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Investments
Investments
Investments
Investments
Investments
Investments
Investments
Investments
Investments
Investments
Investments
Investments
Investments
Investments
Investments
Investments
Investments
Investments
Investments
Investments
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Investments

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  • 1. Investments Wali Memon1 Wali Memon
  • 2. Money And Capital Markets Unit 1 presents an overview of what we frequently term the [stock] market. In addition to the standard material, we will also explore motives, means, and methods. Each class session (165 minutes) will consist of two 75 minute lecture periods divided by a 15 minute break.2 Wali Memon
  • 3. Investment Environment Learning Objectives Why do people invest? Importance of investment decisions Steps to investing Investment management The Financial Crisis of 20083 Wali Memon
  • 4. Investment Environment II. Why do people invest? A. Defer current consumption to increase future consumption or wealth B. Accumulate funds for a purpose C. Benefits to society and the economy 1. Capital formation 2. Job creation Economic expansion4 Wali Memon
  • 5. Investment Environment III. Importance of investment decisions More choices now than ever People live longer Personal income growth is slower Labor market is less stable5 Wali Memon
  • 6. Investment Environment IV. Steps to investing: Personal Financial Planning Personal Inventory (assets, liabilities) Investments: Goals and Time Frames Personal Risk Profile Portfolio Allocation (stocks, bonds, mutual funds) Time Available (to investigate, select, monitor) Exit strategy Insurance (Hedges) Life and Property Emergency Funds (cash, credit)6 Wali Memon
  • 7. Investment Environment V. Financial Crisis of 2008 Whose story do we believe? Wall Street Greed: The CDO and CDS games (Michael Lewis: The Big Short, esp. Ch. 7) Government without Consequences: C.R.A. (1977), Fannie and Freddie, OCC General Council (1995). Building the Real Estate Bubble Changing the method of financing mortgages Growth of non-conforming and sub-prime loans7 Wali Memon
  • 8. Investment Environment C. Banks playing the spread / increasing leverage D. Bursting the financial bubble Broad-based decline in housing prices coupled with rising unemployment Rising rates on variable rate mortgages (resets) Exploding default rates Credit Default Swap losses lead to banking meltdown E. [Re] Discovery of systemic risk International response to banking crisis – increase bank equity8 Wali Memon
  • 9. 2 Asset Classes & Financial Instruments The focus in 2 is on Financial Assets; stocks (equity), bonds (debt), and derivative securities (options and futures).9 Wali Memon
  • 10. 2: Asset Classes & Financial Instruments Learning Objectives Direct Investment Classes Marketable Securities Derivative Securities10 Wali Memon
  • 11. 2: Asset Classes & Financial Instruments II. Direct Investment Classes Nonmarketable Financial Claims Marketable Financial Claims Money market instruments Capital market instruments Derivative securities11 Wali Memon
  • 12. 2: Asset Classes & Financial Instruments III. Money Market Claims T-Bills, Negotiable CD, Commercial Paper, Bankers’ Acceptances Hybrid Claims: Eurodollar deposits, Repos LIBOR: UK version of Fed Funds Federal Agency paper12 Wali Memon
  • 13. 2: Asset Classes & Financial Instruments IV. Capital Market Debt Claims Notes and Bonds Treasuries, Federal Agencies Municipals (GO and Revenue) Corporate Notes and Bonds Collaterized (mortgage & Equip Trust Cert.) Uncollateralized (debentures)13 Wali Memon
  • 14. Asset Classes & Financial Instruments V. Capital Market Equity Claims Preferred Stock (mostly from Utilities) Common Stock (voting and non-voting) Derivative Securities Claims on Financial Claims Options (Calls and Puts), Warrants Futures (financial, commodities, currencies)14 Wali Memon
  • 15. 3 Financial Markets Where does all this activity take place? What are the important characteristics of and requirements for efficient financial markets?15 Wali Memon
  • 16. 3: Financial Markets Learning Objectives What are the principal features? Who are the main players? How are trades executed? How are markets regulated?16 Wali Memon
  • 17. 3: Financial Markets General Characteristics of Financial Markets Primary vs. Secondary Markets Perfect and Complete Markets [Theory] Financial Market Players Investors (Active, Passive) Investment Bankers Advise Underwrite Distribute17 Wali Memon
  • 18. 3: Financial Markets II. Financial Market Players (cont’d) C. Brokers (retail, online/discount) D. Market Makers (OTC) E. [Registered] Investment Advisors (RIA) F. Registered Exchanges (NYSE, AMEX, etc.)18 Wali Memon
  • 19. 3: Financial Markets III. Secondary Market Functions (Execution) Provide liquidity (cost = bid/ask spread) Provide current price information Price information via auction or electronic quote Market makers, [stock exchange] specialists Registered Exchanges (NYSE, etc. - centralized) Over-The-Counter (OTC) – NASDAQ Electronic Networks (e.g., Instinet)19 Wali Memon
  • 20. 3: Financial Markets IV. Trade Order Execution Market Order: immediate at bid (sell) or ask (buy) Limit Order: at specified price Stop Order: buy side, sell side Trailing Stop: trigger price moves with market Margin: borrowing portion of buy order (≤ 50%) Short Sale: profiting from decline in price20 Wali Memon
  • 21. 3: Financial Markets V. Regulation of Financial Markets Securities and Exchange Commission SEC established by 1934 act. Authority to regulate registered exchanges Defines insiders and behavior that is illegal FINRA (self-regulation, formerly NASD) Rules of Conduct/Ethics “Know your customer” Specification of fines and penalties21 Wali Memon
  • 22. V. Regulation of Financial Markets (cont’) C. Sarbanes-Oxley (2002) Securities Act of 1933 requires full disclosure CEO/CFO certification of operating reports Requirement for independent board of directors D. Other Significant Regulations/Acts Investment Company Act (1940) Securities Investor Protection Corporation (1970) Dodd-Frank (2009)22 Wali Memon
  • 23. 4 Mutual Funds Mutual Funds are by far the most important means and method for individual investing and investment management.23 Wali Memon
  • 24. 4: Mutual Funds Learning Objectives What are Mutual Funds? What are the advantages of investing in mutual funds? How mutual funds selected? How are funds regulated?24 Wali Memon
  • 25. 4: Mutual Funds II. Mutual Funds Mutual funds pool funds from many investors to buy securities Open-end investment companies (mutual funds) continually issue and redeem shares @ NAV Closed-End Funds: trade like stocks (listed / OTC) Net Asset Value (NAV) Value of the fund’s net assets, divided shares outstanding at close of market trading Shares may trade at NAV or at bid/ask prices for load funds25 Wali Memon
  • 26. 4: Mutual Funds III. Advantages / Disadvantages of Mutual Funds Diversification Smaller minimum investments to access large diversified portfolio Professional management Ease of entry/exit Minimum holding periods Front/Back-end sales charges26 Wali Memon
  • 27. 4: Mutual Funds IV. Selecting a Mutual Fund Fund Objectives Growth Income Growth and Income Large Cap / Small Cap International / Emerging Markets Management performance Fees and Charges27 Wali Memon
  • 28. 4: Mutual Funds Regulation and taxation of Mutual Funds Mutual Fund Act of 1940 regulates U. S. fund operations through the SEC State approval is also required for sales Regulated Investment Companies 90% of investment income must be distributed to shareholders each year Tax liability [for gains] falls to individual shareholders28 Wali Memon

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