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Financial Investing – What Do You About? Know About?
All About Insurances
Life & Disability Underwriter
Medical Advisor Journals and
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Financial investing is defined as a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. Investing is the active redirection of resources: from being consumed today, to creating benefits in the future; the use of assets to earn income or profit. The Demand and Supply of Microeconomics Microeconomics is a concern with 1. Determining the price we pay for products and services. 2. What output is required by the market place? 3. The impact of the government’s intervention in market forces. Understand the microeconomics will help us to analyze the fundamental nature of supply and demand concepts and how they influence the operation of a market economy. A. Demand In terms of microeconomics, demand is defined as the relationship between the price of a product and the consumer willingness to purchase a certain quality. The law of demand also determine the price and quality sold, if the price of certain increase then the qualities of product sold decrease and the price of certain decrease then the qualities of product sold increase. B. Supply Supply decisions reflect a supplier willingness to produce and sell at the prevailing market price and these factors all influence the supplier qualities. For most products, the quantity supplied will increase as the price level increases, all other factors remaining constant. The Law of Supply determines as a) The quantity supplied increases as price increases. b) The quantity supplied decreases as price decreases. c) Producers increase the supply as their product prices rise.
C. Equilibrium of Demand and supply When the price fall to the level the buyers are willing to pay, this produces equilibrium. The opposite effect occurs when prices are too low. In fact, the forces of demand and supply lead to an equilibrium price and quantity. a) As demand is greater than supply, price levels increase. b) As supply is greater than demand, price levels decrease. c) Only one price guarantees equilibrium D. Other influences There are four fundamental shifts we can examine, each shift having an effect on supply or demand: a) Positive demand shift will increase demand. b) Negative demand shift will decrease in demand. c) Positive supply shift will increase demand. s) Negative supply shift will decrease in demand. E. Government intervention Government intervention is designed to achieve the following: a) A fair distribution of income among individuals and regions. b) To encourage growth in employment and income. c) To protect low-income earners. and including: a) Minimum wages. b) Rent control. c) Farm marketing Board. d) Taxes.
Macroeconomics Policies When the macroeconomics equilibrium exist in the overall economy, there is no need for government intervention. If market forces cause a change in equilibrium and this shift causes inflation or unemployment to increase, the government has several tools called stabilization policies. I. Fiscal policy Fiscal policy changes are implemented to directly affect consumer spending and saving habits. Government spending or tax policies are used to shift aggregate demand to a new
levels. There are 2 types of fiscal policy that the government use to influence the economic activity. 1. Expansionary fiscal policy: In expansionary fiscal policy, the government increases their spending or cutting taxes, thereby creating additional consumer dollars for spending. 2. Contractionary Fiscal Policy: if the government feels the economy is heating up with inflation, they can reduce spending and increase taxes, inducing a slow down. II. Monetary policy 1. Change in Bank Rate The Central Bank lends money at interest which is known as the prime rate. The chartered banks add on a few percentage points to their clients. When the Central Bank changes prime, this signals a change throughout the system. When the bank rate increases, it tightens the monetary policy. A reduction has the opposite effect. 2. Open Market Operation the central bank influences the money supply daily by buying and selling government treasury bills to other bank, financial institution and individuals If the bank wants to pursue an expansionary monetary policy, it buys treasury bills for money on the open market, which has the effect of increasing the money supply. On the other hand, if the bank wants to pursue a contractionary fiscal policy, it sells treasury bills by taking away money supply from the market.
