Transcript Investing Basics

Investing Basics
By: Michael Alfaro & Wellington Rodriguez
Our Objective Today is to…
 Identify your investment needs
 See what’s out there
 Recognize the risks
 Understand the fees
 Reap the rewards
 Diversify your asset pool
Thinking Like an Investor
 Dale Carnegie
Take a chance! All life is a chance. The man who goes the
furthest is generally the one who is willing to do and dare.
 Russian Proverb:
He who doesn’t risk never gets to drink champagne.
 Oscar Wilde:
When I was young I thought that money was the most
important thing in life; now that I am old I know that it is.
I don’t like risk…
 Well that’s too bad!
 Risk is a fact of life
 No risk= a big risk
 Limit your returns
An Introduction to Risk
This is Boring
So what is this Risky Business?
 There are multiple
definitions for risk
 Standard deviation
 Opportunity Cost
 Bad outcome
 Charlie Sheen
What we really care
about is downside risk!
Financial Products: Treasuries
T-Bills, T-Notes, T-Bonds,
and TIPS
 Bills are 4 weeks to 52 weeks
in maturity
 Notes are for 2-10 years
 Bonds are for 30 years
 TIPS range from 5 years to
30 years in maturity
Financial Products: Treasuries
Treasury Bill
Characteristics
 Bills are zero coupon bonds
 Considered to be risk-free
 Historically have returned
3.7% from 1926-2005
 Highly liquid, practically
cash
Treasury Bill
Conventions
 Quoted in terms of
discount yield
 Minimum Investment $100
 Exempt from state and
local taxes, but not federal
Maturity
Auction Date
4-week
Tuesdays
13-week
Mondays
26-week
Mondays
52-week
Every 4 weeks
Financial Products: Treasuries
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Treasury Bond/Notes
Characteristics
Pay interest semi-annually
When it matures the owner is
paid the face value
Trade of increments of $100
Can be held to maturity or
sold prior to maturity
Historical return for bonds
5.5% and 5.3% for notes
from 1926-2005
How can I buy some
Treasuries?
From a broker
From your bank
From Treasurydirect.gov
Ok, so what’s the catch?
 Low risk means low return
 Price risk
 Inflation risk
 Interest rate risk
Financial Products: Bonds
•Bonds are known as fixed-income
investments
•They traditionally pay a fixed coupon
payment
•They come in different flavors such as
high-yield, corporate, and municipal.
•Most bonds pay interest semiannually
•Have historically returned 5.9% from
1926-2005 for corporates
Advantages of Bonds over Stocks to
Investors
• Safety
• Reliable income
• Potential for capital gains
• Diversification
• Tax advantages
Risks of Bonds
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Bonds are generally less
risky than stocks, but they
do suffer from several types
of risk.
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NOTHING is risk free:
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Credit risk
Reinvestment risk
Purchasing power risk
Call risk
Liquidity risk
Foreign exchange risk
Bond risk
Bonds prices and interest rates
 An interest rate is the price a
borrower pays for using someone
else's money.
 When market interest rates rise, the
prices of existing bonds in the
market fall and vice versa.
 Investors are willing to pay more
for a bond that has higher coupon
payments.
 This leads to bonds selling at a
premium (over par, > $1,000) or
discount (under par, < $1,000)
Financial Products: Stocks
Common Shares
 Represents ownership
rights
 Returns achieved through
dividends and capital gains
 Have historically returned
10.4% from 1926-2005
Preferred Shares
 Hybrid equity/bond
instrument
 No voting rights
 Dividends can be
suspended
Financial Products: Common Stocks
Benefits
Risks
 High Reward
 High Volatility
 Very liquid
 Systematic risk
 Reduce your tax liability
 Unsystematic risk
 Different flavors
 Last during liquidation
Financial Products: Stocks
Income Portion
 Dividend paying stocks
 Master Limited
Partnerships (MLP)
 Real Estate Investment
Trusts (REITs)
Man Chasing Yield
Growth Portion
 Make money through
capital appreciation
 Known as growth
companies
Financial Products: Stocks
Taxation and Fees
 Short-term capital gains: Regular tax-bracket
 Long-term capital gains: 15%
 Broker Commissions:
 Flat fee trading: ThinkorSwim $9.95 per trade
 Per share commission: ThinkorSwim $0.015 per share
 OTC Pinks: ThinkorSwim $9.99
Financial Products: Mutual Funds & ETFs
Mutual Funds
 An Investment pool used to
buy financial instruments
 There are two types:
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 Open-ended
 Closed-ended
 They have a Net Asset Value
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 Can be actively or passively
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managed
ETFs
Investment Fund that
tracks an index
Trade on Exchanges just
like closed-ended Mutual
Funds
Can be leveraged
Can track virtually
anything
Mutual Fund Process
Financial Products: ETFs
Advantages
Disadvantages
 Great tax advantages
 Price risk
 No minimum investment
 Dividend Distribution
 Very liquid
 Commissions
 Great way to diversify at a
low expense
 Alter risk-reward style
Financial Products: Mutual Funds
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Advantages
Prices are consistent
No commissions for trades
Dividend reinvestment
Diversification
Disadvantages
 Required minimum
investments
 Front-end, back-end,
management, and 12b-1
fees
 May not match your
investment style
Asset Allocation
Diversification
Investor’s Characteristics
 Objectives
 Risk tolerance
 Time horizon
 Capital amount
 Liquidity needs
Objectives
 Each investor has different goals:
 Retirement
 Buy a new house
 Vacations
 College of his/her kids
 It is important to:
 Prioritize
 Compromise
Risk
 What would you prefer?
 Earn a 2% return with inflation at 6%
 Lose 1% with inflation at 2%
Risk Tolerance
Time Horizon
• Two major risks
– Inflation
– Volatility
Interest-Generating
Investments
Equity Investments
Advantage
Less volatility and stable
principal value
Long- term real capital
growth
Disadvantage
Inflation susceptibility
High Volatility
Appropriate for
Short time horizons
Long time horizons
Types of Investors
 Conservative
 Average
 Aggressive
Deciding Investment Portfolio
 Asset Classes
 Long-term percentage of each class
 Ranges that can be modified (Exploit Opportunities)
 Market Timing
 Securities within the classes
 Passive (Indexes)
 Active (Notion of superior skills)
Types Of Portfolios