Posts

Showing posts from January, 2019

Equity funds VAS Bond funds

Image
The primary focus of equity funds is to invest in common stock. Within equity funds, we find different objectives. Growth funds invest in companies likely to grow their profits faster than competitors and/or the overall stock market. These stocks usually trade at high P/E and price-to-book ratios. Value funds, on the other hand, seek companies trading for less than the portfolio managers determine they're truly worth. These funds buy stock in established companies currently out of favor with investors. Since the share price is depressed, value stocks tend to have high dividend yields. Value funds are considered more conservative than growth funds. What if he can't make up his mind between a growth fund and a value fund? There are funds that blend both styles of investing, and the industry calls these blend funds . In other words, no matter how creative the portfolio managers might get, they end up being either a growth fund, a value fund, or a blend of both styles. If an inves

Advantages of Mutual Funds

Image
Advantages of investing through mutual funds vs. buying stocks and bonds directly include: Investment decisions made by a professional portfolio manager Ease of diversification Ability to liquidate a portion of the investment without losing diversification Simplified tax information Simplified record keeping Automatic reinvestment of capital gains and income distributions at net asset value Safekeeping of portfolio securities Ease of account inquiry   The first point is probably the main reason people buy mutual funds they have no knowledge of stocks, bonds, taxation, etc., and they have even less interest in learning. Let a professional portfolio manager often an entire team of portfolio managers decide what to buy and when to buy or sell it. As we mentioned, it's tough to have your own diversified portfolio in individual stocks and bonds because a few hundred or thousand dollars will only buy a few shares of stock or a few bonds issued by just a few companies. On the other hand,

Pooled Investments

Image
Types and Characteristics of Pooled Investments In the securities industry, there are many ways to refer to the same thing. What some call a "pooled investment vehicle" others refer to as a "packaged product" or a "mutual fund." Whatever we call these investments, a pooled investment vehicle pools the capital of many investors together, with that capital then managed by a professional . Rather than investing directly in a company, investors buy investment products that come with various features. The best-known pooled investment vehicle is the mutual fund. While some investors buy shares of SBUX, many prefer to own shares of a mutual fund that devotes a percent of the portfolio to SBUX and other large-cap stocks. Similarly, rather than putting $100,000 into one issuer's bonds, many investors prefer the diversification and professional management offered by a bond fund.   A mutual fund is an investment portfolio managed by an investment adviser. Inv

ADRs

Image
Americans who own shares of Toyota or Nissan own American Depository Receipts (ADRs) . ADRs allow American investors to diversify their portfolio with foreign investments that trade in the U.S. financial system and U.S. currency while giving foreign companies easier access to U.S. capital markets. The ADR investor buys an American Depository Receipt that represents a certain number of American Depository Shares of a foreign corporation's stock. The shares are held in a U.S. bank in the foreign country, which issues a receipt to the investor in America.   The custodian bank provides services including registration, compliance, dividend payments, communications, and record keeping. These fees are typically deducted from the gross dividends received by the ADR holders. Or, if the issuer does not pay dividends, broker-dealers and banks cover the custody fees charged by depository banks and then pass the charges on to their customers. ADRs file a registration statement called an F-6 w

Dividends

Image
Not all shareholders are looking for dividends. An investment in Berkshire Hathaway today, for example, would be made without the issuer stating any plans to pay dividends, ever. The only type of investor interested in this stock, then, is a growth investor . But, there are growth & income investors and equity-income investors for whom dividends are important. Dividends are a share of profits paid out to shareholders if the Board of Directors for the corporation votes to declare them. The day the Board declares the dividend is known as the declaration date . The board decides when they'll pay the dividend, too, and we call that the payable date . The board also sets the deadline for being an owner of stock if you want this dividend, and we call that the record date because an investor must be the owner of record as of that date to receive the dividend.   Now, since an investor must be the owner of record as of the record date to receive the dividend, there will come a day

