Copyright © 2009–2011 National Academy Foundation. All rights reserved. AOF Principles of Finance Unit 3, Lesson 10 Investment Instruments

When you purchase stock you own a piece of the company Many companies offer both common and preferred stock. There are many different types of stock investments. A stock’s value can change at any moment. If you had money to invest, what type of company would you invest in?

The first time a company issues stock it offers an initial public offering, or IPO When a stock first becomes available it is considered a primary market trade. Secondary markets allow investors to purchase securities from other investors. The New York Stock Exchange is considered a secondary market. Can you think of other securities exchanges that would be considered secondary markets?

Bonds are loans that investors make to corporations or the government Corporate BondsUS Treasury BondsMunicipal Bonds Debenture bonds are backed by faith in the company and its reputation. Mortgage bonds are backed by the company’s assets. Convertible bonds allow investors to trade their bonds for common stock. T- bills are short- term debt securities with maturity dates from 4 to 26 weeks. T-notes provide government funding with maturity dates of 2 to 30 years. Series EE savings bonds are offered by the government. General obligation bonds (GO bonds) are backed by the government and interest is paid out of tax revenues. Revenue bonds are paid from the specific fees that are collected by the project that it is financing (bridge tolls, etc.).

Mutual funds pool everyone’s money together A mutual fund company receives money from people who want diversified holdings. The company pools their money to create greater buying power. The mutual fund company invests clients’ money into a collection of stocks, bonds, and/or other securities. Discuss some of the benefits of “pooling” money.

Exchange-traded funds are hybrid investment instruments Exchange-traded funds (ETFs) are part stock and part mutual fund. ETFs are categorized by their investment target. ETFs help to diversify an investor’s portfolio. How are ETFs similar to mutual funds? How are ETFs similar to stocks?

What will something be worth in the future? Options give an investor the right, but not the obligation, to buy securities at a fixed date. Futures require investors to purchase securities at a fixed date. Annuities are offered by insurance companies and are considered tax- deferred retirement savings plans.

Alternative investment options are available Hedge funds use high risk investment strategies in an attempt to enhance returns. Real estate investment trusts allow you to invest in real estate that you will never live in. Private equity investments generally involve an investment of capital into a new company.