Understanding of the Investment Market to both Maureen and Tom - Case Study Example

Executive summery This report provides an in-depth knowledge on main topics of investment analysis as Maureen and Tom want to invest in an investment that will generate good returns to them. The report emphasizes analytical aspects of investment decision making, analysis and evaluation of different securities as investments, portfolio diversification. Special attention is given to the formulation of investment policy and strategy. This report also highlights an understanding of the investment market to both Maureen and tom in which they can invest their funds. Table of Contents Table of Contents ii 1.0.The main types of financial investment 1 2.0. Short - term investment 1 2.1 Certificate of deposit 1 2.2. Treasury bills 1 2.3. Commercial paper 2 2.4. Bankers acceptances 2 2.5. Repurchase agreement 2 2.0.Fixed-income 3 3.1. Long-term debt securities 3 3.2. Preferred stocks 3 4.0. The common stock 4 5.0. Speculative investment 4 5.1. Options 4 5.2. Futures 5 5.3 Commodities traded on the stock exchange. This guarantees income. 5 6.0 Objectives 5 7.0 Recommendations 5 8.0 References 6 1.0. The main types of financial investment The first case As Maureen is retired I advice her to go for short term investment options which will generate income for her. They go hand in hand with Maureen’s priorities of getting income and make the money work for her. She will earn income and secure a comfortable retirement. This is how Maureen should have invested her funds. Maureen wants to invest in relatively low risk returns that would guarantee returns to supplement their income and invest capital in hand. These investment options provides for low risk while for Tom they guarantee high returns. 2.0. Short - term investment These are viable options for investments that Maureen can choose as they take one year or less to mature. This short term investments mature very fast. Short term investments often are known as money oriented, reason being they are traded in the money market which trades the financial market for short term marketable monetary assets (Myles 2009). Maureen should invest $80,000 previously for bank shares. 2.1 Certificate of deposit This is type of a debt. It is issued by banks. They indicate a specific sum of money has been deposited by the issuing depository organization. Although Maureen have invested in bank shares and have not enjoyed the returns, this certificate of deposit can be withdrawn any time, hence income. It bears a date of maturity together with specified interest rate and can be given in any denomination. For big money-market investors banks allow their huge-denomination certificates of deposits to be marketed as negotiable certificates of deposits (Marcus 2005).Maureen’s $65,000 previously for manages Australian share fund should be invested here. 2.2. Treasury bills They are issued by the government. They have maturities of less than one year this instruments would suit Maureen as they are risk free. They have the unique feature of being issued at a discount from their face value and the difference between face value and discount price is the only sum which is paid at the maturity for these short term securities because the interest is not paid in cash, only accrued (Frank 1999). The other important feature of Treasury-bills is that they are risk-free securities, they are not affected by inflation, and the Treasury-bill will pay the fixed stated yield with certainty. Treasury-bills are issued on an auction basis. The first allocated pension of $350,000 would earn Maureen good returns as treasury bills are risk free and are for a short period of time. 2.3. Commercial paper It is a form of a promissory. It is in most cases not secured. Since this is only affordable by companies Maureen should have invested her allocated pension to buy a commercial paper. This is because they mature faster and have good returns. Big and good funded companies have found that getting funds from investors directly through commercial paper is less costly than relying on bank loans (Ibbotson 2002). Commercial paper is issued by firm or through an intermediary. It is issued at a discount. The most common maturity range of commercial paper is 30 to 60 days or less. It is riskier than government bills, because there is a larger risk that a company will default in payment. Maureen should invest her allocated pension two of $400,000 here. This will earn returns and will get to invest more frequently as possible because they are short term 2.4. Bankers acceptances This would guarantee some return as there is no default risk. This short-term loan contract has a higher interest rate than other securities to pay for the default risk. Since bankers’ acceptances are not uniformity, there is no frequent trading of them in the market. 2.5. Repurchase agreement The unlisted property of $90,000 invested by Maureen should have been invested in repurchase agreement. It is a commitment by the seller to buy the stock back from the buyer at a stated price at a later future date. The difference in the buying price and the selling price is the interest cost of the loan (Schoenmaker 2009), from which repurchase rate can be calculated. Default risk concern makes the length of maturity of this security very short. There is also an overnight loan which is called an overnight repurchases. a term repurchase is for an agreement which extends to more than one day. A reverse repo is the opposite of a repo. Here a company buys the securities with an agreement to sell them at a specified price and time. This repo helps to increase the liquidity in the money market. The second case; Tom. Since he has a modest income, the $150 a quarter and the $10,000 in savings account should be invested in fixed income investment and capital investment. Tom can chose from the following investment options. They are equally viable investments. They are found in stock market through financial advisers. 