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INVESTMENT ALTERNATIVE, Represent ownership in a corporation
Each share…
INVESTMENT ALTERNATIVE
Common Stocks
Advantages
- Appreciate in value
- Providing higher expected returns
- Hedge against inflation
Disadvantages
- Carry higher risk
- Lowest claim on assets
- Company is not obligated to pay dividends
Bonds
Advantages
- Steady income stream and generally lower risk (compared to stocks)
- Higher claim on assets than common stockholders (company faces liquidation)
Disadvantages
- Returns are generally fixed
- Do not provide a hedge against inflation
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Preffered Stocks
Advantages
- Received higher rate of return than bondholders to compensate the slightly greater risk they assume.
Disadvantages
- Investors cannot participate in excess earnings.
- The return on preferred stocks is limited / fixed amount.
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Definition of investment
The devotion of current resources with the expectation of receiving a larger amount of resources in future.
Types of Assets
Real Assets
- contribute directly to the productive capacity of an economy.
- assets produce goods and services of a nation considered as real assets.
- classified as tangible assets or physical capital (land, buildings, machines, gold)
Financial Assets
- claims that organization sell to finance their projects (evidenced by legal documents)
- classified as intangible asset where it claims on real assets or on the income they generate (stocks and bonds)
Classification of Risk
Systematic Risk
Market Risk
- carefully examine history of the stocks
Inflation Risk
- construct investment portfolio carefully
Interest Rate Risk
- hold security until maturity
Unsystematic Risk
Business Risk
- having good management team
Financial Risk
- carefully finance the operation of the company
Fixed Deposits
- Interest earn > saving account
- No interest earning if saving is withdrawn before the maturity period
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- Represent ownership in a corporation
- Each share represents a fractional ownership interest in the firm
- Fixed-income securities where the issuer agrees to make regular interest payments
- Typically issued by governments or corporations
- Maturity less than a year (91-270 days)
- Low risk (issued by government)
- Principle + interest is guaranteed to be paid on time
- Most treasury securities have low liquidity risk and can easily be sold for cash.
- Low interest rates and rising inflation can make treasury bills lose value over time.
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- Investors do not have voting rights.
- Earnings are guaranteed in the form of fixed dividends for regular time period.
- Less risky than common stock in case of liquidation.
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- Issued by corporations.
- hybrid securities ( bond + common stock).
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- Form of deposit account where the principle amount and the terminal value is known for certainty.
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- Less Risk
- Stable and steady return of capital gain and return
- Managed by fund Manager
- Feasible way to participate in stock market
- Good hedge against price volatility
- Source of collateral (financing)
- Highly liquid
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- Investors do not have voting right