What is Financing Methods and Financial Market Participants I. Financial markets The health and operation of the economy is affected by many components, none more important than the segment known as the financial markets. Financial market affects the growth, prices exchange rate and distribution of wealth and income. For the economics system to function well, money must flow from the individuals who have it (the savers) to those that
need it (the borrowers). 1. Direct financing The borrower goes directly to the investor to borrow funds. 2. Indirect financing Indirect financing uses a financial intermediary or midleman to provide the funds, such as the funds flow from savers to financial institutions and then to borrowers. II. Financial market participants There are four main participants 1. The Central Bank the Central Bank is the federal government’s bank and has the following roles in the financial market: a) Is the lender of last resort. b) Oversees and conducts monetary policy. c) Preserves the value of the dollar. 2. Deposit Intermediaries Deposit intermediaries include the following institutions: a) Banks b) Credit Unions c) Mortgage and loan companies. d) Mortgage and loan agencies. 3. Contractual savings intermediaries Contractual savings intermediaries are in the form of the following: a) Life insurance companies. b) Pension funds. c) Property and casualty insurance companies d) Government pension plans. 4. Investment intermediaries Investment intermediaries include: a) Mutual funds companies, b) Investment dealers. c) Consumer loan companies. d) Business finance companies.
Macroeconomics(CPI), Macroeconomics-Consumer Price Index (CPI), Inflation and Unemployment Macroeconomics is the subject analyzing the economic factors that effect nations and the relationship with other nation. In this article, we will discuss the consumer price index(CPI), inflation and unemployment that effect the economy of a nation. 1. Consumer price index (CPI) The price level is impacted by a broad range of prices in the economy and is measured by a price index and changes in price levels are measured by changes in a price index over a period of time. The Consumer Price Index, or CPI measures the price of a basket of consumer good overtime a period of time. This basket of goods refers to those goods and services typically consumed by a nation family for necessities of life, such as food, shelter and clothing, consumer electronic and house hold items. If the CPI increase faster than the family income, the living standard of household declines, and I have inflation. Each year the changes in CPI are measured against the base year and the base year is moving upwards occasionally in order to keep the numbers meaningful and relevant. Since 1980, the CPI has increased by approximately 6% per year. 2. Inflation The inflation rates are shown as a percentage change in the price level and inflation is the increase in the general price in the economy from one period to another. As the inflation increase our purchase power decrease, our money is devalued because good now become more expensive resulting in lower living standard. The central bank in the all nations make momentary and financial change to offset the effects of inflation by lower or increase the central bank rate. 3. Unemployment rate. The unemployment rate is calculated by dividing the total number of unemployed people by the number of persons available in the labor force. The labor force is the total number of people unemployed who are actively looking for work plus the total number of people employed. People
working part time are not included in this calculation. The unemployment rate also fluctuates from one time period to another and varies from group to group. MacroeconomicsMacroeconomics-GDP, The Business Cycle and Macroeconomics Equilibrium Since we have discuss the consumer price index, inflation and unemployment in the last article, in this article we will discuss the economic growth, the business cycle and macroeconomics equilibrium in one nation economy. 1. GDP This measures all income and output through a series of national accounts. At the end of their fiscal year, all cash flow in and out is added up to determine the GDP. Real GDP is the adjustment for the distortion caused by inflation by measuring the fiscal output of goods and services in a given year against the prices of a base year while nominal GDP measures output using current year prices. 2. The business cycle A country economy moves in a familiar pattern of four cycles a) contraction: slow down in growth or recession. b) trough: bottom end of the cycle c) expansion: growth increases or recovery of the economy. d) Peak: top end of the cycle. The normal business cycle experiences continuous fluctuations with one cycle leading – no matter how prolonged – to the next and the recession is defined as 2 consecutive quarters of declining growth in real GDP. When the economy expands: unemployment decreases, inflation begins to increase and the real GDP rises. On the other hand, when the economy contracts: unemployment increases, inflation decreases and the real GDP falls. 3. Macroeconomics Equilibrium Instead of targeting any one price or supply as in microeconomics the economist apply the measurements
against the price level and output for the entire economy. This is accomplished by adding up all the totals for the entire period. a) Aggregate demand curve (AD) The AD measures the relationship between the total amount of all output that consumers are willing to purchase and the price level of that output. AD is the sum of what consumers, governments, business and foreigners, through exports and imports spent in the nation economy. b) Aggregate supply curve (AC) AC correlates the relationship between the total amount of final goods and services all producers plan to supply at a given price level. The two curves are used to predict changes in the real GDP and price levels and the curves reflect what occurs in macroeconomics measurement curves. Where this two curves cross over shows macroeconomics equilibrium.
