Kristin Decides to Try Her Hand at Investing - Essay Example

Discuss the investment options open to Kristin. As a young investor Kristin wants is willing to accept some risk, but does not want to be speculative in her investment decisions. There is a wide array of investment alternatives available for a typical investor from traditionally safe options such as Treasury Bills or U.S. Savings Bonds which earn a modest interest rate but are considered relatively risk-free. Of course the capital market provides the most lucrative alternatives for investment opportunities albeit riskier.

The alternatives are varied from fixed income securities to equity investment in corporations through stocks and bonds. Mutual Funds allow the typical investor to use the expertise of professionals to invest in a portfolio of stocks. They represent one of the easiest ways to invest in the stock market. There are many different types of funds divided by sector, level of risk, or classification; from blue-chip stock to growth funds or funds geared to specific sectors of the economy .The investors buy shares in the fund which provide the individual with ample choices for diversification, levels of risks, and potential returns.

For more sophisticated investors and financial speculators, the derivatives market opens up a diverse array of financial instruments such as options and futures. 2) Discuss the likelihood of Kristen earning a satisfactory return if she invests her $15,000 in: a) Blue-Chip Stocks- These types of stocks provide investments in companies that are leaders in their gauged by their financial strength ,market capitalization, leadership in their industries, and reputation. They are considered one of the best stock categories for long- term investment in a financial portfolio, while earning are fair return on investment b) Growth-Stocks- For a less risk-averse investor, it can become a significant part of an investment portfolio.

Growth stocks typically provide some of the highest returns on investment, but with the volatility and risks of emerging technologies and corporations the risks are much higher than blue-chip stocks. For Kristen allocating a modest percentage of her investment budget might be a good strategy to maximize her return while providing an acceptable level of risk. c) Speculative Stocks- They are the riskiest type of stock since typically involves new companies with emerging technologies with no earning records.

These stocks have a high possibility of incurring great losses or gains therefore are only usually considered by the least risk-averse investor. d) Corporate Bonds- Due to their long maturity period and proven performance, high grade corporate bonds could be part of Kristen's investment portfolio. They help provide diversification, a steady stream of income, but are subject to the effects of rising interest rates, inflation, or the issuer could default on the bond. For Kristen's age and investment goals; blue-chip and growth stocks provide a more attractive alternative, although a small portion could be allocated to corporate bonds. e) Municipal Bonds- Just like corporate bonds, municipal bonds provide a steady stream of income.

There are many classes of municipal bonds with different levels of risks and returns, based on the municipality's credit rating or bond type. Since municipal bonds are typically tax exempt, they can be an attractive alternative to some investors depending on their tax bracket. 3) Describe which factors will drive Kristin's decision related to her investment choices. Kristin's is a young management trainee at a large chemical company. She has $15,000 to invest, plus she is currently saving around $8,000 yearly from her job.

She is willing to take some risk since she is young and has no family, therefore is willing to accept some risks for higher potential return. She does not consider herself a gambler or speculator, so high risk technology companies or penny stocks are not an option for her. 4) Recommend Kristin the best available investment alternative for her. Explain your reasoning Kristin needs to diversify her financial holdings. The majority of the $15,000 investment around 60% or so should be allocated to blue-chip stock oriented mutual funds.

Kristen should look into allocating a portion of around 15-20% on growth oriented funds which can provide high returns in the long term while providing an acceptable level of risk. As an investor Kristin needs to decide what has many options for her last 20-25% of her budget. Since she works for a large chemical company, investing in her own employer through employee stock options, could provide a valuable investment opportunity since employers often sell these shares below fair market value.

High grade corporate bonds could also be a way of diversifying the investment portfolio while providing a residual stream of steady income to reinvest. Since Kristin is not an experienced investor, getting advice from a financial advisor to sort out her portfolio would be her best option before investing. Kristin needs to combine several kinds of investment instruments to maximize profit potential while not incurring to high level of a risk.