Most Popular Investment for Long-Term Focus
Majority (75 percent) of U.S. individual investors are currently investing in domestic equities and 60percent in international equities. The figures are revealed on July 29, 2008 by Schroders, a global asset manager, on its semi-annual survey of U.S. individual investors. The survey also revealed that individual investors are continuing to build their portfolios and maintaining a long-term outlook with an investment time horizon of more than five years.
Stock is an instrument that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporation's assets and profits. Ownership in the company is determined by the number of shares a person owns divided by the total number of shares outstanding. Most stock also provides voting rights, which give shareholders a proportional vote in certain corporate decisions. Only a certain type of company called a corporation has stock; other types of companies such as sole proprietorships and limited partnerships do not issue stock.
Equities are generally riskier (higher variance of returns) than money market securities and bonds, but they provide higher rates of return over a long time period. Due to their risk and return profile, equities are categorized as a separate asset class commonly used in building investment portfolio mix. A number of types of equities include domestic stocks, developed market equities, emerging market equities, and Real Estate Investment Trusts.
Domestic Equities
Domestic equities are common stock held in publicly traded companies which operate primarily in the country where the investor resides. Owning the equity grants the holder the rights to any dividends or other distributions that the company makes. Equities are more risky than bonds since the bond holders have first call on the company’s assets if a bankruptcy and liquidation occurs. The equity holders can be left with nothing if a company liquidates.
Most people will subdivide the domestic equities market into more asset classes based on the size of the company (generally represented by the market capitalization) and the value/growth split. Value stocks are stocks that appear under-valued using some ratio such as price/earnings or book value to market cap. Growth stocks are companies with a higher than average rate of growth in their revenue, earnings or distributions. Thus, several combinations of size and value/growth behavior exist. There are several exchanges where these stocks trade and many indices which track the performance of equities in each particular asset class.
Developed Market Equities
These include equities of companies which operate in developed countries outside the investor’s home country; for the U.S. investor, they are primarily in Europe and several of the countries in the Pacific Rim. The economies of these countries are generally less volatile than developing countries. There are several indices for the developed markets. Morgan Stanley has one called the MSCI EAFE index.
Emerging Market Equities
This class includes stock in companies based in developing countries like Brazil, China and India. The economies of these countries can be very volatile and they generally don’t have as many investor protections through auditing and securities law as exist in developed markets.
REITs
REITs stand for Real Estate Investment Trusts. These are funds that make investments in real estate (both commercial and residential). They will generally generate higher levels of dividends since their investments will typically be paying them income from rents and leases. Since the distributions are higher, REITs behave somewhat like a hybrid between a traditional equity and a fixed income instrument. They will generally have higher expected returns and higher variance than most fixed income instruments.
Showing posts with label Investment Securities. Show all posts
Showing posts with label Investment Securities. Show all posts
7.29.2008
7.26.2008
Fixed Income Securities
A Relative Safety Investment For Rough Economy
From SmartInMoney
U.S. economic prospects are so grim as shown by recent leading economic indicators. Investors will take shelter in the relative safety of the bond market during a painful economic period. Weaken earnings during the rough economic time will cause price-earnings multiples of stocks collapse triggering stock market sell off.
Companies, municipalities, states, U.S. government, and foreign governments issue bonds, commonly referred to as fixed-income securities, to finance a variety of projects and activities.
Bonds are debt investments in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Interest on bonds is usually paid every six months (semi-annually). The annual return rate that the bond will pay is usually referred to as the yield of the bond. The entity returns the investor's principal at the maturity. Before maturity, the value of fixed-income investments can fluctuate in response to current interest and inflation rates.
Bonds are generally a less risky asset than equities (their variance of returns has been lower over time) but produce lower rates of return. Bonds are considered as a distinct asset class commonly used in investment portfolio construction because they have different risk and return characteristics from other asset classes. Some types of bonds include Treasury bonds, municipal bonds, corporate bonds, foreign bonds, asset backed securities, and mortgage backed securities.
Treasury Bonds (T-Bond) A marketable, fixed-interest debt security issued by U.S. government with a maturity of more than 10 years. Treasury bonds make interest payments semi-annually and the income that holders receive is only taxed at the federal level.
Municipal Bonds
Also known as a "muni", this is a debt security issued by a state, municipality or county to finance its capital expenditures. Municipal bonds are exempt from federal taxes and from most state and local taxes, especially if you live in the state in which the bond is issued.
Corporate Bonds
This is a debt security issued by a corporation and sold to investors. The backing for the bond is usually the payment ability of the company, which is typically money to be earned from future operations. In some cases, the company's physical assets may be used as collateral for bonds. Corporate bonds are considered higher risk than government bonds. As a result, interest rates are almost always higher, even for top-flight credit quality companies.
