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Lecture 3

FIN 501 Lecture Notes - Lecture 3: Proa, Swedish Riksdaler, Tetum Language


Department
Finance
Course Code
FIN 501
Professor
Lianzeng(edward) Yuan
Lecture
3

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FIN 501 Chapter 3 Investment Process
3.1 – INVESTMENT POLICY STATEMENT (IPS)
-Objectives: Risk + Return
oMost investors are risk adverse
oIndividuals must balance return objective with risk tolerance
-Investor Constraints
1. Resources – a min investment amount will tie up
2. Horizon – planned life of the investment
3. Liquidity – how easy for you to sell it without taking a price concession
4. Taxes – different investments are taxed differently
5. Unique Circumstances – makes economic sense but just don’t want it
-Strategies + Policies
oOnce IPS is in place, investor must determine the appropriate strategies to achieve the stated objective
1. Investment Management – manage your investments yourself or hire someone else to do it
2. Market Timing – buying + selling in anticipation of the overall direction of a market
3. Asset Allocation – distribution of investment funds among broad classes of assets
4. Security Selection – selection of specific securities within a particular class
3.2 – INVESTMENT PROFESSIONALS
-Canadian Deposit Insurance Corporation (CDIC) – your bank account is protected up to $100,000
-Canadian Investor Protection Fund (CIPF)
oInsurance fund covering investors’ brokerage accounts with member firms
oDoesn’t guarantee the value of security
oOnly protects amount that was in your account in the event of fraud or other failure
oProtects up to $1,000,000 from fraud, not losses
-Broker-Customer Relations
oAny advice you receive is not guaranteed
Brokers have the duty to exercise R~ care in formulating recommendations
oYour broker works as your agent + has legal duty to act in your best interest
You are responsible for checking your account statements + notifying your broker in the event of any problems
3.3 – TYPES OF ACCOUNTS
-Hypothecation
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FIN 501 Chapter 3 Investment Process
oPledging securities as collateral against a loan
oPledge is needed so that the securities can be sold by the broker is the customer is unwilling/unable to meet a margin call
oInstead of adding to the Margin, you can sell some Asset thereby decreasing the ratio of Equity to Asset
-Street Name
oArrangement under which a broker is the registered Owner of a Security
oYou, as the account holder are the Beneficial Owner
-Types of Accounts
1. Advisory Account – you pay someone else to make buy/sell decisions on your behalf
2. Wrap Account – all the expenses associated with your account are wrapped into a single fee
3. Discretionary Account – you authorize your broker to trade for you
4. Asset Management Account – provide for complete money management
-Cash Account
oAll transactions are made of a strictly cash basis
oSecurities are paid for in full when purchasing
-Margin Account
oSecurities can be bought + sold short on credit
oSubject to limits
oMargin – % of investment that is NOT borrowed
oCall Money Rate – broker’s interest rate on the borrowed portion
oInitial Margin – min margin that must be supplied on a security purchase
oMaintenance Margin – margin amount that must be present at all times after the purchase; =
Equity
Value of Stock
oMargin Call – demand for more funds when the margin drops below the MM
ASSETS LIABILITIES + EQUITY
1,000 Shares 24,000 Margin Loan 6,000
Account Equity 18,000
Total 24,000 Total 24,000
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