FIN 1011: Types Of Investments – An Overview

Current situation: Net worth

Discuss about the FIN 1011 Types of Investments.

• To purchase a house in public locality
• To have secured future after retirement
• To have secured investments for long term commitments

There are two main types of investments i.e. ownership and lending. When the lending investment option is chosen, the party loans its money to an organization, an individual or a company. In its return, the party gets interest payments. At the conclusion of the consented loan period, the party will also receive its original investment amount. Lending investments entail everything from corporate bonds to a savings account, Guaranteed Investment Certificates and Canada Savings Bonds. On the other hand, an ownership investment option implies that the party becomes the real owner – or part-owner – of its investment. Ownership investments are also known as equity investments and entail stocks, real estate, and ploughing money into a small business (Konstantelos and Strbac, 2015). If the core property or business rises in value then the value of the share will also increase.

Hence, lender investors lend their money to other party in return of interest payments. This loan can take the shape of Treasury bill, bond or GIC. In contrast, owner investors become the real or part owners of the firms in which they make an investment. Therefore, they get paid a segment of the company’s earnings. Such investors normally buy equity such as real estate or stocks (Frank and Shen, 2016).

• Government of Canada Bonds – Federal Bonds are touted to be the safest investment options. The only risk factor is a nation may default, however it is very improbable that Canada, which is among the most economically strongest nations will go bankrupt. For e.g. the same is not true for Greece. As it is highly safe, the interest received by investors for holding this bond is lower as compared to other bonds. It is specifically small today due to the immensely low rates of interest. As of October 2011, a five-year Federal Bond gives around 1.61%. Still, if you are apprehensive of stocks, this is a great means of saving money (Ryan and Young, 2018).
• Guaranteed Income Certificates (GICs) – These are similar to bonds, only that the banks issue them. An investor loans the bank money by purchasing a GIC and on the maturity of this investment, you receive your money with interest. Banks normally utilize the dough to finance other investments. The Canada Deposit Insurance Corporation protects the GICs. Hence, if any bank defaults, the investor will receive his/her money up to $100,000. The interest earned is dependent on the duration of the GIC. An investor can buy bonds which have a maturity of just one month or between 1-5 years. The longer the period, the higher the interest rate. However, in time of low rates of interest, the investor is not seeking great returns; for e.g. Ally’s 5-year GIC pays 2.75%, the highest of the lot (Gotze, Northcott and Schuster, 2016). The investor cannot sell GICs, hence majority people utilize them to park some money for a short time period. If a person know that he/she will have to purchase a car next year, then they may invest in GIC. On its maturity, the person will make a little more money than what he would get from a standard bank account.
• High-yield savings account – If an investor wants to deposit some cash in the bank, he may consider a high-yield saving account. This account gives higher rate of interest as compared to regular savings account, although some need a minimum balance to get the high rate (Subramani, 2011).
• Corporate bonds – Corporate bonds could be risky, however, they can provide the portfolio with much-required income infusion. Basically, the investor is loaning a business money and is getting interest in return. A company has more chances of becoming bankrupt than a nation, hence investors receive higher rate of interest on corporate bonds than on federal bonds. These bonds are still safer option than stocks but ensure sticking to highly-rated bonds only (Gupta, 2017).

• Stocks – Stocks are issued by companies wherein the investor is made the part-owner of the company by purchasing its shares. There are two main types of stocks: preferred and common. Trading of stocks is done on stock exchanges or over-the-counter. Returns and prices of shares fluctuate immensely and there is no surety of income (Daily, Kieff and Wilmarth, 2014).
  • Common stock – With common shares/stock, investors enjoy voting rights. These shares are normally bought for likely capital appreciation. If the firm makes money, its investors have share in the profits. But, if the firm has a weak year and is suffering losses or the market declines, then the share value falls and dividends are scarce. Blue chip stocks are normally stocks of big, stable and actively traded corporations with a history of regular payment of dividends. Penny stocks refer to low-cost common shares which are valued under $1. These are bought for speculative intentions and issued by unproven companies or start-ups seeking money for expansion (Anderson and Haslem, 2015). Small, mid and large-cap shares are the outcomes of companies of all sizes issuing common stock to raise funds. Usually, the smaller the company, the greater the risk.
  • Preferred shares-  These are considered as bond-like investments. Preferred stocks are usually bought by investors who require a consistent stream of dividends instead of capital appreciation. Dividend paid on these shares is higher yielding as compared to common shares. The share price and value are influenced more by trends in interest rate than company earning. The shareholders do not have voting rights normally. They are preferred as the investors receive preferential claim to the assets and profits before common stockholders (Ju, Leland and Senbet, 2014).
• Precious Metals – These include gold, silver, platinum and other precious metals. Precious metals are held in form of certificates of ownership or bullion i.e. the real metal.
• Commodities – These include bulk goods like oil, grains, foods and metals and are traded on commodities exchange (Jordan, 2014).
• Derivatives – These are securities whose value is dependent on the market value of some other thing like commodity or stock. They are intricate investments utilized by sophisticated investors for the purpose of speculation or to aid in risk management for e.g. as a hedge against altering market conditions. Futures and Options are examples of derivatives. A “Futures” contract bounds the investor to purchase or sell a particular amount of asset at a decided price on a set date. An “Options” gives the investor the freedom to purchase or sell a particular security at a decided price before the set date (Hull and Basu, 2016).
• Mutual Funds – This is an investment product composed of many investors’ contributions, wherein a professional money manager invests in a range of securities. This wealth pool may be invested in a particular market of geographical region, in small company stocks or in blue-chip firms. The manager oversees the investments on a continual basis. These funds are attractive as they provide access to a broad variety of investments, are extensively available and are simple to purchase (Frankel and Laby, 2015). All mutual funds levy Management Expense Ratio which is the cost of operating and managing a fund. There are other fees as well like initial fee, acquisition fee, and selling fee.

