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Investment Companies In 1992 for first time in U.S. financial history, individuals no longer held a majority of all publicly traded U.S. stocks. However, if one counts indirect ownership, the individual investor controls more than 50% of the stock. Assets in mutual funds grew by more than tenfold in the 1980s to $1 trillion dollars and by June 1999 $6 trillion dollars. Mutual funds owned almost 19% of all US stocks by the beginning of 1999. Household Choices in Saving: 1. Hold liabilities of traditional intermediaries (savings accounts,MMDAs) 2. Hold securities directly 3. Hold securities indirectly Indirect investing refers basically to trading shares of investment companies. Investment Companies Financial organization that sells shares on itself to the public and uses the funds it raises to invest in a portfolio of securities such as money market instruments or stocks or bonds Don’t pay taxes on any distribution if Qualify as a regulated investment company (earns 90% of its income from security transactions) and If at least 90% of its taxable income each year is passed onto the shareholder Must register with the SEC Not insured or guaranteed Types: Managed Closed-end Open-end Unmanaged Unmanaged Funds Unit Investment Trusts Unmanaged, usually fixed income Handled by an independent trustee Redeemable trust certificates Sold at the NAV + small commission All interest (dividend) and principal repayment distributed to holders Most hold tax-exempt securities Recently some have been created for stock Passive investment Designed to be bought and held with capital preservation as a major objective Trust ceases to exist when the bond matures If conditions change, investor loses the ability to make rapid, inexpensive, or costless changes in their portfolio Managed Funds (1) Closed End Funds Do not buy their shares back Capitalization is fixed until issue new public offering Shares trade in a secondary market Special type of closed-end fund---Dual Purpose Funds Limited life 2 Classes income capital 6/25/17 Prices fluctuate widely from the NAV Discount Premium (2) Open End Fund Referred to as a mutual fund Continues to sell shares after the initial sale of shares that starts the fund Capitalization continually changing Purchase Direct from fund Indirect from sales agent Fund must buy back shares at current NAV Fund is a corporation formed by an investment advisory firm that selects the board of trustees. Trustees hire a management company. Management company research manage the portfolio administrative chores receives a fee for services To get into a fund: 2/3 require $1000 or less 85% require $5000 or less IRA-minimum requirement often lower Types of Mutual Funds: Short-term—money market Long-term—equity or bond or combination Short-term----Money-Market Funds Portfolio consist of money-market instruments Three Types General Purpose Broker-dealer Institutional Funds can be Taxable Tax-exempt Taxable funds Commercial paper make up 40-50% of fund assets Avrg maturity –1-2 months SEC set max maturity at 90 days Tax-Exempt Types National State—invest in only one state No sales Charge No redemption charge Redeemed by phone or wire Management Fee Interest earned and credited daily Some offer check writing privileges 6/25/17 Not insured Long-Term Equity and Bond/Income Funds Objective 18 categories (Investment Company Institute) Other companies such as Lipper or Morningstar have a different number of categories investor matches their personal objective to fund objective Stock Funds Account for 54% of total assets in the mutual funds market (1999) Stock funds can be divided into two main categories Value Growth Funds can be sold either Directly by the company Sales force (brokers, insurance agents, and financial planners) Load Funds Sales fee when purchase Fee goes to marketing organization (the company itself or its sales force) selling the shares Fee split between the salesperson and the company selling the shares Typically no redemption fee (back-load) 12b-1 fee distribution fee has ranged as high as 1% of average assets of fund 50% of funds charge a 12b-1 Combination of fees Different classes have different combination of sales charge, annial,12b-1 or redemption fees No Load Funds Bought at NAV directly from the fund Investors must purchase and redeem by mail, wire, or phone Performance Benchmarks S&P 500 Composite Index Russell 2000 (index for small companies) Returns Total return Cumulative total return Average annual return Performance consistency has been researched and there is (as usual) conflicting evidence on whether past performance can be maintained. As a result the index funds with lower expenses have gained popularity. Operating expenses charged by all funds Management fees Overhead charges 12b-1 fees 6/25/17 Investing Internationally Types Mutual Funds International funds Global funds Single country funds (usually closed-end funds) US companies with strong earnings abroad More volatile than the market as a whole Passively managed country funds-geared to match a foreign stock index of a particular country Morgan Stanley’s World Equity Benchmark Shares (WEBS) Deutsche Morgan Grenfell’s Country Baskets 6/25/17