INVESTMENTS 2 VEHICLES FOR CHOICE Dr. 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