Foreign Bonds
Foreign countries issue bonds in their domestic market in their home currency to fund the operations of the government. Foreign bonds are regulated by the domestic market authorities. The investor is taking on a couple of risks with foreign bonds. First, the bonds are dominated in the foreign country’s currency so there is some currency risk. Secondly, changes in interest rates for that country will impact bond prices.
Asset-Backed Securities (ABS)
There are a host of fixed income securities whose payments are backed by assets. These securities generally will make periodic payments to the owner of the security. There is an asset (like loans, leases, credit card debt, a company's receivables, and royalties) which provides collateral in case there is a non-payment by the party which has entered into the payment arrangement. These securities are often offered by financial institutions which have created the security from a bunch of underlying assets which they have purchased. For investors, asset-backed securities are an alternative to investing in corporate debt.
Mortgage-Backed Securities (MBS)
A type of asset-backed security that is exclusively secured by a mortgage or collection of mortgages. These securities must also be grouped in one of the top two ratings as determined by an accredited credit rating agency, and usually pay periodic payments that are similar to coupon payments. Moreover, the mortgage must have originated from a regulated and authorized financial institution. MBS is also known as a "mortgage-related security" or a "mortgage pass through". When you invest in a mortgage-backed security you are essentially lending money to a home buyer or business. The bank that originated the mortgage acts as a middleman between the home buyer and the investment markets.
From SmartInMoney
U.S. economic prospects are so grim as shown by recent leading economic indicators. Investors will take shelter in the relative safety of the bond market during a painful economic period. Weaken earnings during the rough economic time will cause price-earnings multiples of stocks collapse triggering stock market sell off.
Companies, municipalities, states, U.S. government, and foreign governments issue bonds, commonly referred to as fixed-income securities, to finance a variety of projects and activities.
Bonds are debt investments in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Interest on bonds is usually paid every six months (semi-annually). The annual return rate that the bond will pay is usually referred to as the yield of the bond. The entity returns the investor's principal at the maturity. Before maturity, the value of fixed-income investments can fluctuate in response to current interest and inflation rates.
Bonds are generally a less risky asset than equities (their variance of returns has been lower over time) but produce lower rates of return. Bonds are considered as a distinct asset class commonly used in investment portfolio construction because they have different risk and return characteristics from other asset classes. Some types of bonds include Treasury bonds, municipal bonds, corporate bonds, foreign bonds, asset backed securities, and mortgage backed securities.
Treasury Bonds (T-Bond) A marketable, fixed-interest debt security issued by U.S. government with a maturity of more than 10 years. Treasury bonds make interest payments semi-annually and the income that holders receive is only taxed at the federal level.
Municipal Bonds
Also known as a "muni", this is a debt security issued by a state, municipality or county to finance its capital expenditures. Municipal bonds are exempt from federal taxes and from most state and local taxes, especially if you live in the state in which the bond is issued.
Corporate Bonds
This is a debt security issued by a corporation and sold to investors. The backing for the bond is usually the payment ability of the company, which is typically money to be earned from future operations. In some cases, the company's physical assets may be used as collateral for bonds. Corporate bonds are considered higher risk than government bonds. As a result, interest rates are almost always higher, even for top-flight credit quality companies.
Foreign Bonds
Foreign countries issue bonds in their domestic market in their home currency to fund the operations of the government. Foreign bonds are regulated by the domestic market authorities. The investor is taking on a couple of risks with foreign bonds. First, the bonds are dominated in the foreign country’s currency so there is some currency risk. Secondly, changes in interest rates for that country will impact bond prices.
Asset-Backed Securities (ABS)
There are a host of fixed income securities whose payments are backed by assets. These securities generally will make periodic payments to the owner of the security. There is an asset (like loans, leases, credit card debt, a company's receivables, and royalties) which provides collateral in case there is a non-payment by the party which has entered into the payment arrangement. These securities are often offered by financial institutions which have created the security from a bunch of underlying assets which they have purchased. For investors, asset-backed securities are an alternative to investing in corporate debt.
Mortgage-Backed Securities (MBS)
A type of asset-backed security that is exclusively secured by a mortgage or collection of mortgages. These securities must also be grouped in one of the top two ratings as determined by an accredited credit rating agency, and usually pay periodic payments that are similar to coupon payments. Moreover, the mortgage must have originated from a regulated and authorized financial institution. MBS is also known as a "mortgage-related security" or a "mortgage pass through". When you invest in a mortgage-backed security you are essentially lending money to a home buyer or business. The bank that originated the mortgage acts as a middleman between the home buyer and the investment markets.
