Vocabulary - Investment Planning Assignment

Assignment 1. Vocabulary - Investment planning What does it mean? Description This is a document that is prepared to help in creating a strategy for your investment to be distributed in the investment vehicles that suit your needs. Term Investment plan This is a statement that helps you in identifying how you can cut down some expenses to save money to invest. Capital accumulation plan This term describes the process whereby you and your broker present their side of the dispute before a panel who helps in resolving the dispute. Arbitration This corporation’s responsibility is to provide congressional oversight, insuring that customers’ accounts remain safe if brokerage firms fail. Securities Investors Protection Corporation (SIPC) This phrase is used to describe an investor who buys and sells stocks and other securities throughout the day trying to benefit from fluctuations during or within the trading day. Day trader 2. Attachment 3. Choosing the appropriate investment vehicle What are the different ways you can invest? It is important to define your investment goals because it will help you in creating an investment plan. Your investment plan specifies where your capital will be invested and what investment vehicles you will use. To create an investment plan that will help in achieving your goals, it is important to understand the different ways you can invest. Description Term Shares of ownership in the assets and earnings of a business corporation. Interest-bearing, negotiable certificates of long-term debt issued by a corporation that can be exchanged for common stock in the issuing company. An investment company that combines the funds of investors who have purchased shares of ownership in it and then reinvests that money in a diversified portfolio of stocks and issued by other corporations or governments. An investment in this can yield returns in the form of rents, capital gains, and certain tax benefits. An investment that has some characteristics of both a stock and a bond. Common stock Convertible bonds Mutual funds Real estate Preferred stock Andrew is an inexperienced investor with a relatively small amount of capital that he would like to invest in a wide variety of securities. A mutual fund is his best investment option because of the diversification it offers to smaller investors and bigger investors alike. Beth is a slightly more confident investor than Andrew. She thinks that the technology sector is going to perform particularly well in the stock market in the coming months. Consequently, she chooses to buy shares of a particular technology-centered exchange traded fund because, like Andrew’s purchase, this option also offers diversification, but it tends to be concentrated in a certain industry. 4. Securities markets Understanding Securities Markets All the investment vehicles that you can use in your investment plan are traded in the securities markets in the form of stocks, bonds, and other financial instruments. There are physical places such as the NYSE (New York Stock Exchange) or the electronic networks such as NASDAQ (National Association of Securities Dealers Automated Quotations) where investors trade these securities. Securities markets can be divided into primary and secondary markets. When securities are bought and sold by investors who did not originally purchase the issued security, the transactions take place in the secondary market. Within the arena of security trading, the secondary market plays an extremely important role. The secondary market can be divided into the broker market and dealer market.     Trades take place on a physical trading floor. – Broker Ask and bid prices are posted electronically. – Dealer The NYSE and NYSE/MKT are a part of this market. – Broker This market involves trades in securities for big-name companies. – Broker & Dealer 5. Features of different types of brokers How do transactions work in the securities markets? Transactions involving buying and selling securities are conducted through stockbrokers, who are also known as account executives or financial consultants. When choosing a stockbroker, investors have three primary options: full-service brokers, discount brokers, and online brokers. Brokers who charge low overheads, low fees and commissions but offer no additional services other than executing trade transactions are called discount brokers . Brokers who offer services at low commissions and allow investors to execute trades themselves electronically are called online brokers . While some brokers still operate exclusively in person or online, the distinction between the three types has become increasingly blurred over the years. The chart that follows shows fees imposed by different discount brokers; as you can see, all of them offer both online and broker-assisted trades. Broker ShareCo AmeriTrading TradeBuilder ShareFunder eExchange Commission for Online Trades Market Order Price $7.95 $9.99 $7.95 $9.95 $9.99 Limit Order Price $7.95 $9.99 $7.95 $9.95 $9.99 Commission for Broker-Assisted Trades Market Order Price $20.00 $44.99 $32.95 $19.95 $54.99 Limit Order Price $20.00 $44.99 $32.95 $19.95 $54.99 Because the fees charged for broker-assisted trades can vary considerably shopping around before choosing a broker. , it is worth Suppose you are a serious investor with large amounts of capital and prefer to deal directly with an in-person stockbroker. Which of the following statements regarding your options are true? Checkallthatapply. Full service broker is a better option than online brokers for those who want services beyond simply executing trades. You can reduce the commissions you pay to brokers by purchasing “odd lots.” Active traders can generally negotiate reduced fees. Choosing a discount broker can save 30–80% of the commissions charged by fullservice brokers. If you want a full-service broker, it’s wise to choose someone you can get to know socially. You can reduce the commissions you pay to brokers by purchasing “odd lots.” Active traders can generally negotiate reduced fees. Choosing a discount broker can save 30–80% of the commissions charged by fullservice brokers. 