2.0. Fixed-income Tom is earning an income. He wants to invest so as to boost his income and be able to provide for his children education. Since he already has another means by which he is earning income, long term investment will be the best investment option for him. This investment provides good returns at a whole and he can be able to provide for his needs. These are the investment funds that I would recommend to Tom. They have a fixed return and have relatively low risk. These securities are those which return is constant, up to some buying back date or indefinitely. They may be stated in money terms or stated to some measure of the price level. This type of financial investments is presented by two different groups of securities: 3.1. Long-term debt securities This would suit Tom necessarily as he wants to invest his funds in risk free investment. They are long-term debt financial assets representing the issuer’s whole obligation. They take more than one year to mature. The buyer is the investor who lends money to the issuer; the issuer pays interest on this amount and repays the principal amount at a agreed maturity date. They are traded in the capital markets. They are a safe asset to investors who invest in them. a good example of this securities are the bonds, there are quite a number of bonds in the market, they differ by the type of issuer and by different types of interest payments which is a result of bringing financial innovations to the long-term debt securities market (Charles 2010). 3.2. Preferred stocks This has two types of returns at once, there is the capital return and the dividends return. It characterized by low risk and therefore fits Tom well. They are equity security, which has endless life and also pay dividends. Preferred stock is attributed to the type of fixed-income securities; this is because the dividend for preferred stock is constant in amount and known in advance. They provide for the investor the flow of income very similar to that of the bond. The main difference between preferred stocks and bonds is that the preferred stock flows are forever, if the stock is not callable. Some dividends are cumulative and therefore failure to pay in one year they will be paid the next year. Dividends for those years with losses do not have to be paid if the dividends are not cumulative. Usually some rights to voting in general meetings for preferred stockholders are usually suspended. Because of having the features attributed for both equity and fixed-income securities preferred stocks is known as hybrid security. 4.0. The common stock If Tom were to invest in this common stock, he would be entitled to share of residual assets. They represent the ownership interest of corporations or the equity of the stock holders. The holders are entitled to attend and also vote at annual general meeting of shareholders, to receive declared dividends also and to receive their share of the residual assets, if the corporation is bankrupt. The issuers of the common stock are the companies which seek to receive funds in the market and though are going public. 5.0. Speculative investment Derived from the term speculation, could be defined as investments with a high risk and high investment return. Although they have high risk they have high return and this is good for Tom. Using this investment the speculators try to buy low and to sell high, their primary concern is with anticipating and profiting from the expected market fluctuations. The only gain from such investments is the positive difference between selling and purchasing prices. The market is dominated by speculators and the jobbers who buy and sell at different times to the investors. 5.1. Options This will make Tom to incur some fee in buying it. It gives the owner of the contract the right and not the obligation, to buy or to sell a financial asset at a specified price from or to another part (Vaitlingam 1999). The buyer of the contract must pay a commission (option price) for the seller. There is a big uncertainty about if the buyer of the option will take the advantage of it and what option price would be relevant, it depends on the demand and supply in the market. The performance of other securities also matters slightly when it come to the demand of the security. 5.2. Futures This represents an agreement between two persons that agree to transact a financial asset at a set price in a future date. One person agree to buy the financial asset, the other person agrees to sell the financial asset. It’s crucial that in futures contract case, both parties are bound to perform and neither party charges the fee (Jerry 1993). 5.3 Commodities traded on the stock exchange. This guarantees income. 6.0 Objectives Tom needs to know which investment pays well in return wise. To do this he must have guideline to guide him in making decisions. These objectives would help Tom to make an informed choice. Investment objective is to help Tom to understand the investments field as it is currently is and for sound investment decisions making. To analyze the investment environment, different types of investment; To understand the logic of investment process and its contents. To use risk and expected return of various investment and the investment portfolio. To distinguish different portfolios and apply them in investment portfolio formation. To analyze and to evaluate the relevance of stocks, bonds, options for the investments. To understand the psychological issues in investment decision making. To know active and passive investment strategies and to apply them in practice. 7.0 Recommendations I would recommend to Tom these companies because they have the highest ratings in terms of profitability and return to investors in blend medium share fund rankings. MasterCard 1.7 % Google 1.6 Morgan Stanley 1.5 8.0 References Black, J. Nigar, H., & Gareth, M., (2009). Oxford dictionary of economics, 3rd ed. New Yolk: Oxford University Press Inc. Fabozzi, F. J., (1999). Investment Management, 2nd. ed. New Yolk: Prentice Hall Inc. Francis, J., C., & Ibbotson, R., (2002). Investments: a global perspective. New Yolk: Prentice Hall Inc. Haan, J., Oosterloo, S., & Schoenmaker, D., (2009). European financial markets and institutions. Cambridge: Cambridge University Press. Jones, P. (2010). Investments principles and concepts. New Yolk: John Wiley & Sons, Inc. LeBarron, D. & Romesh, V., (1999). Ultimate Investor. Capstone: International edition. Prentice –Hall International. Levy, Haim, Thierry Post (2005). Investments. New Yolk: FT / Prentice Hall. Rosenberg, Jerry M. (1993). Dictionary of investing. John Wiley & Sons Inc. Sharpe, William F. Gordon J.Alexander, Jeffery V.Bailey. (1999). Options in financial investments. New Yolk: Prentice Hall Inc. Zvi, B., Kane, K., Marcus, A., (2005). Investments, 6th ed. New Yolk: McGraw Hill. Read More