Investment Vehicle and Strategies PDF

# Investment Vehicle and Strategies ## Investment Vehicle An investment vehicle is a financial instrument or commodity as an asset. This helps investors choose the best-fit investment strategies that fit them with the expectation of gaining returns in the future as income and capital gains. These a...

# Investment Vehicle and Strategies ## Investment Vehicle An investment vehicle is a financial instrument or commodity as an asset. This helps investors choose the best-fit investment strategies that fit them with the expectation of gaining returns in the future as income and capital gains. These are products and services of the investment industry that help investors understand their structure and create value for them. ## Two Categories of Investment Vehicle ### Direct Investment It occurs when investors purchase a company and government-issued securities or purchase real assets. ### Indirect Investment It occurs when investors give investment companies money to invest in securities for them. ## The Most Common Types of Investment Vehicles 1. **Ownership Investments** - The most volatile and profitable class of investment. (Ex: stocks, real estate, business, precious items & collectibles) 2. **Cash Equivalents** - These types of investments are “as good as cash”, which means they can be converted easily and quickly. (Ex: money market funds, savings account) 3. **Lending Investments** - Lending money is a category of investing. The risk generally are lower than for many investments, but the return are relatively modest. (Ex: bonds, certificate of deposit) 4. **Pooled Investment Vehicles** - Multiple investors often pool their money to gain certain advantages they would not have as individual investors. (Ex: mutual funds, pension funds, unit investment trusts (UITs), hedge funds) ## Mutual Funds A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor's part ownership in the fund and the income it generates. Mutual funds are a popular choice among investors because they generally offer the following features: - Professional Management - Diversification or “Don't put all your eggs in one basket.” - Affordability - Liquidity ### Types of Mutual Funds - **Money Market Funds** - Have relatively low risks. - **Bond Funds** - Have higher risks than money market funds because they typically aim to produce higher returns. - **Stock Funds** - Invest in corporate stocks. Not all stock funds are the same. Some examples are: - Growth Funds - Income Funds - Index Funds - Sector Funds - **Target Date Funds** - Hold a mix of stocks, bonds, and other investments. ### Structure of Mutual Funds According to the Investment Company Institute (ICI), a mutual fund is typically organized under state law as a business trust (which is sometimes known as a statutory trust), or a corporation. Funds that are operated as business trusts are administered by trustees. Those set up as a corporation are managed by officers and directors. ### Understanding Fees As with any business, running a mutual fund involves costs. Funds pass along these costs to investors by charging fees and expenses. Fees and expenses vary from fund to fund. A fund with high costs must perform better than a low-cost fund to generate the same returns for you. ## Exchange Traded Fund (ETF) An exchange-traded fund (ETF) is a pooled investment security that can be bought and sold like an individual stock. ETFs can be structured to track anything from the price of a commodity to a large and diverse collection of securities. ### Types of ETF - Passive ETF - Actively managed ETF - Bond ETF - Stock ETF - Industry or sector ETF - Inverse ETF - Leveraged ETF - Commodity ETF - Currency ETF - Bitcoin ETF ### Pros and Cons of ETF #### Pros - Access to many stocks across various industries - Low expense ratios and fewer broker commissions - Risk management through diversification - ETFs exist that focus on targeted industries #### Cons - Actively managed ETFs have higher fees - Single-industry-focused ETFs limit diversification - Lack of liquidity hinders transactions ## Hedge Fund and Private Equity ### Hedge Funds Hedge funds pool money from investors and invest in securities or other types of investments with the goal of getting positive returns. Hedge funds are not regulated as heavily as mutual funds and generally have more leeway than mutual funds to pursue investments and strategies that may increase the risk of investment losses. Hedge funds are limited to wealthier investors who can afford the higher fees and risks of hedge fund investing, and institutional investors, including pension funds. ### Things to consider in investing to Hedge funds - Be an accredited investor. - Read a fund's prospectus and related materials. - Understand how fund assets are valued. - Understand fees. - Understand any limitations on your right to redeem your shares. - Research hedge fund managers - You can get this information by reviewing the adviser's Form ADV, which is the investment adviser’s registration form. - If you don't find the investment adviser firm in the SEC's IAPD database, call your state securities regulator or search FINRA's BrokerCheck database. - Ask questions. ### Types of Hedge Funds - Global Macro Hedge Funds - Equity Hedge Funds - Relative Value Hedge Funds - Activist Hedge Funds ### Private Equity Private equity investing sounds like what it means: Investing in companies that are not publicly traded. But behind this straightforward-sounding term is a sometimes opaque investment strategy that's limited to certain wealthy individuals and institutions, and requires investors to lock up their money for years at a time. ### Types of Private Equity Deals - Buyouts - Growth - Mezzanine Financing ## Investment Strategy An investment strategy is a term used in the financial and investing world to describe an approach to investing. Essentially, an investment strategy is a plan for selecting financial vehicles tailored to the investor's needs and goals, in addition to their risk appetite, specific interests, and time horizon. An investment strategy plays a key part in portfolio management, which is a process involving deep analysis of investor goals and interests as well as market strengths, weaknesses, opportunities, and threats to then tailor the perfect investment choices. ### Common Types of Investment Strategy - **Momentum Trading** - This involves selecting investments based on their recent past performances. - **Dividend Growth Investing** - An investor invests in company shares based on forecast future dividend payments. - **Pairs Trading** - An investor buys similar stocks and takes a linear combination of their price to achieve a stationary time series. - **Contrarian Investing** - An investor selects a company in a down market and purchases large quantities of shares in the company in a bid to make a long-term profit. ## Investment Strategy: Long, Short, Leveraged, etc. ### Long-Term Investments Long-term investments are bought and held for multiple years, such as 10 years or more. This investing strategy may be suitable for long-term financial goals, such as retirement and college savings, and can include certain stocks and mutual funds. ### Short-Term Investments Short-term investments are typically bought and held for a shorter period of time - generally three years or less. They are typically suitable for needs or goals that are more immediate or in the near future - for example, saving for the purchase of a vehicle. If an investor chooses a short-term investing period, they might consider investment types that have relatively low market risk. However, seeking lower market risk does not guarantee gains or a sustained principal value. Examples of short-term investment securities can include certificates of deposit (CDs), money market accounts, government bonds, and Treasury bills. ### Leveraged Investing Leveraged investing is a technique that seeks higher investment profits by using borrowed money. These profits come from the difference between the investment returns on the borrowed capital and the cost of the associated interest. Leveraged investing exposes an investor to higher risk. ### Portfolio Diversification Portfolio diversification is a risk management strategy that creates a mix of various investments within a portfolio. A diversified portfolio contains a mix of distinct asset types and investment vehicles in an attempt to limit exposure to any single asset or risk. The rationale behind this technique is that a portfolio constructed of different kinds of assets will, on average, yield higher long-term returns and lower the risk of any individual holding or security. ### Asset Allocation Asset allocation refers to an investment strategy in which individuals divide their investment portfolios between different diverse asset classes to minimize investment risks. The asset classes fall into three broad categories: equities, fixed-income, and cash and equivalents. Anything outside these three categories (e.g., real estate, commodities, art) is often referred to as alternative assets.