Investment Planning

• Investment products are financial tools individuals and entities use to grow their wealth and achieve financial goals
• They offer different levels of risk and potential return, so understanding them is crucial for making informed investment decisions

Equities (Stocks/Shares)

• Equities represent ownership in a company and are bought and sold on stock exchanges
• Shareholders can profit from stock appreciation (increase in stock price) and dividends (payments made by the company to shareholders from its profits)
• Stocks are riskier than bonds but have historically provided higher returns over long periods
• Common stock gives voting rights in company matters, while preferred stock generally does not, but it may offer a fixed dividend
• Market capitalization is the total value of a company's outstanding shares; large-cap, mid-cap, and small-cap refer to company size
• Investing in stocks can be done directly or through mutual funds and ETFs

Bonds (Fixed Income)

• Bonds are debt instruments issued by corporations or governments to raise capital
• Investors lend money to the issuer and receive periodic interest payments (coupons) plus the return of the principal (face value) at maturity
• Bond prices and interest rates (yields) have an inverse relationship, as one goes up, the other goes down
• Bonds are generally less risky than stocks but offer lower potential returns
• Credit ratings (e.g., AAA, BB) assess the creditworthiness of bond issuers
• Government bonds are considered safer than corporate bonds
• Maturity dates range from short-term (a few years) to long-term (decades)
• Investors will often allocate a portion of their investment dollars into bonds and other fixed income products

Mutual Funds

• Mutual funds pool money from many investors to purchase a diversified portfolio of stocks, bonds, or other assets
• They are managed by professional fund managers
• Net Asset Value (NAV) is the total value of the fund's assets minus liabilities, divided by the number of outstanding shares
• Mutual funds offer diversification and professional management
• Expense ratios are annual fees charged to cover operating expenses
• Load funds charge a sales commission (front-end or back-end), while no-load funds do not
• Index funds track a specific market index (e.g., S&P 500) for passive investing
• Actively managed funds aim to outperform the market through active stock selection

Exchange-Traded Funds (ETFs)

• ETFs are similar to mutual funds but are traded on stock exchanges like individual stocks
• They typically have lower expense ratios than mutual funds
• ETFs can track an index, sector, or investment strategy
• ETFs offer intraday trading flexibility
• Some ETFs are actively managed, but most are passively managed
• ETFs can be more tax-efficient than mutual funds

Real Estate

• Real Estate involves investments in land, residential properties, commercial properties, or Real Estate Investment Trusts (REITs)
• Rental income and property appreciation are potential sources of return
• REITs are companies that own or finance income-producing real estate
• Investing in physical properties can provide tangible assets
• Real estate investments can provide diversification and inflation hedging
• Liquidity can be low, and management responsibilities exist for direct real estate investments

Alternative Investments

• Alternative investments include hedge funds, private equity, commodities, and derivatives
• Hedge funds use various strategies to generate returns, often with higher risk
• Private equity involves investing in private companies not listed on stock exchanges
• Commodities are raw materials or primary agricultural products traded on exchanges
• Derivatives derive their value from an underlying asset (e.g., options, futures)
• Alternative investments are generally less liquid and more complex than traditional investments
• Accredited investors (high-net-worth individuals or institutions) often engage in alternative investments

Options

• An option provides one party the right, but not the obligation, to buy or sell an asset to another party at a pre-agreed price and specified date
• Call options allow the holder to buy an asset, while put options allow the holder to sell
• Options can be used for hedging or speculation and are leveraged investments
• Option buyers pay a premium to the seller
• Option values are affected by factors like asset price, time to expiration, and volatility
• Options contracts can be complex and carry significant risk

Futures

• Futures contracts obligate the holder to buy or sell an asset at a predetermined price and date
• Futures are commonly used for commodities, currencies, and financial indexes
• Futures contracts trade on exchanges and require margin accounts
• Hedgers use futures to protect against price fluctuations, while speculators aim to profit from price changes
• Futures trading involves leverage and potential for substantial gains or losses

Certificates of Deposit (CDs)

• CDs are savings accounts that hold a fixed amount of money for a fixed period of time, and the interest rate is fixed
• Issued by banks and credit unions, these are very low risk if held to maturity
• Penalties for early withdrawal

Retirement Accounts

• Include 401(k)s, 403(b)s, Traditional IRAs and Roth IRAs
• These are investment accounts that are tax advantaged
• Some allow pre-tax contributions, such as traditional 401(k)s and traditional IRAs, which reduces present income tax obligations
• Roth 401(k)s and Roth IRAs are after-tax contributions, but the investment gains are not taxed

Investment Risk

• Investment risk refers to the probability of incurring losses or earning less than expected
• Risk tolerance varies among investors based on factors like age, financial goals, and investment horizon
• Diversification (spreading investments across different asset classes) reduces risk to a degree
• Systematic risk (market risk) affects the entire market, while unsystematic risk (specific risk) affects individual companies or sectors
• Risk can be measured using metrics like standard deviation, beta, and Sharpe ratio
• Understanding and managing risk is essential for successful investing

Investment Returns

• Investment returns are the profits or losses generated from an investment
• Returns can come from income (dividends, interest) or capital appreciation (increase in asset value)
• Total return considers both income and capital appreciation
• Returns are usually expressed as a percentage of the initial investment
• Inflation can erode the real value of returns, so it's crucial to consider real returns (adjusted for inflation)
• Benchmarking compares investment performance against a relevant index or peer group
• Higher potential returns typically come with higher risk

Investment Strategies

• Asset allocation involves dividing investments across different asset classes based on risk tolerance and financial goals
• Diversification aims to reduce risk by investing in a variety of assets
• Dollar-cost averaging involves investing a fixed amount of money at regular intervals
• Value investing focuses on undervalued stocks, while growth investing targets companies with high growth potential
• Active investing involves actively managing a portfolio to outperform the market
• Passive investing involves tracking a market index for long-term returns
• Tax-advantaged investing strategies minimize tax liabilities
• Long-term investing emphasizes patience and a focus on long-term goals