jas319 | Student
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Investing Basics Investing Basics Types of Assets: ● Equities - Ownership of corporate entities which produce proﬁts and return that capital to shareholders (owners of the company) ● Fixed Income - Debt securities which pay interest periodically based on ● Alternative Assets - Contracts which give a person the right to purchase an asset at a certain time and price ● Real Estate - Ownership of land or buildings ○ Some investors will buy a property when it is cheaper and sell it later at a higher price ○ Other investors may buy a property and rent it out to generate proﬁt ● Cash - yep, just cash ● There are also some other assets that are tangible such as precious items (diamond, artwork, designer bags) ○ In this case, investors will buy them at a cheaper price; overtime, an older Chanel bag may grow in price ○ Some people ﬁnd that precious stones are less risky because they are always tangible and ﬂuctuate less in price (gold used to be the benchmark for money) ○ On the other hand, tangible items are harder to liquidate since you have to ﬁnd and negotiate with a buyer. With stocks, you can sell them online almost instantaneously Equities (Stocks): - Public vs. Private equity - Best used to hedge inﬂation - Usually have most potential to appreciate in value while also holding more cyclical risk Index Funds/ETFs/Mutual Funds: ● ETF - baskets of stocks/bonds which are bought as one security. ○ Ex. If you want to buy Apple as part of your stocks but not all of it, you could purchase an ETF which contains some Apple, often having very small expense ratios. ● Index Funds - similar to ETFs although they are generally meant to replicate a certain indice and operate similarly to mutual fund; very low expense ratios ● Mutual Funds - funds which are generally actively managed by professionals (as are index funds and ETFs) and as a result are generally more expensive Dividend Investing: ● ● Methods of capital return to shareholders (people owning stock): ○ Business growth (growth in revenue, proﬁts, scale, etc) ○ Debt reduction ○ Share buybacks (raising demand to rise prices) Taxed as ordinary income so might not be as tax efﬁcient Fixed Income: ● Any security which entitles the investor to a ﬁxed interest payment until maturity. ● Most commonly associated with bonds. ○ Investors will receive a payment of interest based on prevailing interest rates. ○ At time of maturity, the principal which the investor initially loaned will be returned. ○ ● ● Par Value - principal amount for most bonds is $1,000 Bond securities generally fall into either: ○ Government or municipal bonds ○ Corporate bonds Credit Risk - potential for default Derivative Assets: ● Derivative assets - assets whose value is “derived” from another asset ○ Options on stocks (contract which you buy that gives you the right to buy shares of a certain stock at a certain date. If you do not exercise the option by that date, it expires) ● Options are EXTREMELY leveraged and therefore can gain or lose enormous amounts of value within seconds. *It is important to diversify your assets because one sector or type of asset may be heavily affected one year. For example, if the only stocks you buy are in the agricultural sector and the crop harvest is bad that year, you may lose most of your money. Investing only in one type of asset or one sector is more risky. *Most people diversify their stock portfolios depending on their age. If you are younger, you might put about 70% of your allocated funds in stocks and 40% in index funds. If you are older, you would want more of your money in index funds since they are normally less risky.