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The Investment
Environment
Learning Goals
1.Understand the term investment and list the
attributes that distinguish one investment from
another.
2.Describe the investment process and types of
investors.
3.Discuss the principal types of investments.
4.Describe the steps in investing, review fundamental
tax considerations, and discuss investing over the
life cycle.
5.Describe the most common types of short-term
investments.
6.Describe some of the main careers available to
people with financial expertise and the role that
investments play in each.
Copyright 2014 Pearson Education, Inc. All rights reserved.
1-2
What is an Investment?
1-3
Attributes of Investments
Securities or Property
Direct or Indirect
1-4
1-5
Attributes of Investments
(cont'd)
1-6
Attributes 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: foreign-based companies
1-7
Government
Federal, state and local projects & operations
Typically net demanders of funds
Business
Investments in production of goods and services
Typically net demanders of funds
Individuals
Some need for loans (house, auto)
Typically net suppliers of funds
1-8
1-9
Types of Investors
Individual Investors
Invest for personal financial goals
(retirement, house)
Institutional Investors
Paid to manage other people s money
Trade large volumes of securities
Include: banks, life insurance companies,
mutual funds, pension funds
1-10
Types of Investments
Short-term Investments
Conservative investments with lives of 1 year or less
Provide high liquidity
Common Stock
Represents an ownership share of a corporations
Return comes through dividends and capital gains
Fixed-income Securities
Bonds
Convertible Securities
Preferred Stock
1-11
Mutual funds
Portfolio of stocks, bonds, and other securities created by
pooling the funds of many different investors
Allow investors to construct diversified portfolios without
investing a lot of money
Hedge Funds
Funds that pool resources from different investors, but
usually have higher minimum investments and are less
regulated than mutual funds
Copyright 2014 Pearson Education, Inc. All rights reserved.
1-12
Derivatives
Include options and futures contracts
Securities that derive their value from some
underlying asset (e.g., a share of stock or a
commodity)
1-13
1-14
Steps in Investing
1-15
1-16
1-17
1-18
State taxes
1-19
1-20
Ordinary Income
1-21
1-22
Individual plans
1-23
1-24
1-25
Retirement Stage
1-26
1-27
1-28
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Advantages
High liquidity
Low risks of default
Disadvantages
Low levels of return
Loss of potential purchasing power from inflation
1-30
Careers in Finance
1-31
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Chapter 1
Additional
Chapter Art
1-33
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1-35
1-36
Investment Suitability
Investment
Yield is often as important as safety
Used as component of diversified portfolio
Used as temporary outlet waiting for attractive
permanent investments
1-37
1-38
Chapter 1 Review
Learning Goals
1. Understand the term investment and list the attributes
that distinguish one investment from another.
2. Describe the investment process and types of investors.
3. Discuss the principal types of investments.
4. Describe the steps in investing, review fundamental tax
considerations, and discuss investing over the life cycle.
5. Describe the most common types of short-term
investments.
6. Describe the role of investments in some of the main
finance related careers.
1-39