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Economics: Investment Options
Transcript of Economics: Investment Options
Investors can make money off the stock market on both high-value companies and companies falling in value. They can do this by selling short, using warrants, buying on margin, or simply buying and selling stocks through a broker. This arrow indicates a rise in the percent change of a company on the stock exchange. In this case, the company's price is increasingly steadily and its value is rising. This arrow indicates a steep drop in the percent change. This means that both the comany's price per share and value are dropping. Three ways to buy and sell stock on the stock exchange: Selling Short Using Warrants Buying on Margin Investors sell short when they think a company's stock price will decrease.
Works by borrowing a set number of shares from a broker, selling the shares, waiting for the price to drop, buying back the same number of shares, and returning the shares to the broker while you keep the profit.
Buying back the shares is also called "covering the short position."
The risk of selling short is if the stock price goes up instead of down.
Another risk is the timing since you have to pay interest to the broker on the shares you borrowed.
When numerous investors try to sell short a company, some may get caught in what is known as the "squeeze," and will have to compete with other investors to buy back the shares as the price rises. Investors use warrants to wager on future prices, and they are used when investors thing the price of a stock will rise.
For a small fee, warrants guarantee a fixed price for a stock during a certain period of time.
Investors buy a number of shares using the warrants for a fixed price and then sell the shares back at the normal price, thus making money.
The only risk is if the stock price is less than the warrant's during the warrant's time frame - then the warrant is virtually useless. Investors buy on margin when they don't have or want to spend as much money buying the stock themselves.
In order to buy on margin, you would have to open a margin account with a broker and sign an agreement or contract.
The account will let you borrow money from the broker as long as you maintain a minimum balance on the account.
Brokers charge a fee for using the account and also issue margin calls if the account's minimum balance becomes low. Bank Accounts Treasury Bills Foreign Investments Company Investment Firm Investment Firm Brokerage Brokerage Brokerage Brokerage Public How Bonds Work: When a company first decides to sell a bond, it tests to see if the public will buy it by "floating" the bond.
Once the company determines that the public will buy the bond, it sells them in bulk to investment firms for face value minus any fees.
The investment firms then break up the bonds and sell them to smaller brokerages.
The brokerages sell the bonds to the public, who, in turn, can trade bonds with each other. Bonds are loans made to companies or the government in exchange for their full value plus interest when they mature. They are fixed-income securities (pay a set amount of interest) and also have a fixed maturity date. Investors like to include bonds in their portfolios because they provide a steady income that can only be affected by inflation. This being said, bonds can also be traded to make money when interest rates change. There are two main types of bonds - Corporate Bonds
- sold by companies to raise money for their growth and development. U.S. Treasury/Municipal Bonds
- sold by the U.S. government since they cannot issue stock themselves. These bonds fund capital improvements and help keep everyday operations running. Each type of bond can also be split into three more types. . . . Short-term
- maturity date is reached after one year or less. Intermediate-term
- maturity date is reached between two and ten years. Long term
- maturity date is reached after 30 years or more. Generally, the longer the term, the higher the interest rate is to appeal to investors. A mutual fund is diverse collection of stocks, bonds, and other securities. They:
Offer a solution to investors who want a diversified portfolio for a smaller cost than investing by themselves.
Make money by earning dividends and by earning interest on the investments that have increased in price.
Pay funds on different schedules, from once a year to once a day.
Give investors the option to reinvest the dividends they earn.
Collect taxes investors pay on the dividends.
And are created by investment companies such as mutual fund companies, brokerage houses, and banks. There are two main types: Open-end and closed-end mutual funds. Open-end: These funds sell as many shares as the investor wants. Sometimes they have to be closed to new investors because they get too large. Closed-end: These funds behave more like stocks since they raise money only once, offer a limited number of shares, and are traded on an exchange. Mutual Funds never invest at random; therefore, there are many kinds of focused funds. Stock or Equity Funds These funds invest primarily in stocks. Investors get a more diversified stock portfolio for the same price as buying stocks normally. All profits from these funds are taxable, but no tax is due until the fund is sold. Blue-chip stocks - invested in for income and safety. Growth stocks - invested in for future gains. Value stocks - invested in for stability and growth. Cyclical stocks - invested in to catch economic booms in the stock market. Bond Funds These funds produce regular income like bonds but have no maturity date and no guarantee of repayment. Dividends can be reinvested to increase the principal. Taxable bond funds - corporate and U.S. government bond funds are taxed. Tax-free bond funds - municipal bond funds have no federal tax and also have no state tax for investors in the same state. Money Market Funds These funds resemble savings accounts in the fact that for every dollar you put in, you get a dollar back plus interest. They are essentially risk-free but interest rates are generally low. As an added appeal, investors can write checks against their accounts. Taxable money market funds - buy best-yielding, short-term corporate and government bonds. Tax-free money market funds - buy municipal debt. Other mutual funds include: index funds, which buy all the stocks in a particular index (Dow Jones Averages); sector funds, which invest in a certain industry; and "green" or "conscience" funds, which appeal to investors with certain political or social beliefs. But where can I read more about a particular mutual fund? The Prospectus This document allows investors to get to know the mutual fund they are planning on investing in. It offers basic information such as the fund's objective, strategy, any fees associated with opening an account, etc. Let's put all of this into action . . . An average citizen by the name of Stan Diedrich decides to put his economic skills to use and starts investing. First he contacts his local broker and buys 100 shares of Google and sells short 50 shares of Apple Inc. Realizing he needs a steadier income in his portfolio, Diedrich then decides to buy a couple short-term bonds from that same broker. Over time, he begins to realize he really isn't making money and decides to invest in a mutual fund instead. He heads over to an investment firm and opens up an account there. Diedrich then invests in a blue-chip stock fund and an index fund, deciding to let other people handle his investments. After all, even The Master of Economics can't do everything himself.