INVESTMENTS 2INVESTMENTS 2VEHICLES FOR VEHICLES FOR

CHOICECHOICE

INVESTMENTS 2INVESTMENTS 2VEHICLES FOR VEHICLES FOR

CHOICECHOICE

Dr. NeidermeyerDr. Neidermeyer

Vehicles for Choice• Equity funds• Fixed-income funds• Mutual Funds• Real Estate• Call Options• Put Options• Derivatives

• Commodities• Precious Metals• Gems• Coins• Stamps• Antiques/collectibles

Equity funds

• Common stocks representing ownership in a corporation.

Characteristics of equities

• Residual ownership in the entity

• Voting rights

Types of Equity funds

• Blue-chip funds

• Growth funds

• Income funds

• Defensive stocks

• Cyclical stocks

• Speculative stocks

Indicators of Value• EPS• Net Asset Value per

share• Price-earnings ratio• Yield

Fixed-income securities

Provide a determinable rate of return on your investment which is fixed for the period of the investment.

Characteristics of Fixed-income Securities

• Interest-rate sensitive for valuation

• Rate of return is stated

Types of fixed-income securities

• Preferred stocks• Corporate bonds• Deep-discount

bonds• Municipal bonds

– General obligation– Revenue– IDBs

• U.S. Treasury issues

• U.S. savings bonds• Certificates of

Deposit• Savings Accounts

Indicators of Value for Fixed Securities

• Stipulated interest rate

• Time period for the investment

• Probability of interest rates changes during the term of the investment

Mutual Funds

• Pooled investor resources purchasing stocks, bonds and other securities chosen under the investment criteria established by the fund and implemented by the fund manager.

Characteristics of Mutual Fund Investments

• Offer diversification to investors• May be closed or open ended • May be load or no-load• May carry additional annual fees

– 12b-1– Annual management fee

Types of Mutual Funds• Stock:

– Growth– Equity income– Global– Index– Growth/income– International– sector

• Bond:– Junk– Corporate– Government– Municipal– World

• Other– Balanced– Money market

Value Indicators for Mutual Funds

• NAV: Net Asset Value of each fund is calculated at the end of each trading day

• The total market value of fund holdings is divided by the number of outstanding shares.

Real Estate Investments

• Acquisition of land and/or buildings for commercial use.

Characteristics of Real Estate Investments

• Made in anticipation of long-term appreciation.

• Usually leveraged.

• Value and appreciation dependent on demand.

Types of Real Estate Investments

• Land

• Buildings

Indicators of Real Estate Value

• Demand for occupancy space.

• Growing population

• Reasonable interest rates

Calls and Puts

• Market instruments which provide purchase or sale discretion to the investor.

Call/Put Characteristics

• A call provides the opportunity to purchase an investment at a stated price for a defined period of time.

• A put provides the opportunity to sell an investment at a stated price for a defined period of time.

Types of Calls & Puts

• These instruments exist for both stocks and bonds. They are actively traded on the open market.

Calls & Puts Indicators of Value

• The likely change in value for the instrument during its established life.

• The overall demand for the items to which the instruments provide market access.

Derivatives

• Contracts which offer risk/price protection to the purchaser of the instrument.

Characteristics of Derivatives

• Pseudo insurance policy for the holder• This instrument is a risk-management

technique• The instrument is available for business

situations in which one party is attempting to mitigate a potential shortfall in revenue or increase in cost.

Types of Derivatives• Derivative contracts are available for a

variety of business situations: e.g. interest-rate derivatives & foreign currency derivatives

Indicators of Value for Derivatives

• The likelihood of adverse market movement in price for the event being insured.

• The greater the probability of adverse movement, the greater the cost of the derivative contract.

Commodities

• Contracts calling for the delivery of named goods or services in the future.

Characteristics of Commodity Contracts

• Written at a fixed price

• Written for a state period of time

• Includes a penalty clause for non-timely delivery of the contracted item.

Types of Commodity Contracts

• Commodity contracts can virtually be purchased for any item in our economy.

• Usual products on commodity contracts would be oil, wheat, barley, pork bellies, etc.

Indicators of Value for Commodity Contracts

• Consumer demand for the respective commodity item and the probability of a change in the supply quantity would drive the value up or down.

Precious Metals

• Extractive resources which have value to consumers and/or for industrial uses in the production of goods & services.

Characteristics of Precious Metals

• Usually available in short supply

• Subject to demand swings

• May be subject to monopoly control

Types of Precious Metals• Gold

• Silver

• Magnesium

• Copper

Indicators of Value for Precious Metals

• Demand

• Supply

• Market control

Collectibles

• Listed items which individuals may accumulate because of intrinsic value to them or assumed on the part of others.

Collectible Characteristics• Usually limited in number

• May be old

• Appeal to particular purchaser preferences

• Usually limited sources of availability

• Usually appreciating in value

Types of Collectibles• Unlimited depending on collectors’

tastes

• May be gems, coins, stamps and/antiques

• Usually evolve in composition each generation as collector tastes vary

Indicators of Collectibles’ Value

• Strictly driven by the willingness of another to place enhanced value on an item in limited supply

• Market forces and consumer preferences dictate direction of demand and thereby, value swings for these items