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Transcript of by by Financial Markets The place where entities with surplus funds and those requiring funds...
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Financial MarketsFinancial Markets
The place where entities with surplus funds and those requiring funds transact business. The financial market comprises:
Money MarketBond MarketStock Market
Money MarketMoney Market
The market place where debt instruments that matures within one year are purchased and sold.
Money Market InstrumentsMoney Market Instruments
Certificate of DepositsMoney Market FundsRepurchase Agreements (Repos)Commercial PaperTreasury Bills
GOJ Treasury BillGOJ Treasury Bill
BOJ Repurchase AgreementBOJ Repurchase Agreement
Bond MarketBond Market
It is the market-place for the purchase and sale of debt instruments that expires in over one year.
Bond Market InstrumentsBond Market Instruments
A bond is a medium to long term loan that pays interest during a fixed term. Types of bonds are:
Government BondsCorporate Bonds
GOJ VR LRSGOJ VR LRS
GOJ FR LRSGOJ FR LRS
GOJ Investment DebentureGOJ Investment Debenture
Stock Exchange or Stock Stock Exchange or Stock MarketMarket
An organized marketplace where buyers and sellers are brought together to buy and sell stocks and must follow certain rules, regulations and guidelines.
Stocks/Shares Stocks/Shares
Certificates representing ownership in a corporation and the appropriate claim on the corporation's earnings and assets. There are two types of stocks:
Preferred Stocks/Shares
Common Stocks/Shares
InvestingInvestingA process of wealth accumulation
involving the purchase and sale of assets and management of the risk/ return dynamics.
Fundamental Concepts
in Investing
Fundamental Concepts
in Investing
Risk and VolatilityRisk and Volatility•Inflationary risk
•Investment or credit risk
•Interest rate risk
When considering your own risk tolerance, you should understand that investments associated with higher risk typically offer higher reward potential over time. A key factor to successful investing is to identify which types of risk you are willing to assume and which you want to mitigate.
Total ReturnTotal Return
In selecting investments based upon their expected total return, you should understand which portion is generated from income and which from growth. Usually, the greater the reliance on income, the lower the market risk but the greater the long-term purchasing power (or inflationary) risk.
Liquidity Liquidity
A "liquid" investment is one that can be readily turned into cash if you need the funds on short notice. Investments can vary greatly in their degrees of liquidity. Money Market Funds and savings accounts are very liquid; so are investments with short maturity dates such as Certificates of Deposits (CDs).
Time HorizonTime HorizonDifferent investors have different time frames in which to achieve their investment objectives. Generally, young investors with long time horizons should be able to assume greater risks because they have more time to offset any losses with the higher return potential of investments with greater risk. Older investors, however, often choose to reduce risk because they have less time to recoup losses.
DiversificationDiversification
Building a diversified portfolio, with securities spread across different investment classes, can help you avoid the risk of having all your eggs in one basket. By mixing industries and types of assets, you spread your risk. A particular market condition will have less impact if your portfolio consists of a wide assortment of securities than if you purchase only one type of security.
Tax ConsequencesTax Consequences Building a diversified portfolio, with securities spread across different investment classes, can help you avoid the risk of having all your eggs in one basket. By mixing industries and types of assets, you spread your risk. A particular market condition will have less impact if your portfolio consists of a wide assortment of securities than if you purchase only one type of security.
Dollar Cost Averaging Dollar Cost Averaging
Dollar cost averaging, the practice of committing a fixed amount of money to an investment program on a regular basis, is a popular practice with many long-term investors. By investing a set amount regularly (usually monthly or quarterly), investors are able to avoid the pitfalls of trying to time market peaks and valleys. Also, because the dollar amount of the investments is set, investors who practice dollar cost averaging are able to buy more shares of a stock or mutual fund when they are less costly and fewer shares when they are more expensive.
Value of Time
The design of your portfolio should take advantage of time and conform to your personal objectives and risk tolerance.
High - Yield
“Junk” Bonds
Common Stocks
Preferred Stocks
Mortgaged-Backed Securities
Corporate Bonds
Municipal Bonds
Government Securities
Certificates of Deposits
Treasury Bills
Money Market Funds
Passbook Accounts
THE RISK PYRAMID
Investor ProfileInvestor Profile
Speaks to the risk/return preferences of investors. The basic profiles are:
Conservative
Moderate
Aggressive
Asset AllocationAsset Allocationthe proportion of certain types of basic
investments in your portfolio -- is an important component in a total portfolio approach to investing
Developing an asset allocation strategy can help you capitalize on the unique risk and return features of different basic investment types, or asset classes, and reduce the volatility of your portfolio.
Consevative
Stocks35%
Bonds30%
Cash35%
Moderate
Bonds44%
Stocks55%
Cash1%
ASSET ALLOCATION - YOUNG INVESTOR
Aggressive
Cash0%
Bonds25%
Stocks75%
Conservative
Cash45%Stocks
30%
Bonds25%
ASSET ALLOCATION - MIDLIFE INVESTOR
Moderate
Stocks50%
Cash10%
Bonds40%
Aggressive
Bonds30%
Cash0%
Stocks70%
ASSET ALLOCATION - PRE-RETIRED INVESTOR
Conservative
Stocks25%Cash
54%
Bonds21%
Moderate
Stocks45%
Bonds36%
Cash19%
Aggressive
Stocks65%
Cash0%
Bonds35%
ASSET ALLOCATION -RETIRED INVESTOR
ConservativeStocks
30%
Bonds25%
Cash45%
Moderate
Bonds33%
Cash27%
Stocks40%
Aggressive
Cash0%
Stocks60%
Bonds40%
ASSET ALLOCATION - CONSERVATIVE INVESTOR
Young Investor
Stocks35%
Bonds30%
Cash35%
Mid Life
Cash45%Stocks
30%
Bonds25%
Pre-Retired
Stocks25%Cash
54%
Bonds21%
RetiredStocks
30%
Bonds25%
Cash45%
ASSET ALLOCATION -MODERATE INVESTORASSET ALLOCATION -MODERATE INVESTOR
Young
Bonds44%
Stocks55%
Cash1%
Mid Life
Stocks50%
Cash10%
Bonds40%
Pre-Retired
Stocks45%
Bonds36%
Cash19%
Moderate
Bonds33%
Cash27%
Stocks40%
ASSET ALLOCATION -AGGRESSIVE INVESTORASSET ALLOCATION -AGGRESSIVE INVESTOR
Young
Cash0%
Bonds25%
Stocks75%
Mid Life
Bonds30%
Cash0%
Stocks70%
Pre-Retired
Stocks65%
Cash0%
Bonds35%
Retired
Cash0%
Stocks60%
Bonds40%
THE INVESTMENT PROCESSTHE INVESTMENT PROCESS
Establish your goals.Line up the MoneyAssess your risk appetite.Allocate the money according to the
goals.Decide on your asset allocation.Find a financial advisor/mentor.Improve your financial intelligence.
Sources of Investment Information
Friends & Family
The Street
Financial Newspapers
Edward Gayle & Company