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Introduction to Investments
BUS-123
Introduction to Investments
Frank Paiano – “Paco”
Professor, School of Business and Technology
Welcome, Everyone!
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First – A Perspective
“It is a gloomy moment in history.
Never has the future seemed so
dark and incalculable. The United
States is beset with racial,
industrial and commercial chaos,
drifting we know not where. Of our
troubles, no one can see the end.”
Harper’s Magazine, 1847
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What is an Investment?
An investment is any vehicle into which resources can
be placed with the expectation that it will generate
positive income, or that its value will be preserved or
increased, or both
“An investment operation is one which, upon thorough
analysis, promises safety of principal and a satisfactory
return. Operations not meeting these requirements are
speculative.” – Benjamin Graham
Investment returns (a.k.a. investment rewards)
Income – interest, dividends, rent
a.k.a. cash flows
Increased value / Decreased value
a.k.a. capital gains, capital appreciation (Yippee!)
a.k.a. capital losses (Boo! Hiss!)
Types of Investments
Securities
Investments that represent debt or ownership or the
legal right to acquire or sell an ownership interest
(a.k.a. financial investments)
Property
Real property (land, buildings) and personal property
(precious metals, autos, art, collectibles, etc.)
(a.k.a. real estate, hard assets, tangible assets,
commodities)
Personal
Examples: Education and Training, Travel
College is often the best investment a person will ever
make – Why?
This class concentrates on securities
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Direct Investments
Your name is on the investment and you control
the investment – can buy or sell as you wish
Examples: Real Estate, Stocks, Bonds
Indirect Investments
Someone else is in control of the investment
You have limited control, or more likely, no control
over the underlying investment
Examples: Mutual Funds, REIT, Limited Partnership*
*You can buy or sell your shares in the mutual fund, REIT, or limited
partnership, but you do not control the underlying investments
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Domestic Investments
Global =
Based inside the United States Domestic
International Investments (a.k.a. Foreign) and
International
Based outside the United States
Be careful of this subtle distinction
International (a.k.a. Foreign) ≠ Global
The return of the stock markets in the developed world has been 8.7%.
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Short-term Investments
These are
Up to a 1 year
general
Intermediate-term Investments guidelines used
2 to 5 years throughout the
industry
Long-term Investments
5 or more years
I disagree with the general guidelines. Here are mine:
Short-term – 1 to 2 years
Intermediate – 3 to 5, maybe even 6 or even 7 years
Long-term – 7 years or longer (10 to 30 years)
Before you make an investment, you must know your time horizon!
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Liquid Investments
Easily and quickly converted into cash
There is a ready market to purchase the
investment and change of ownership happens
quickly
Examples: Stocks, Bonds, Mutual Funds, REITs
Illiquid Investments
May be difficult to convert into cash
Market for investment is small or change of
ownership happens slowly or both
Examples: Real Estate, Partnerships, Collectibles
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Investments Overview
Equity Securities – a.k.a. Common Stocks
Fixed-Income Securities – a.k.a. Bonds
Short-term Investments – a.k.a. “Cash”
Mutual Funds – a.k.a. Investment Companies
Hybrid Securities – Preferred Stocks,
Convertible Securities
Others – Real Estate, Physical Assets
Derivatives – Options, Futures
Short-term Investments
a.k.a. “Cash” “Short-term vehicles”
Normally up to 1 year (1 to 3 years)
Usually guaranteed (or pretty darned close)
Liquid (many let you simply write a check!)
Very low risk of losing principal
Hence, very low reward
2% to 5% over time (currently less than 1%)
“A place to park your money”
Also used for holding an “emergency fund”
2008 Definition: “Short-term investments are instruments
designed to accept what remains of investors’ money after
they have given up on stocks and bonds.”
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Mutual Funds
a.k.a. Investment companies
A company that pools investors’ money and
invests in a diversified portfolio of securities
Investors get…
Diversification
Mutual fund can purchase hundreds of securities
Professional money management
Very popular form of investment
Range from low-risk to speculative-risk
a “mutual” fund
a.k.a. investment company
Hybrid Investments
Preferred Stock
Represents ownership in corporation, but…
Dividends are not considered optional
Convertible Securities
A bond or preferred stock that can be converted
into common stock
Hybrid investments are designed to offer the
stability of fixed-income investments (bonds)
with the opportunity for capital growth of equity
investments (stocks)
Some in the industry categorize these with stocks,
some categorize them with bonds
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Derivative Assets
Speculative securities that derive their value from
an underlying security or asset
Options – a.k.a. Options Contracts
Calls and puts
Futures – a.k.a. Futures Contracts
Commodities
Stock indexes
Many in the financial world (myself included) do not
categorize these as investments
The derivative speculators did not feel so all alone in 2008.
Usually, they are the only ones who are proud to have only lost 30%.
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For the vast majority of investors, these are the most popular
and most important financial investment options
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A. hybrid securities
B. common stocks
C. bonds
D. short-term securities
The correct answer is (B). When people use the term “stocks,”
they are talking about common stocks.
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A. derivatives
B. hybrid securities
C. bonds
D. short-term securities
The correct answer is (A). You can make a lot of money;
you can lose a lot of money.
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B. bonds 12%-
4% (Better to say 3%-6%)
C. short-term securities 8%
2% - (Better to say 1%-2%)
mutual funds 5%
D. ?
E. hybrid securities ?
F. derivatives -?
Now, let us look at investment returns and risks in detail…
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The greater the standard deviation, the wider the distribution of returns
and the riskier the investment
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Investment B 10% 9%
$110 $120
The correct answer is (A). Don’t you dare get this one wrong
on the exam!
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Short-term Investments
Review
a.k.a. “Cash” “Short-term vehicles”
Normally up to 1 year (1 to 3 years)
Usually guaranteed (or pretty darn close)
Liquid
Very low risk of losing principal…
Hence, very low reward
2% to 5% over time
For many years since the Great Recession paying
close to zero! Finally starting to rise toward norms
“A place to park your money”
Also used for holding an “emergency fund”
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Treasury Bills
Obligations of the United States Treasury
Sold at a discount, redeemed at face value
Varying short-term maturities
Typically one-, three- and six-month maturities
Generally regarded as the safest of all
investments – a.k.a. “risk-free return”
Used as the benchmark for all other investments
Free from state and local income tax
Can be purchased directly from the Treasury
www.treasurydirect.gov
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Commercial Paper
Short-term, unsecured promissory notes (IOUs)
issued by corporations with very high credit
standings
90-day, 180-day and 270-day maturities
Maximum maturity is 270 days
By keeping the maturity less than one year,
commercial paper does not need to be registered
with the Securities and Exchange Commission
Usually sold in multiples of $100,000
Hence, commercial paper is usually purchased by
institutional investors (exp: money market mutual funds)
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