6. Types of orders Recognizing Different Types of Orders As an investor, based on your goals and investment objectives you create an investment plan. You choose your stockbroker that suits your needs, but when it is time to actually buy or sell securities in the securities market, it is important to understand how your transactions will be executed. Based on your expectations regarding a specific transaction you have the option to select from three different order types: market order, limit order, or a stop-loss order. Dina is an experienced investor who enjoys researching and investing in individual stocks that appear promising. On August 12 she is reviewing the trading information for a new smart-phone company MobileRover, presented in the following table. Stock Information for MobileRover Trade Time: 1:02 PM EDT Last Trade: 66.62 Open: 63.89 Prev Close: 62.00 Day’s 61.71–68.63 Change: +4.62 (0.07) Range: She is extremely confident in the future performance of MobileRover and wants to buy 100 shares of stock regardless of the price, therefore she places a market order at 1:02 PM EDT. She knows that the execution price for this type of order could vary substantially from the last-trade price at the time she places the order. Her broker is able to execute the trade within minutes, obtaining her 100 shares at $66.98 each. Suppose the price of the stock rises for the rest of the day, eventually closing at a price of $70.12. In this case, the total value of the shares she purchased rose by $314 between the time of her purchase and the end of the day. If she had instead placed a limit order at 1:02 PM to buy the same number of shares only if the price fell to $63.62, she would have not purchased any shares by the end of the day instead. Charles is another investor who currently owns shares of MobileRover stock. He would like to place a particular kind of limit order, in which the order is not filled unless a certain quantity is available at the specified price. This type of order is known as an all-or-none order . 7. Understanding limit and stop orders Understanding How Trade Orders Work Different trade orders such as market orders, limit orders, and stop-loss orders are created to give investors the liberty to manage their securities based on their expectations out of the investments. Albert purchased 150 shares of an exchange traded fund (ETF) specializing in energy for $90.24 per share. Albert is comfortable holding on to his shares in the face of minor fluctuations, but does not want to risk the share value falling far below his purchase price. He therefore considers placing a stop order so that all 150 shares would be sold if the share price falls to $88. The following graphs depict two hypothetical paths for the share value of Albert’s ETF over the course of the next six months. Complete the sentences below each graph to describe what would happen if Albert placed the preceding order under each of the two circumstances. In the preceding scenario, his order would be activated after 2 months best available price ; thus the order would limit his losses and executed at the over the six month period. In the preceding scenario, his order would be activated after 3 months and executed at the best available price ; thus the order would prevent him from earning large gains over the six month period. True or False: If instead the stock price had risen steadily and never fallen below $88, placing the order would have acted as a safeguard but would have had no real effect. True 8. Understanding the major market indexes Understanding How Indexes Report Data The securities market is tracked by a wide variety of indexes, each of which focuses on a different group of stocks. The following table lists stock quotes from four of the most widely cited indexes: the Dow Jones Industrial Average (DJIA), the Nasdaq-100, the S&P 500, and the NYSE Index, where in interpreting these numbers, it is most important to consider how they have changed over a period of time . Index Quotes S&P 500 DJIA Nasdaq-100 28,979.78 (+377.13) 8,544.87 (+119.96) 3,076.19 (+28.26) NYSE Index 13,498.82 (+120.77) True or False: Based on the numbers not in parentheses in the previous table, you can tell that NYSE Index stocks were performing roughly one-half as well as DJIA stocks at the time this data was collected. False Complete the following table by indicating the name of the index being described, as well as the number of stocks each index tracks. Description All stocks listed on the “big board” Index NYSEIndex Size Over 2,000 stocks All large NYSE stocks, as well as major AMEX and Nasdaq stocks S&P 500 500 The biggest (non-financial) firms traded on Nasdaq Primarily stocks from the NYSE, but a few Nasdaq stocks as well Nasdaq100 DJIA 100 stocks 30 stocks stocks 9. Reading and analyzing stock quotes Interpreting Stock Market Data The following table displays hypothetical stock quotations. Use the information in the table to answer the questions that follow. Company Ticker High MarkMin Doxxon SWElec MM DX SWE 123.17 49.58 373.91 Listed Stock Quotes Low Last Net Price* Change** 89.58 111.97 4.08 32.42 38.14 2.55 243.0 311.59 -1.00 4 YTD %*** 1.56 7.09 4.92 Div. Yield 