The section will comprise the detail in which John and Juli Brown will attempt to buy the house they require and the manner in which they will secure their future. The cost of house in North York where public transit is easily available is approximately $450000- $500000. Thus a loan of $450000 would be passed from bank. In present case as they will not be able to provide 20% of loan amount as down payment thus they will not be able to procure conventional mortgage which is available at lower rate. They will have to attempt for insured mortgage in which facility of loan with lower down payment to the extent of 5% is available. As their earnings are almost fixed thus a fixed interest loan will be applied so that they could know the exact amount to be paid by them.

Amount available for investment and other expenses after payment of principal and interest amount of loan:

Net saving of John and Juli after expending their all required expenditure is  $50128

Amount to be paid for loan every year (1454.01*12)  $17450

Budget

Net amount retained for other expenses and savings $32678

Note: In present case as the amount to be paid for down payment is higher than amount available as net saving to both the assessee. Thus, a higher amount of loan has been applied so that the difference can be arranged and in case any modifications are required in house than amount for same can be also made available.

The amount which is available after payment of loan expenses (interest and payment) $32678, $25000 will be applied for investment purpose in retirement and other investment in above specified securities and remain amount will be retained in case there is any emergency.

It is necessary to invest in retirement plan as they same lead to balance the requirement of present as well as the need of tomorrow. Income tax on same will be paid at the time when money is withdrawn and the same will done through government pension scheme in order to remain more secured. A part of saving will also be invested in insurance in order to secure future of their child in case they face any accident or other issue. The amount will be invested in following manner in specified securities:

References

Anderson, R. N., & Haslem, J. A. (2015). Common Stock Valuation Models: Estimation of the Discount Rate Using the Geometric-Mean Criterion.

DAILY, J. E., KIEFF, F. S., & WILMARTH JR, A. E. (2014). Introduction. In Perspectives on Financing Innovation (pp. 13-16). Routledge.

Frank, M. Z., & Shen, T. (2016). Investment and the weighted average cost of capital. Journal of Financial Economics, 119(2), 300-315.

Frankel, T., & Laby, A. B. (2015). The Regulation of Money Managers: Mutual Funds and Advisers (Vol. 3). Wolters Kluwer Law & Business.

Gotze, U., Northcott, D., & Schuster, P. (2016). INVESTMENT APPRAISAL. SPRINGER-VERLAG BERLIN AN.

Gupta, M. (2017). KEYWORDS Investor Attitudes, Investment Alternatives, Sampling Method, Questionnaire Method. A STUDY FOR ATTITUDE OF INVESTORS TOWARDS VARIOUS INVESTMENT ALTERNATIVES., (183).

Hull, J. C., & Basu, S. (2016). Options, futures, and other derivatives. Pearson Education India.

Jordan, B. (2014). Fundamentals of investments. McGraw-Hill Higher Education.

Ju, N., Leland, H., & Senbet, L. W. (2014). Options, option repricing in managerial compensation: Their effects on corporate investment risk. Journal of Corporate Finance, 29, 628-643.

Konstantelos, I., & Strbac, G. (2015). Valuation of flexible transmission investment options under uncertainty. IEEE Transactions on Power systems, 30(2), 1047-1055.

Ryan, S., & Young, M. (2018). Social impact bonds: the next horizon of privatization. Studies in Political Economy, 99(1), 42-58.

Subramani, R.V. (2011). Accounting for Investments, Equities, Futures and Options. John Wiley & Sons.

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