What is Financing Methods and Financial Market Participants
I. Financial markets The health and operation of the economy is affected by many components, none more important than the segment known as the financial markets. Financial market affects the growth, prices exchange rate and distribution of wealth and income. For the economics system to function well, money must flow from the individuals who have it (the savers) to those that need it (the borrowers). 1. Direct financing The borrower goes directly to the investor to borrow funds. 2. Indirect financing Indirect financing uses a financial intermediary or midleman to provide the funds, such as the funds flow from savers to financial institutions and then to borrowers.
II. Financial market participants There are four main participants 1. The Central Bank the Central Bank is the federal government’s bank and has the following roles in the financial market: a) Is the lender of last resort. b) Oversees and conducts monetary policy. c) Preserves the value of the dollar. 2. Deposit Intermediaries Deposit intermediaries include the following institutions: a) Banks b) Credit Unions c) Mortgage and loan companies. d) Mortgage and loan agencies. 3. Contractual savings intermediaries Contractual savings intermediaries are in the form of the following: a) Life insurance companies. b) Pension funds. c) Property and casualty insurance companies d) Government pension plans. 4. Investment intermediaries Investment intermediaries include: a) Mutual funds companies, b) Investment dealers. c) Consumer loan companies. d) Business finance companies.
Understand Present Value versus Future Value The concept of present value versus future value is like the concept that a dollar today is worth more than a dollar. In fact, a dollar invested today earning interest will grow in value
when the interest is paid and if the dollar plus interest is automatically reinvested for a further period of time, new interest will be earned on both the dollar of original investment and on the interest already earned. As this is repeated over a period of time, we call the result of compounding interest. It is possible to determine the future value of money by using 1. Financial tables a) Present value represents the original investment that we have in hand today. b) Future value represents what that investment will grow to when interest is earned on a sequential renewal of investment, where the original investment plus all interest earned, keeps being reinvested for subsequent periods until maturity. Here is the formula FV = PV (1+I)ⁿ where FV is future value PV is present value I is annual interest rate n is number of compounding periods 2. Present value of a single sum In order to determine the present value, we must take the final sum and discount it by the interest factor working backwards from our known single sum. Here is a formula: PV= FV/ (1+I)ⁿ The definitions for PV, FV, I, n are the same as 1. above. 3. Present value and the amount of the annuity payment of an annuity There are two types of annuities *Deferred Annuity: receipts on payments are made at the end of the period. *Annuity Due: the receipts or payments occur at the beginning of the period. Future value of an annuity helps to calculate how much money needs to be invested today, in order to receive a certain payment in the future. a) The present value of an annuity is calculated by the formula below
PV = (PMT/i) · [1 - (1 / (1 + i) )] where PV= Present value PMT= The amount of the annuity payment i =The annual rate of interest n =The number of discounting periods b) The amount of the annuity payment is calculated by this formula below PMT= (PV·i)/ [1 - (1 / (1 + i) )] where PV= Present value PMT= The amount of the annuity payment i =The annual rate of interest n =The number of discounting periods
Understand Understand Types of Investments If you want to be a successful investor yourself, the same tips you’ll learn here today will be helpful. Financial planners have a wide knowledge of services and products that can help in achieving their goals, by providing the knowledge of the strategies and a comprehensive insight of investment products. Please consult your financial planner before investing. Investment portfolio A portfolio is a selection of investments designed to produce a investment objectives which are based on the risk tolerance, financial expectation and acceptable investment types. There are three basic markets: money markets, bond markets and equity markets. 1. Money markets Money markets are the debt instruments that generate primarily interest with some small amounts of risk attached. 2. Bond markets Bond markets are the debt instruments which are issued primarily by governments and large corporations.
