portfolio...

Copyright © Cengage Learning. All rights reserved

Traditional Investment Alternatives

• Portfolio management– Depends on your investment goals, tolerance for

risk, financial resources available for investment• Asset allocation, the time factor, and your age

– Asset allocation—the process of spreading your money among several different types of investments to lessen risk

– The time factor—investing for the long term or the short term

– Age—growth-oriented investments versus conservative investments

20 | 1


Investment Alternatives

20 | 2


Traditional Investment Alternatives (cont’d)

• Bank accounts– Advantages—bank accounts are safe (low risk) and

have definite rates of return– Disadvantage—low risk means low investment returns

• Corporate bonds– Primarily a long-term, income-producing investment

with a value that fluctuates with market interest rates and the financial condition of the issuer

• Convertible bonds– Interest-bearing corporate bonds that can also be

exchanged for a specific number of shares of common stock

– Bond market value is equal to the underlying value of the stock

20 | 3


Bond Ratings

20 | 4

Source: Moody’s Investors Service, www.moodyseurope.com, October 27, 2008; Standard & Poor’s Corporation, Standard & Poor’s Bond Guide, September 2008.



• Government bonds– Considered risk free; pay low interest

– Treasury bills—sold in minimum units of $1,000; short maturities

– Treasury notes—issued in $1,000 units with maturity of 1 to 10 years

– Treasury bonds—issued in minimum units of $1,000 with maturities from 10 to 30 years

– Savings bonds—(EE bonds) purchased for ½ their maturity value

– Municipal bonds—issued by a state or local government; may be exempt from federal taxes

20 | 5



• Common stock– Dividend income

• Stock dividend—a dividend in the form of additional stock• Dividend payments—cash payments as the result of a

distribution of the company’s profits

– Increase in dollar value• Capital gain—the difference between a security’s purchase price

and its selling price• Market value—the price of one share of a stock at a particular

time

– Stock splits• A division of each outstanding share of a corporation’s stock into

a greater number of shares• Reduces the stock price to a price range that management feels

is attractive for the stock

20 | 6


Sample Common Stock Transaction

20 | 7

Source: Price data and dividend amounts were taken from the Yahoo Finance website, http://finance.yahoo.com, accessed

October 26, 2008.



• Preferred stock– Stock in a corporation that has a claim on the

dividends that supersedes common stock

– Cumulative preferred stock• Stockholders have priority claim to full payment of all

omitted dividends and corporate assets

– Convertible preferred stock• Stock that pays dividends and can also be

exchanged for a fixed number of shares of common stock

20 | 8



• Mutual funds– A professionally managed investment vehicle that combines

and invests the funds of many individual investors– Closed-end funds

• Funds with a fixed number of shares

– Open-end funds• Funds with an unlimited number of shares

– Net asset value (NAV)

Net asset value Value of the fund’s portfolio – LiabilitiesNumber of shares outstanding

=

• Current market value of a mutual fund’s portfolio minus the mutual fund’s liabilities and divided by the number of outstanding shares

20 | 9



• Mutual funds (cont’d)– Load funds

• Investors pay sales and purchase fees every time they purchase shares

– No-load funds• No sales or purchase fees are charged

– Yearly management fee– Managed funds

• Professional fund manager chooses securities in the fund

– Index funds• Managers buy stocks or bonds contained in an index

(such as Standard & Poor’s 500)

– Family of funds• A group of mutual funds managed by one investment

company

20 | 10



• Types of mutual fund investments– Aggressive growth stock funds

– Global stock funds

– Growth stock funds

– High-yield (junk) bond funds

– Income stock funds

– Index funds

– Long-term U.S. bond funds

– Sector stock funds

– Small-cap stock funds

20 | 11



• Real estate– Advantage

• One of the best hedges against inflation

– Disadvantages• Risk of the property losing of value due to poor

location• Buyers may be difficult to locate• Real estate market may be in decline at time of

sale• Taxes, mortgage interest, and Installment

payments can be a heavy burden

20 | 12


Real Estate Checklist

20 | 13

Copyright © Cengage Learning. All rights reserved Traditional Investment Alternatives Portfolio...

Documents

Transcript of Copyright © Cengage Learning. All rights reserved Traditional Investment Alternatives Portfolio...