Characteristics, uses, and taxation of investment vehicles Flashcards
(56 cards)
Common stocks
- ownership in a corporation
- entitled to vote
- may receive dividends
- most junior, last to receive income if corporation is liquidated
Capitalization
market value of a compnay
- large cap: 10 B < x
- mid cap: 2B < x > 10 B
- small cap: 2 B > x
- micro cap: 300 M > x
Corporate Report - Annual report
written by corporate management for its shareholders
- explains previous year results
- provides financial data and report by independent auditors
Corporate Report - 10Q
quarterly reports from corporate management to SEC
Corporate Report - 10K
annual reports from corporate management to SEC
Preferred Stock
- hybrid security: both equity and debt
- typically issued at $25 par or $100 par with stated dividend rate
- pays fixed dividend rate (different than common)
- perpetual: infinite duration, more sensitive to interest rate changes
- cumulative or noncumulative
Cumulative vs noncumulative stock
when dividend payments are missed….
cumulative: pay all dividends in full before any payment to common stockholders is allowed
noncumulative: missed dividends do not have to be made up
Preferred stock investors
typical buyer is corp with excess funds on hand
- interest is taxable with bonds, with preferred usually 50% is tax free
Preferred stock dividends
- for annual dividend to be qualified: must own for 90 days in 181 day period that begins 90 days before ex-dividend date
American Depositary Receipts (ADRs)
buy foreign shares in the US
- instead of buying foreign companies overseas
- ADR: receipt for shares of foreign corp held in US
- entitled to dividends (paid in dollars)
- prices quoted in US dollars
- dividends declared in country of origin but paid in dollars
Exchange Traded Funds (ETFs)
- basket or index of stocks
- open ended: UIT, investment company or closed ended
- traded on exchange
- broadbased track large groups of stock
- more tax efficient than mutual funds
Unit Investment Trusts (UITs)
- no day to day portfolio management
- unmanaged portfolio created by sponsor and handled by trustee
- passive investment of frozen assets not traded
- no new securities purchased and rarely sold
- trust collects income and repayment of principal
- self liquidating : as funds are received, they are not reinvested, distributed to unit holders
- buy and sell used units, traded NAV
Mutual Funds
- open ended
- cap always changing as people buy and sell
- NAV computed at end of day = total market value / number of shares
- possible sales change to compensate professionals
- redeemable not tradeable
Closed-end investment companies
- funds issued once then books are closed
-no new shares issued - shares trade on exchange
-can hold illiquid securities
Types of funds
aggressive growth: maximum capital appreciation
balanced: both stocks and bonds (not necessarily 50/50)
growth: securities potentially offering rising share price. dividends are least important
growth and income: equity securities and seeks dividend income
global equity: securities worldwide, including US
international: securities only outside US
corporate bond: US based companies
GNMA: mortgage backed securities
high yield: non-investment grade corporate bonds
municipal bond: issued by states and municipalities
specialty: particular sectors
Index funds
- invest in stocks/bonds that are components of various indexes
- emphasize tax efficiency through minimal portfolio turnover
Hedge funds
- aggressively managed investment portfolio using advanced strategies (leveraging, long, derivative)
- goal to generate high returns in down and up markets
- open to limited number of investors with large minimum deposit
-illiquid, must keep in for 1 year - less regulated
- accredited investors
- 100M or more must register with SEC
Limited partnerships
- real estate, oil, gas
-blind pool
Guaranteed Investment Contracts (GICs)
- similar to CDs
- issued by insurance companies
- 2-5 years
- guaranteed interest rate
- value does not fluctuate with interest rates
- value depends on financial strength of issuer
- popular for DB plans
Real estate
- hedge against inflation
- low correlation with US common stocks
- diversification potential
Unimproved vs improved land
Unimproved: passive, no income or depreciation, return is price appreciation, possible negative cash flow for upkeep
Improved: generates income from rentals, NOI used for intrinsic value
Net Operating Income (NOI)
Gross rental receipts
+ non-rental income
= potential gross income (PGI)
- vacancy and collection losses
= effective gross income
- operating expenses
= Net operating income NOI
vacancy= PGI * %
operating expense = excludes interest and depreciation, only actual cash expense
Property’s intrinsic value
NOI / Capitalization rate
Real Estate Investment Trust (REIT)
- invests in real estate, construction, mortgages
- diversification and marketability
- exchange or OTC
- nonpublic REITs and limited partnerships are not liquid or marketable
- at least 75% of income must come from real estate
- 90% of income gets distributed, only taxed on undistributed amount
- if fails to distribute 90% then all of it is taxed
- shareholders can deduct 20% pass through income