3. Equity markets trading equities (common and preferred shares of corporations) has a higher degree of risk attached. we will be going into more detail on the three basic markets later, but that’s a good bit of knowledge for you to have at this point. It’s important to note at this point as well that the concept of risk vs return is one that must clearly be understood by you.
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Understand Your Portfolio, Financial Goals and Investment Objectives There are major concepts that form the working knowledge required, amongst many other things, by the planner to carry out their fiduciary responsibilities to their clients. Let me go back and talk about portfolios again first. 1. Your Portfolio A portfolio refers to all of your assets and gives a complete investment picture of the various types of investments. The investment mix also expresses your investment strategies, as it will reveal the amount of risk and potential for return held in the portfolio. It is vitally important for you to understand that your investments associate the risk and potential with your goals. In other words, great care must be taken not exceed your risk tolerance when building the portfolio. 2. Financial Goals The below three terms may sound synonymous, but they’re not, namely: a) Financial objective: Financial objective is a specific condition with certain financial implications. b) Accumulation Objective: It targets a specific accumulation of wealth, such as shortterm by setting aside a certain amount of money each month,
quarter, etc. c) Financial goal: This is where you want eventually to be. This amount includes those amounts required to meet a specific accumulation objective. 3. Investment objectives There are 4 specific benefits an investor might require from an investment a) Income Income is a return on an investment such as is achieved through the payment of interest or a dividend. Income may provide a return on investment or if the investor is retired and require a steady income flow. b) Safety of principal Some investments guarantee a safety of principal if held to maturity such as T-bills, savings bonds GICs and money market funds. c) Liquidity This is the ease with which an asset cab be converted to cash quickly with minimal or no loss of capital such as saving account and emergency funds. d) Capital Growth It is the increase in value earned by original investment. The investment products used should be targeted as long-term investments. Growth vehicles usually experience spurts of growth and periods of market correction. Understand Your Investment Risk All investments involve some risk, and a clear understanding is required for the client to manage these risks properly.There are several types of risk. I. Systematic risk All businesses experience some economic reversals. Therefore, market risk is a systemic risk that the value of the investment may suffer from some economic, political or social change. II. Unsystemic risk
Financial and default risk of an individual company are considered to be unsystemic risk.Quality of management, ability to offer better goods and services for a profit including control costs and meet competition all will help in reducing the risk. III. Financial risk Some company may not perform as well as expected, or may fail and go bankrupt. That is financial risk if you invest in those companies. IV. Default risk This is a risk if the issuer of a bond or debenture can not be able to repay the loan. In the event of bankruptcy, secured creditors come first, shareholders second. If the security pledged has declined in value, it may no longer be sufficient to satisfy the claims. V. Interest rate risk The interest rate risk is associated with fluctuations in the interest rate and how it affects the investment. There are a few ways the interest rate can affect the investment a) If the interest rate rises, bond prices will drop if sold before maturity. b) If a fixed interest rate security is held, it protects the investment against falling interest rates and it also locks in the investments for the lower rate when the interest rate rises. Bonds are highly subject to interest rate risk. VI. Marketing risk A “marketability risk” occurs when a buyer cannot be found at the time the investor wants to sell. 1. No market Company has gone out of business. 2.Thin market Poor exposure or reversal. 3. Active market Everybody wants a piece of the security. VII. Exchange rate risk foreign investments are subject to an exchange rate risk. If an
investment is denomination in foreign currencies and the domestic currency falls, the foreign investment value increase. VIII. Inflation risk Inflation erodes the purchasing power of an investment so that over time it declines in real rate of return.