Common Stock

Image
Common stock, on the other hand, is all about the profits a company makes. Unlike with bonds, common stock does not give the investor a stated rate of return. If shareholders receive 64 cents per share of common stock as a dividend this year, they might or might not receive that much next year. A famous toy maker just cut its dividend in half as it tries to turn itself around. And, many companies never pay dividends. Both the income produced by common stock and the market value of the stock itself are unpredictable. Therefore, common stock investors should only invest the money they could afford to lose. Bond interest is a fixed expense to the issuer paid to the bondholder. Profits at most companies are unpredictable and, therefore, so are the dividends and the market price of the issuer's common stock. Rights and Privileges Common stockholders are owners of the corporation and vote at all annual and special meetings. The owner of common stock has the right to vote for any major is

Premium Bonds

Image
What happens when interest rates fall? Bond prices rise. If you owned this 8% bond and saw that interest rates had just fallen to 6%, how would you feel about your bond? Pretty good. After all, it pays 2% more than new debt is paying. Do you want to sell it? Not really. But you might sell it if investors were willing to pay you a premium. Current Yield Bond investors push the price of the bond up as interest rates go down. Maybe your bond is worth $1,200 on the secondary market now dividing our $80 of annual interest by the $1,200 another investor would have to pay for the bond gives us a cur¬rent yield of just 6.7%. That's lower than the coupon rate. So, wait, did the price of this bond just rise, or did its current yield drop? Exactly right! When you see a coupon of 8% and current yield of 6.7% (or anything lower than that 8% printed on the bond), you're looking at a premium bond. A discount bond trades below the par value, while a premium bond trades above the par value. Th

Discount Bonds

Image
Par value is what is returned to the bondholder at maturity and what the coupon rate is multiplied against. But, bonds are not bank deposits. Rather, they are securities trading on a secondary market. Among other factors, a bond's market price fluctuates in response to changes in interest rates. If a bondholder has a bond that pays a nominal yield of 8%, what is the bond worth when interest rates in general climb to 10%? Not as much. If you had something that paid you 8%, when you knew you could be receiving more like 10%, how would you feel about the bond? Not too good. But, when interest rates fall to 6%, suddenly that 8% bond looks good, right? It's all relative.   Current Yield When we take a bond's market price into consideration, we're looking at current yield. Current yield (CY) takes the annual interest paid by the bond and divides it by what an investor would have to pay for the bond. Current Yield = Annual Interest / Market Price So, let's say after an inv

Callable Bonds

Image
A bond has a maturity date that represents the date the issuer will pay the last interest check and the principal. At that point, it's all over—the debt has been paid in full, just like when you pay off your car, student loan, house, etc. This can be referred to as "maturity" or redemption. As we saw earlier, many bonds are repurchased by the issuer at a set price if interest rates drop. So, a bond might not make it to the maturity date due to an early redemption or "call." Either way, the debt would have been retired by the issuer. Municipal bonds are frequently callable by the issuer. Refunding a current issue of bonds allows municipalities to finance their debt at lower rates going forward. Or, there could be a covenant in the bond indenture for the current issue that is burdensome, motivating the issuer to start over. An optional redemption gives the issuer the option to refinance/refund their debt as of a certain date at a stated price, or over a series of

Municipal Securities

Image
If there is an old brick industrial building that was supposed to be turned into a major condominium and townhouse development back before the bottom fell out of the real estate market. Unfortunately, the developers borrowed $15 million but pre-sold only one condominium, sending the property into foreclosure. So, the park district, whose land sits next to the foreclosed property, wanted to tear down the outdated structure for their operations. The park district needed $6 million to acquire and develop the property and, therefore, raised that amount by issuing municipal bonds . In a recent election, a majority of Forest Parkers voted to allow the park district to raise property taxes slightly to create the funds needed to pay off a $6 million bond issue to be used to better the community. The bonds pay investors tax-exempt interest at the federal level. Illinois residents also escape state income tax on the bond interest. For us, all it took to see the connection between this municipal