0 6.1 1.8 P/E Ratio 39 9 26 *Last price for the day **Net change in price from previous day ***Year-to-date percentage change in stock price Of the three stocks listed, a retiree who lives partially off of investment income would be best off holding Doxxon because of its high dividend yield . Explanation: For those who depend on their stock investments for a portion of their current income, it is beneficial to hold stocks with high dividend yields. Of the stocks listed, Doxxon has the highest dividend yield, at 6.1%. You can calculate that MarkMin had per-share earnings for the most recent 12-month period of $2.87 . Explanation: The P/E ratio reflects the current market price of a share divided by the per-share earnings for the most recent 12-month period. Because you are given both the P/E ratio and the current market price of MarkMin stock, you can rearrange the following equation to find the per-share earnings: P/E Ratio = Current Market Price PerShare Earnings Per-Share Earning = Current Market Price P/E Ratio s = $111.97/39 = $2.87 If you had purchased 100 shares of SWElec stock yesterday at the last price of the day, you would have suffered a loss of -$100.00 if you sold all 100 shares at the last price today. Explanation: The difference between the last price of a share today and the last price of the previous day is given by the final column labeled “Net Change.” At the end of yesterday, the price-pershare was $1.00 higher than it was at the end of today, meaning you would have lost $1.00 on each share if you had sold them at the end of today. Your total loss would therefore have been (100 x $1.00) = -$100.00. 10. Asset allocation Managing Your Investment Assets Asset allocation is the decision of how you divide your investment portfolio between various assets. Typical asset categories include cash or short-term securities (Treasury bills, CDs, etc.), bonds (municipal bonds, corporate bonds, etc.), and equity funds or equities (stocks, stock mutual funds, etc.). The following table illustrates several model portfolios that you can use as a basis for your own investment plan, depending on such factors as your time horizon, risk tolerance, and investment philosophy. Model Portfolios and Time Horizons Risk Tolerance/Investment Philosophy 0–5 Years 6–10 Years High Risk/Aggressive 10% Cash 20% Bonds 30% Bonds 80% Equities 60% Equities Moderate Risk/Moderate 20% Cash 10% Cash 40% Bonds 30% Bonds 40% Equities 60% Equities Low Risk/Conservative 35% Cash 40% Bonds 20% Cash 40% Bonds 11+ Years 100% Equities 20% Bonds 80% Equities 10% Cash 30% Bonds Risk Tolerance/Investment Philosophy 0–5 Years 25% Equities 6–10 Years 40% Equities 11+ Years 60% Equities Suppose that Robyn is beginning a long-term investment plan for her retirement savings. She plans to retire at least 25 years in the future, so she has plenty of time for her investments to grow. Because Robyn is investing for the long term, she has a high risk tolerance and would like to grow her investments as aggressively as possible. Robyn is an aggressive investor with a time horizon of 11 or more years . Using the model portfolios provided, what is the ideal asset allocation for Robyn’s portfolio, based on her time horizon and investment philosophy? Ifnofundsarerecommendedtobeallocatedtowardanasset,enter“0”intothenumericentry boxforthatasset. Recommended asset allocation for Robyn’s portfolio: Cash: Bonds: Equities : 0 % 0 % 100 % In general, if you have a longer time horizon and a higher risk tolerance, then a higher percentage of your portfolio should be in equities . If you are investing for a shorter time horizon, or if you have a more conservative investment philosophy, then you should invest a greater percentage of your portfolio in bonds . 11. Portfolio rebalancing Rebalancing Your Portfolio Portfolio rebalancing is the process of bringing your different asset classes (stocks, bonds, and cash) back into proper relationship following a significant change in the value of one or more of them. You should monitor your investments and normally rebalance your portfolio about once a year to return your investments to their proper balance when they no longer conform to your investment plan. Suppose that you begin an investment program with a portfolio having an asset allocation of 30% bonds, 60% equities, and 10% cash investments. One year later, you find that some investments have performed better than others. After a year, the portfolio now consists of 40% bonds, 40% equities, and 20% cash investments. To rebalance this portfolio back to its original asset allocation, you should sell some of your bonds and cash investments and use the proceeds to purchase additional equities . Suppose that you begin an investment program with a portfolio having an asset allocation of 40% bonds, 25% equities, and 35% cash investments. One year later, you find that some investments have performed better than others. After a year, the portfolio now consists of 40% bonds, 40% equities, and 20% cash investments. To rebalance this portfolio back to its original asset allocation, you should sell some of your equities and use the proceeds to purchase additional cash investments . Colin thinks he can reasonably expect to buy a house in five years. He would like to have accumulated a $30,000 down payment (or a 20% down payment) on a $150,000 home. If Colin thinks he can earn 4% per year on his investments, how much must he invest annually (rounded to the nearest whole dollar) to reach his goal? Future value of annuity=Annuity[(1+rate)^time period-1]/rate 30,000=Annuity*[(1.04)^5-1]/0.04 30,000=Annuity*[1.2166529-1]/0.04 30,000=Annuity*5.4163225 Annuity=30,000/5.4163225 =$5539(Approx)