1. TYPES OF INVESTMENT
Dr.P.Saradhamani, DoMS,

2. What is an Investment?
Investment: any vehicle into which funds can be placed with the expectation that it will generate positive income and/or that its value will be preserved or increased
Return: the reward for owning an investment
Current income
Increase in value
Dr.P.Saradhamani, DoMS,

3. Types of Investments Securities or Property Direct or Indirect
Securities: stocks, bonds, options
Real Property: land, buildings
Tangible Personal Property: gold, artwork, antiques
Direct or Indirect
Direct: investor directly acquires a claim
Indirect: investor owns part of a portfolio
Dr.P.Saradhamani, DoMS,

4. Types of Investments (cont'd)
Debt, Equity or Derivative Securities
Debt: investor lends funds in exchange for interest income and repayment of loan in future (bonds)
Equity: represents ongoing ownership in a business or property (common stocks)
Derivative Securities: neither debt nor equity; derive value from an underlying asset (options)
Low Risk or High Risk
Risk: chance that actual investment returns will differ from those expected
Dr.P.Saradhamani, DoMS,

5. Types of Investments (cont'd)
Short-Term or Long-Term
Short-Term: mature within one year
Long-Term: maturities of longer than a year
Domestic or Foreign
Domestic: U.S.-based companies
Foreign: overseas-based companies
Dr.P.Saradhamani, DoMS,

6. Key Participants in Investment Process
Government
Federal, state and local projects & operations
Typically net demanders of funds
Business
Investments in production of goods and services
Individuals
Some need for loans (house, auto)
Typically net suppliers of funds
Dr.P.Saradhamani, DoMS,

7. The Investment Process
Dr.P.Saradhamani, DoMS,

8. Types of Investors Individual Investors Institutional Investors
Invest for personal financial goals (retirement, house)
Institutional Investors
Paid to manager other people’s money
Typically manage large amounts of money
Include: banks, life insurance companies, mutual funds and pension funds
Dr.P.Saradhamani, DoMS,

9. Steps in Investing Step 1: Meeting Investment Prerequisites
Make certain necessities of life are provided for
Adequate protection against losses from death, illness and disability
Step 2: Establishing Investment Goals
Examples include:
Accumulating retirement funds
Enhancing current income
Saving for major expenditures
Sheltering income from taxes
Dr.P.Saradhamani, DoMS,

10. Steps in Investing (cont'd)
Step 3: Adopting an Investment Plan
Develop a written investment plan
Specify target date and risk tolerance for each goal
Step 4: Evaluating Investment Vehicles
Assess potential return and risk
Chapter 4 will cover risk in detail
Step 5: Selecting Suitable Investments
Research and gather information on specific investments
Make investment selections
Dr.P.Saradhamani, DoMS,

11. Steps in Investing (cont'd)
Step 6: Constructing a Diversified Portfolio
Use portfolio comprised of different investments
Diversification can increase returns or decrease risks (Chapter 5 will cover diversification in detail)
Step 7: Managing the Portfolio
Compare actual behavior with expected performance
Take corrective action when needed
Dr.P.Saradhamani, DoMS,

12. Taxes in Investing Decisions
“It’s not what you make, it’s what you keep that is important.”
Tax Planning involves:
The desired return after-taxes
Type of income received from investments
Timing of profit-taking and loss recognition
Dr.P.Saradhamani, DoMS,

13. Taxes in Investing Decisions (cont'd)
Major Sources of Taxes in Investing
Federal: tax rates from 10% to 35%
State taxes
Types of Income for Individuals
Active income: income from working (wages, salaries, pensions)
Portfolio income: income from investments (interest, dividends, capital gains)
Passive income: income from special investments (rents from real estate, royalties, limited partnerships)
Dr.P.Saradhamani, DoMS,

14. Taxes in Investing Decisions (cont'd)
Ordinary Income
Active, portfolio and passive income included
Taxed at progressive tax rates (rates go up as income goes up)
Capital Gains and Losses
Capital Asset: property owned and used by taxpayer, including securities and personal residence
Capital Gain: amount by which the proceeds from the sale of a capital asset are more than its original purchase price
Capital Loss: amount by which the proceeds from the sale of a capital asset are less than its original purchase price
Dr.P.Saradhamani, DoMS,

15. Taxes in Investing Decisions (cont'd)
Taxation of Capital Gains
Capital assets held less than one year: ordinary income tax rates
Capital assets held more than one year: 15% (or 5 %)
Taxation of Capital Losses
Capital losses can be used to offset capital gains
Up to $3,000 per year of capital losses can be used to offset ordinary income (such as wages)
Dr.P.Saradhamani, DoMS,

16. Tax-Advantaged Retirement Vehicles
Allows taxes to be deferred until withdrawn in future
Employer-sponsored plans
Profit-sharing plans, thrift and savings plans, and 401(k) plans
Individual plans
Individual retirement arrangements (IRAs) and Roth IRAs
Self-employed individual plans
Keogh plans, SEP-IRAs, SIMPLE-IRAs
Dr.P.Saradhamani, DoMS,

17. Investing Decisions Over Investor Life Cycle
Investors tend to follow different investment philosophies as they move through different stages of the life cycle.
Youth Stage
Twenties and thirties
Growth-oriented investments
Higher potential growth; higher potential risk
Stress capital gains over current income
What are some examples of age- appropriate investments?
Common stocks, options or futures
Dr.P.Saradhamani, DoMS,

18. Investing Decisions Over Investor Life Cycle (cont'd)
Middle-Aged Consolidation Stage
Ages 45 to 60
Family demands & responsibilities become important (education expenses, retirement savings)
Move toward less risky investments to preserve capital
Transition to higher-quality securities with lower risk
What are some examples of age- appropriate investments?
Low-risk growth and income stocks, preferred stocks, convertible stocks, high-grade bonds
Dr.P.Saradhamani, DoMS,

19. Investing Decisions Over Investor Life Cycle (cont'd)
Retirement Stage
Ages 60 and older
Preservation of capital becomes primary goal
Highly conservative investment portfolio
Current income needed to supplement retirement income
What are some examples of age- appropriate investments?
Low-risk income stocks, government bonds, quality corporate bonds, bank certificates of deposit
Dr.P.Saradhamani, DoMS,

20. Investing in Different Economic Environments
Market Timing: process of identifying the current state of the economy/market and assessing the likelihood of its continuing on its present course
Three Conditions of the U.S. Economy
Recovery or expansion
Corporate profits are up, which helps stock prices
Growth-oriented and speculative stocks do well
Decline or recession
Values and returns on common stocks tend to fall
Uncertainty
Dr.P.Saradhamani, DoMS,

21. Figure 1.2 Different Stages of an Economic/Market Cycle
Dr.P.Saradhamani, DoMS,

22. THANK YOU
Dr.P.Saradhamani, DoMS,