Chapter 3: Investment Assets
Investing I Premium
Learning Tip
In this chapter we will learn about different kinds of assets available for investment in different kinds of financial markets. These include stocks, ETFs, Real Estate, Bonds etc.
Section 3.1
Stocks
Definition of Stocks: Stocks represent ownership in a company. When you purchase a stock, you buy a share of that company, entitling you to a portion of its assets and earnings.
Types of Stocks:
Common Stocks:
- Description: Represent ownership in a company and come with voting rights.
- Example: Holding common stock in Apple Inc. allows you to vote on company matters at shareholder meetings.
Preferred Stocks:
- Description: Generally do not come with voting rights but have a higher claim on assets and earnings. They typically pay fixed dividends.
- Example: Preferred shareholders may receive dividends before common shareholders and have priority in asset distribution during liquidation.
Analyzing Stocks:
- Fundamental Analysis: Evaluates a company’s financial health through metrics like earnings per share (EPS), price-to-earnings (P/E) ratio, and revenue growth.
- Technical Analysis: Studies price movements and trading volume to identify trends and patterns using charts and indicators.
Section 3.2
Bonds
Definition of Bonds: Bonds are debt securities that represent a loan made by an investor to a borrower (typically a corporation or government). The borrower pays interest over time and repays the principal at maturity.
Bond Market:
- Description: A market for trading debt securities, primarily bonds issued by governments and corporations.
- Example: U.S. Treasury bonds, municipal bonds.
- Function: Provides a mechanism for borrowers to obtain capital and for investors to earn interest.
Types of Bonds:
Government Bonds:
- Description: Issued by national governments to finance operations. They are considered low-risk.
- Example: U.S. Treasury bonds.
Corporate Bonds:
- Description: Issued by companies to raise capital. They carry higher risk than government bonds.
- Example: A bond issued by a corporation like IBM.
Municipal Bonds:
- Description: Issued by states, municipalities, or counties to fund public projects. Interest is often tax-exempt.
- Example: Bonds issued to finance the construction of a new school.
Bond Ratings:
- Description: Ratings from agencies like Moody’s or Standard & Poor’s indicate the credit quality of bonds. Ratings range from AAA (highest) to D (default).
- Function: Higher-rated bonds typically offer lower yields due to perceived lower risk.
Section 3.3
Mutual Funds and ETFs
Mutual Funds:
- Definition: Investment vehicles that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities.
- Types:
- Equity Funds: Invest primarily in stocks.
- Bond Funds: Invest in bonds.
- Index Funds: Aim to replicate the performance of a specific index (e.g., S&P 500).
- Advantages: Professional management, diversification, and ease of investment.
- Example: Vanguard 500 Index Fund.
Exchange-Traded Funds (ETFs):
- Definition: Similar to mutual funds but trade on stock exchanges like individual stocks.
- Types: Include equity ETFs, bond ETFs, and commodity ETFs.
- Advantages: Lower expense ratios, tax efficiency, and flexibility in trading.
- Example: SPDR S&P 500 ETF (SPY).
Section 3.4
Real Estate
Definition of Real Estate Investment: Investing in real estate involves purchasing property for rental income, capital appreciation, or both.
Types of Real Estate Investments:
Direct Investment:
- Description: Buying physical properties, such as residential homes, commercial buildings, or land.
- Advantages: Potential for rental income and property value appreciation.
- Example: Purchasing a rental property.
Real Estate Investment Trusts (REITs):
- Definition: Companies that own, operate, or finance income-producing real estate.
- Advantages: Provide liquidity and diversification, as they trade on stock exchanges.
- Example: Public Storage (self-storage REIT).
Section 3.5
Alternatives
Definition of Alternative Investments: Alternative investments are asset classes that fall outside traditional investments (stocks, bonds, cash).
Types of Alternative Investments:
Commodities:
- Description: Physical goods like gold, silver, oil, and agricultural products.
- Example: Investing in gold futures or commodity ETFs.
Cryptocurrencies:
- Description: Digital currencies that use cryptography for security.
- Example: Bitcoin and Ethereum.
Collectibles:
- Description: Items of value, such as art, antiques, and rare coins.
- Example: Investing in a rare painting by a famous artist.
Advantages and Risks:
- Advantages: Potential for high returns, diversification, and low correlation with traditional markets.
- Risks: Higher volatility, lack of regulation, and difficulty in valuation.
Final Takes
Conclusion
In this module, students have learned:
- The various types of investment vehicles, including stocks, bonds, mutual funds, ETFs, real estate, and alternatives.
- Key characteristics and advantages of each investment type.
- Basic methods for analyzing stocks and bonds.
