Chapter 2 - Learning Objectives Dont sell yourself short...

2-1
Learning Objectives
Don’t sell yourself short. Instead, learn about these key
investment subjects:
1. The importance of an investment policy statement.
2. The various types of securities brokers and brokerage
accounts.
3. How to calculate initial and maintenance margin.
4. The workings of short sales.

2-2
Investment Overview
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Fundamental Question: Why invest at all?
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We invest today to have more tomorrow.
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Investment is simply deferred consumption.
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We choose to wait because we want more to spend
later.
•
Investors have their own investment objectives and strategies
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The Investment Policy Statement (IPS)
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Designed to reflect your objectives and strategies
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Two parts
•
Objectives
•
Constraints

2-3
Objectives: Risk and Return
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In formulating investment objectives, the individual must
balance return objectives with risk tolerance.
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Investors must think about risk and return.
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Investors must think about how much risk they can handle.
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Your risk tolerance is affected by
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Your ability to take risk
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Your willingness to take risk

2-4
Investor Constraints
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Resources. What is the minimum sum needed? What are the
associated costs?
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Horizon. When do you need the money?
•
Liquidity. How high is the possibility that you need to sell the asset
quickly?
•
Taxes. Which tax bracket are you in?
•
Special circumstances . Does your company provide any incentive?
What are your regulatory and legal restrictions?

2-5
Investment Strategies and Policies
•
Investment management . Should you manage your investments
yourself?
•
Market timing. Should you try to buy and sell in anticipation of the
future direction of the market?
•
Asset allocation. How should you distribute your investment funds
across the different classes of assets?
•
Security selection. Within each class, which specific securities
should you buy?

2-6
Choosing a Broker/Advisor, I.
•
Brokers are now divided into three groups:
1.
full-service brokers
2.
discount brokers
3.
deep-discount brokers
•
These three groups can be distinguished by the level of service
provided, as well as the level of commissions charged.
•
As the brokerage industry becomes more competitive, the
differences among broker types continues to blur.

2-7
Choosing a Broker/Advisor, II.
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Another important change is the rapid growth of online brokers , also
known as e-brokers or cyberbrokers .
•
Online investing has really changed the brokerage industry.
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slashing brokerage commissions
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providing investment information
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Customers place buy and sell orders over the Internet

2-8
Security Investors Protection Corporation
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Security Investors Protection Corporation (SIPC) : Insurance fund
covering investors’ brokerage accounts when member firms go
bankrupt or experience financial difficulties.