Understand Your Investment and Income Tax
I. Interest earning: Interest earned on an investment is taxable. Interest can also be earned but not paid. This is known as accrual interest. Interest may be paid at various times, according to the terms of the investments. The interest paying period is referred to as the term. If the investment has a term of less than one year the interest does not need to be accrued at the end of the first calendar year and is taxable when paid. If the investment has a term greater than one year, interest must be accrued as of the anniversary date of its purchase. a) Interest income received during the year is taxable income for the calendar year unless it was accrued and reported in a previous calendar year. b) Interest earned, but not paid, during a bond year, must be accrued at the end of the bond year and reported as taxable income for the calendar year in which the bond year ends. III. Corporate dividends Dividends from taxable corporation are tax advantage due to method of calculating of tax by the government and dividends from foreign corporate investment are taxed at 100% of the amount received.
Term Deposits, Government Bonds, Treasury Bills & Money Market Funds
Financial instruments found in the debt market include: 1. Term Deposits 2. Government bonds 3. Treasury Bills (T-Bills) 4. Money Market Funds 5. Corporate Bonds and Debentures 6. Domestic Bond Funds. In this article, we will only discuss the term deposits, government bonds, treasury bills and money market fund. 1. Term Deposits Term Deposits are qualifying instruments for tax shelter and will share the following characteristics. a) Short-Term Deposit: less than 1 year b) Long-Term Deposit: to 5 years. Interest Rate: depends on length of deposit and competitive interest rates available in the marketplace. Long-term investments are called Guaranteed Investment Certificates (GICs) and can be purchased for a lesser amount such as $500. They are also called a Certificate of Deposit (CD). Rates may vary as little as 0.10% amongst the deposit takers. Term Deposits may be cashed prior to maturity, but this may incur a penalty. GICs generally cannot be cashed before they mature, although some deposit takers are now more flexible. 2. Government saving bonds Country residency is required and guaranteed by the country of issuer. a) are registered bonds that provide protection against loss, theft or destruction. b) are not transferable. c)can be purchased for a minimum of $100 to a maximum of $500,000. d)The interest is taxable and is competitive with GICs. e) Mature in 10 to 12 years. In Canada, Canadian saving bonds are issued as either R bonds or C bonds. In US, US saving bonds are issued as series EE bonds, Series I Bonds The investment risk for government savings bonds Issued by Canadian government or US government is nil, since the bond
is guaranteed by the federal government. 3) Treasury bills (T bill) Treasury bills are a short term money market instrument and issued by the federal government in terms of 30, 60, 91, 182 and 364 days. They are sold by auction. Banks and investment houses buy at wholesale in multiples of $5 million denominations. They then sell these T-Bills to brokers and investment dealers who break down their purchases into $1,000 lots. T bills are sold discount to their face values and also sold on the secondary market and their value fluctuates depending on competitive interest rates at the times of resell. The short-term nature of T-Bills does not cause a large exposure to interest rate risk, but to some extent there is an inflation risk.If a T-Bill is sold before maturity, any gain is taxed as interest. 4. Money market funds Money market fund holds T bills and other short term money market contracts. Investors pool the investments through the mutual fund. Units in this fund can be bought and sold daily. Money market funds produce capital gains although their primary function is to generate interest income. Interest is generally paid monthly, while capital gains are paid annually. The benefits of money market funds include a) security of principal b) liquidity. c) eligible for plan registration
Bonds and Debentures Debentures are loans, secured by a corporation, municipality or government. Bonds and debentures are instruments that provide for a maturity at which time the principal will be repaid. In addition to the payback of principal, the borrower will pay interest at stated intervals, usually semi-annually. There are four common types of bonds and debentures: 1. Government bonds and debentures
