06 - Lecture 6 Investing in Securities BM Ch 5 7 8 TJHM Ch...

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Investing in Securities BM Ch 5, 7, 8; TJHM Ch 7; CCH Ch 9; Day et al Ch 18 Lecture 6 ` Not all purchases of assets regarded as ‘investing’ ` Investing – perspective generally medium to long term; investor expects relatively stable & predictable returns ` Speculating – perspective generally short term; viewed as a purchase or sale of securities with volatile & less predictable returns. More risky activity than investing. 2 ` New investors with limited funds usually advised to stick to basic investment choices: cash, fixed interest, shares, managed investments probably best to aim for reliable returns rather than spectacular ones ` A reasonable return with reduced risk can usually be achieved with a combination of investments (i.e. diversification) 3
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` Peace of mind wealth – day to day expenses, emergency funds, short-term goals ` Lifestyle wealth – medium to long-term goals prior to retirement ` Retirement wealth – funds required to finance retirement 4 ` Growth assets – have the ability to grow over time, building capital value (shares, property) Profits partly reinvested so company grows Increased rental income due to increased demand Both can increase in value over time; trade-off is more risk ` Defensive assets – trade off higher potential returns for increased security (fixed interest, cash investments) Generally not capable of achieving higher long- term returns 5 ` Financial securities are financial claims, or financial instruments ` Great variety. Some are marketable, some not ` Generally the longer the period and less secure the lender, the higher the interest rate ` Issuer not always required to buy back the instrument until maturity Investor generally holds to maturity or sells via secondary market 6
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` One classification is: Securities with variable returns (shares) Cash and fixed interest securities (bonds) Securities primarily designed for hedging or speculative purposes (derivatives) ` Another classification: Length of loan period (ST, MT, LT) Interest payment (interest only, regular) Type of issuer (government, corporation) Security which backs the debt (secured, unsecured) 7 ` “At call” means money back on demand ` Cheque or savings account with bank, building society, credit union ` Low risk, but inflation & tax can mean ‘real’ returns can be negative ` No capital growth ` All interest is taxed as income 8 ` Comprise securities with maturities of one year or less (simple interest) bank accepted bills, promissory notes, certificates of deposit & financial futures ` Carry little or no risk. Often used to warehouse funds (i.e. temporary investment) to generate returns while suitable LT investments are found ` Conservative investors may have all or most of their money invested here as primary investment (cash management trusts) 9
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` Bank products, where deposits are made for fixed time period (one to three years) ` Investment risk is very low ` No capital growth ` All interest is taxed as income ` Purchaser faces interest rate risk, as well as reinvestment risk 10 `
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