7.24.2008
Money Market Instruments
A Safer Investment Alternative In Volatile Bear Market
SmartInMoney
U.S. stock markets are officially in bear market territory in this July 2008 with all three major indexes, the S&P 500, the Dow, and the Nasdaq, plunged from their peak in October 2007. When official bear market strikes, investors usually begin to dump stocks and seek refuge for their money to safer investment in money market instruments.
Cash Equivalents (Money Market Instruments) are investment securities that are short-term, have a low-risk, low-return profile and are highly liquid. Money market instruments are considered as a unique asset class commonly used in building an investment portfolio as they have distinct risk and return characteristics from other asset classes. Cash equivalents include U.S. government Treasury bills, bank certificates of deposit, bankers' acceptances, commercial paper and other money market instruments.
Treasury Bill (T-Bill)
This short-term debt obligation is issued by the U.S. government and backed by its full faith and credit, with a maturity of less than one year, and exempt from state and local taxes. T-bills are sold in denominations of $1,000 and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks). T-bills are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, the appreciation of the T-Bill provides the return to the holder.
Certificate of Deposit (CD)
A short- or medium-term debt instrument offered by commercial banks. CDs bear a specified fixed interest rate and can be issued in any denomination. CDs are also known as "time deposits", because the account holder has agreed to keep the money in the account for a specified amount of time, anywhere from three months to six years. Money withdrew before maturity is subject to a penalty. CDs are FDIC-insured, low risk, low return investments.
Banker's Acceptance (BA)
A short-term credit investment which is created by a non-financial firm and whose payment is guaranteed by a bank. BA is originated merely as an order by the drawer to the bank to pay a specified sum of money on a specified date to a named person or to the bearer of the draft. Upon acceptance by a bank, which occurs when an authorized bank employee stamps the draft "accepted" and signs it, the draft becomes a primary and unconditional liability of the bank. BA is often used in international trade (importing and exporting). Banker's acceptances are traded at a discount from face value on the secondary market.
Commercial Paper (CP)
An unsecured, short-term debt instrument issued by a corporation or bank to finance its short-term credit needs, such as accounts receivable and inventory. Maturities typically range from 2 to 270 days. Commercial paper is available in a wide range of denominations, can be either discounted or interest-bearing. Companies with high credit ratings usually issue commercial paper, meaning that the investment is almost always relatively low risk. It does not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months (270 days).
SmartInMoney
U.S. stock markets are officially in bear market territory in this July 2008 with all three major indexes, the S&P 500, the Dow, and the Nasdaq, plunged from their peak in October 2007. When official bear market strikes, investors usually begin to dump stocks and seek refuge for their money to safer investment in money market instruments.
Cash Equivalents (Money Market Instruments) are investment securities that are short-term, have a low-risk, low-return profile and are highly liquid. Money market instruments are considered as a unique asset class commonly used in building an investment portfolio as they have distinct risk and return characteristics from other asset classes. Cash equivalents include U.S. government Treasury bills, bank certificates of deposit, bankers' acceptances, commercial paper and other money market instruments.
Treasury Bill (T-Bill)
This short-term debt obligation is issued by the U.S. government and backed by its full faith and credit, with a maturity of less than one year, and exempt from state and local taxes. T-bills are sold in denominations of $1,000 and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks). T-bills are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, the appreciation of the T-Bill provides the return to the holder.
Certificate of Deposit (CD)
A short- or medium-term debt instrument offered by commercial banks. CDs bear a specified fixed interest rate and can be issued in any denomination. CDs are also known as "time deposits", because the account holder has agreed to keep the money in the account for a specified amount of time, anywhere from three months to six years. Money withdrew before maturity is subject to a penalty. CDs are FDIC-insured, low risk, low return investments.
Banker's Acceptance (BA)
A short-term credit investment which is created by a non-financial firm and whose payment is guaranteed by a bank. BA is originated merely as an order by the drawer to the bank to pay a specified sum of money on a specified date to a named person or to the bearer of the draft. Upon acceptance by a bank, which occurs when an authorized bank employee stamps the draft "accepted" and signs it, the draft becomes a primary and unconditional liability of the bank. BA is often used in international trade (importing and exporting). Banker's acceptances are traded at a discount from face value on the secondary market.
Commercial Paper (CP)
An unsecured, short-term debt instrument issued by a corporation or bank to finance its short-term credit needs, such as accounts receivable and inventory. Maturities typically range from 2 to 270 days. Commercial paper is available in a wide range of denominations, can be either discounted or interest-bearing. Companies with high credit ratings usually issue commercial paper, meaning that the investment is almost always relatively low risk. It does not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months (270 days).
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