2. Corporate bonds and debentures 3. Domestic bond funds 4. International bond funds. In this article, we will discuss the overall concepts of bonds and debentures a) Security *Bonds are considered as secured debt. If the borrower defaults, the assets can be seized to satisfy the bondholder. * Debentures, on the other hand, are unsecured, but are supported by the general credit of the corporation, municipality or government issuing the bonds. When issued by governments, there is the ability to raise taxes to honor their repayment obligation. b) Contract features Bonds and debentures are prominent players in the debt market. They come in 3 maturity durations. i. Short Term: three years or less. ii. Medium Term: three to five years. iii. Long Term: more than ten years and the most common features in the contract are i. Identify the Term to maturity. ii. Show interest payment structure. iii. Provide a coupon rate. iv. Indicate the valuation and pricing. In bonds and debentures, the issuer is the borrower and the lender is the bond owner. when bonds are sold on the secondary market, the ownership changes. Each bond that is sold requires the presentation of a prospectus. Prospectus is a document that lists the name of the issuer, bond features, assets securing the loan and other details. In addition, a prospectus also gives the company background, purpose of the bonds and other information of value to the buyer. There are types of bonds, but the two most common are Bearer Bonds and Registered Bonds. i. Bearer bonds are owned by the holder and are issued with coupons for interest payments.The holder may sell the bond at any time. ii. Registered bonds are registered with the issuer who keeps a record of the owner. They may only be sold by the registrant and interest payments are made by check to the
registered owner. Other Corporate Bond types include i. Redeemable bonds. ii. Callable bonds. iii. Retractable bonds. For bonds of these types, the principal amount borrowed may be paid back anytime prior to maturity and thirty days notice is generally required before exercising the option. c) Bond and Taxation If a bond is sold before maturity, it can be sold using any of the following three methods i. At Par: yield will be identical to the coupon rate. ii. At Discount: yield will be less than the coupon rate. iii. At a Premium: yield will be more than the coupon rate. Bonds are taxed on a bond year basis and attract taxation in two ways i. 1. Capital Gains. The adjusted cost base of a bond is the purchase price plus any sales commission less any accrued interest paid. Any profit is considered a capital gain and any loss is considered a capital loss. ii. Coupon rate or interest earned d) Government bonds Government bonds are debentures. The investment risk is nil due to the federal government’s ability to increase taxes which will generate additional income to make bond payments. These bonds and debentures are subject only to interest rate risks. Government bonds can be used to satisfy the following investment objectives: i. Provide income. ii. Ensure safety of principal. iii. Very Liquid. They are taxed on a bond year basis and are eligible for any deferred tax saving plan.
Equity Market - Common Stocks
A company can sell shares to raise capital A shareholder invests in the company and gains a degree of ownership, plus income. The total amount paid for the company shares is the shareholder equity. The main equity market instruments are common and preferred shares. In this article, we will discuss the common stock of a company. Common Stock purchases may be issued on the following basis: 1. Voting Shares: It gives the shareholder with the right to vote on important company issues, including attending the annual meeting and to vote on Board of Directors elections. 2. Non-Voting Shares: Share holders of the company do not have the right to vote on company issues. Shares after the initial offering (IPO) are resold in the secondary market either through the listed or unlisted common share market. The unlisted market is called the over-the-counter share market and the listed market is called the stock exchange. a) Dividends Dividends are a portion of the company's profits and paid on a per share basic quarterly, semi-annually, annually or whenever the corporation decides. b) Earning per share Earning per share is calculated by dividing the amount of earnings by the number of share outstanding. The amount of the dividend paid per share is only a portion of the overall profit as the company will need to retain some portion of that profit for future expansion and operation. c) Growth The value of shares is determined by the amount of buying and selling of the shares in the market. The goal is capital appreciation gained by price increases. Capital growth is the priority objective of the equity markets. d) Risk All common shares are exposed to the following risks Systemic and unsystemic risks as well as poor liquidity can result if low market activity is experienced.
e) Taxation Any appreciation would be taxed on a capital gains basis and your losses would provide write-offs against gains. Any dividends paid to the investor are taxed on a gross-up basis with an accompanying dividend tax credit.
