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Indirect Investing
The buying and selling of the shares of
Direct Investing
Investors buy and sell securities
Nonmarketable Financial
Assets
Bonds
Adebt instrument issued for aperiodof more than
Characteristics of Bonds
Set Maturity Dates bonds have set maturity dates that can range from
however, this depends on their structure: "Fixed Rate Bonds" provide fixed
interest payments on a regular schedule for the life of the bond; "Floating
Rate Bonds" have variable interest rates that are periodically adjusted; and,
"Zero Coupon Bonds" do not pay periodic interest at all, but offer an
advantage in that they are can be bought at a discounted price of the face
value and can be redeemed at the face value at maturity
Principal Investment Repayment bond issuers are obligated to repay
the full principal amount of a bond in a lump sum when the bond reaches
maturity
Credit Ratings You can evaluate the "default risk" (the risk that the
redeem the bond before its maturity date, repay the loan and thus, stop
paying interest on it
Minimum Investment Bonds are usually issued in $1,000 or $5,000
denominations
Treasury/Government Bonds
Government bond is a debt security loaned
Municipal Bonds
A municipal bond is adebt securityissued by a
Corporate Bonds
Corporate Bond is a debt security which is issued by company
Corporate Bonds
The most common type of unsecured bond is the
Asset-Backed Securities
An asset-backed security (ABS) is a financial security
Mortgage-Backed Securities
Mortgage-Backed Securities (MBSs) Securities
Equity Securities
Preferred Stock: An equity security with an
Preferred Stock
Preferred stockholders are paid after the
bondholders but before the common stockholders in terms of priority of payment of income
and in case the corporation is liquidated.
However, preferred stock dividends are not legally
binding, but must be voted on each period by a
corporations board of directors. If the issuer fails
to pay the dividend in any year, the unpaid
dividend will have to be paid in the future before
common stock dividends can be paid if the issue
is cumulative. (If noncumulative, dividends in
arrears do not have to be paid.)
Types of Preferred Stocks
Variable-Rate Preferred Stock
Convertible into Common Stock
Common Stock
An equity security representing the ownership
Characteristics of Common
Stocks
The par value (stated or face value) of common
stock
The book value of a corporation is the accounting
value of the equity as shown on the books (i.e.,
balance sheet).
The market value (price) of the stock is of concern
to investors. The aggregate market value for a
corporation, calculated by multiplying the market
price per share of the stock by the number of
shares outstanding, represents the total value of
the firm as determined in the marketplace.
Market value of a Firm = m.k.t price per share no.
of shares outstanding
Cash Dividends
The only cash payments regularly made by
Derivative Securities
Securities that derive their value in whole or in