IV. Capital gain Canadian investors are subject to tax on 50% of capital gains received from investment and allowed to deduct 50% of capital losses. In U.S. the tax rate on eligible dividends and long term capital gains is 0% for those in the 10% and 15% income tax brackets in 2008, 2009, and 2010. Other will pay will be taxed at the taxpayer's ordinary income tax rate. It is generally 20%. V. Tax deferred plans Tax deferred programs allow you to save for your retirement while providing you with a tax break. It allows you to select an amount by which the gross salary can be reduced and taxsheltered. In US 1. Thrift Plan (401K) and Deferred Compensation (457) 2. Tax-Sheltered Annuity (403B) Income taxes are paid at the time funds are withdrawn or at annuitization. The maximum amount an employee can shelter in these programs is determined by the Internal Revenue Service In Canada 1. Registered Pension Plans (RRP) 2. Registered Retirement Savings Plans (RRSP) 3. Registered Retirement Income Funds (RRIF) Contributions to these plans are tax deductible and all earning are tax deferred and withdrawals are taxable including payments after maturity.
Equity Market - Prefered Stock
Preferred stock also represents ownership of a company. They generally do not have voting rights, their dividends tend to be fixed and have a higher payment priority than common
shares. 1. Types of preferred stocks a) Participating preferred stock b) Non participating stock Preferred stock can also be issued on an accumulative or non-accumulative basis and can be callable or retractable. 2. Dividends Dividends are paid at a fixed rate based on company earnings. Preferred share dividends must be paid prior to common share dividends. The company also has the right to omit or defer the payment of the dividend. This provides preferred shares with a lower risk element than common shares. The prospectus published by the company and provided to the purchaser, outlines all the details and rights of each particular share issue. 3. Risks Holders of preferred shares are exposed to the following risks: a) Systemic and unsystemic risks. b) Liquidity risks due to low market activity. c) Dividend payment risk, though lesser so than for common shares. People who include stock consisting of the preferred shares of a company will do so when they have the following investment objectives of high liquidity and dividend income. 4. Taxation Same as common stocks, earnings would be taxed on a capital gains basis and your losses would provide write-offs against gains. Any dividends paid to the investor are taxed on a gross-up basis with an accompanying dividend tax credit.
Domestic and International Equity Funds
I. Domestic Equity Funds Mutual funds companies located in Canada invest in the
common and preferred shares of Canadian corporations. They are called, not surprisingly, domestic Equity Funds and Mutual funds companies located in US invest in the common and preferred shares of US corporations. They are called, not surprisingly, domestic equity funds. Some funds may specialize in a certain area such as small cap domestic equity funds, technology domestic equity funds, etc. When a person invests in a domestic equity fund, they are provided with a professionally management diversification portfolio and the unit of the funds can be brought and sold daily. The investment return is the same as if a fund was personally held, but with no management fee. Capital gains, interest and dividends are taxed like other investment returns. II. International equity funds International equity funds operate the same as their domestic counterparts and also may be sectionalized such as they can concentrate on only one location, such as Asia or an emerging market. The funds provide for a diversified portfolio that is professionally managed, with units bought and sold daily. Investment risk is identical to the domestic funds, but the capital gains or losses may be augmented by the currency risk, such as currency fluctuations of the currencies can add to the size of the gain or loss and income is taxed as capital gains and dividends do not attract a dividend tax credit.
Underst Understand Tax and your Investment Returns
Taxes are paid on these investment returns, whether as the result of true market growth or inflation. While the nominal rate of return may appear impressive, part of the return goes to the government in the form of taxes and part is eroded by inflation. Both of these influences can be taken into account to disclose the real rate of return. 1. Real rate of return a) Real Rate of Return(I1)=(I- inflation rate)/1+ inflation rate b) Income tax adjust return(I2)= I(1-MTR)
c) After-tax, real rate of return After tax real rate of return=[I(1-MTR)- inflation rate]/1+ inflation rate Where I= the nominal rate of return I1=real return i2=after-tax return MTR= marginal tax rate 2. Break even rate If the real return is 0 or negative position which means that the investment is losing its purchasing power. The rate of return at which the principal amount retains its purchasing power is called the break even rate and is calculated by the formula below break even rate=Inflation rate/ (1- MTR) Therefore, The assumptions that investments that offer safety of principal are risk free are not quite true. Since these investments offer a low rate of return, they are exposed to inflation risk. 3. Risk and return rate Risk and return operate on a “teeter-totter evaluation. As the return potential increase, the chance of risk is also increase Generally, investments that offer safety of principal also offer low rates of return. Since the low rates of return are subject to inflation, the result may be a negative real rate of after-tax return.
What is Active Investment Strategies
There are two types of investment strategies in common use include: Active strategies and passive strategies, in this article, we will only discuss the active strategies and leave the passive strategies for a new article. Active strategies need regular decision about what securities to invest in and how much to invest, as well as the timing of the sale of assets and the reinvestment in new equities. a) Stock selection the investor looks for stock that is undervalued, since this
offers the greatest opportunity for growth above the market averages by analyzing the publicly available information, looking for any indication that this stock is undervalued. This type of investor will hold fewer companies in their portfolio so they can stay better informed about each company’s situation, thereby providing for better management. b) Market timing investor attempts to purchase a stock when its value is low, and sell when its value peaks, they are relying on their ability to time the market. Very few investors over the long haul are successful at making market predictions. c) Bond swapping Since capital gain of bonds is linked to interest rate changes. Long-term bonds are very sensitive to interest rates. Investor attempts to guess rising interest rate times to sell long term bond and buy short term bonds and to pursue the opposite action when rate fall for capital gain. d) Ladder approach Investor purchase different investments that will mature at difference time, so as to provide a fixed income with low risk.
What is Passive Strategies
Passive strategies require little change in the portfolio, with a few occasional adjustments to offset market change or investment objective changes. This method assumes that the investments are made in an efficient market. An efficient market is a market where the price reflects all the available information and the investor will experience few surprises. 1. Balance mutual funds Mutual funds are usually a mix of investments, with different risks and maturity dates. Balanced fund managers offer diversification for the small investor, and the fund primarily invests in a mix of equities, different maturity date bonds, and stocks and bonds with different risk levels.
2. Index portfolio An indexed portfolio is designed to duplicate a major index, like the NASDAQ 1000 index. The portfolio includes the same shares in the same proportion and the purpose is to duplicate performance, not to out-perform the market. The returns are quite predictable. This method is used more often with equities than bonds. 3. Dollar cost averaging Investments are purchased at regular time intervals regardless the fluctuation of prices. If the price trend is downward, the average price will be greater than the current price. If the trend is up, then the average cost will be less than the current price. This method is also an alternative for market timing. 4. Buy and Hold The buy & hold strategy aims to provide the highest rate of return for a given level of risk. When using this strategy, stocks and bonds are held for a long period of time or until investment matures. 5. Dividends reinvestment plan Dividends paid by public trading companies are reinvested in additional shares. The investor pays tax on the dividend as though it were taken in cash. The reinvestment plan purchases are made by a trustee. I hope this information will help. If you need more information, you can read the complete series of the above subject at my home page: Recommended Recommended reading Long Term Care Insurance Consumer Buying Guide. Annuities: The Shocking Secrets Revealed.
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All articles By Kyle J. Norton Are For Information and Education Only, Please Consult With Financial Adviser Specialist Before Applying. All rights reserved. Any reproducing of this article must have the author name and all the links intact.” Let You Be With Your Health, Let Your Health Be With You" Kyle J. Norton. I have been studying natural remedies for disease prevention for over 20 years and working as a financial consultant since 1990. Master degree in Mathematics and BA in World Literature, teaching and tutoring math at colleges and universities before joining insurance industries. Part time Health, Insurance and Entertainment Article Writer.