Alternative Investments

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Alternative Investments by Mind Map: Alternative Investments

1. Non-Marketable Instruments

1.1. Savings

1.1.1. Definition It is the money an individual has after subtracting their consumer spending amount from their disposable income, during a time period.

1.1.2. Who Issues The individual issues this

1.1.3. Time Based on the individual’s goals.

1.1.4. Advantage Earn interest potentially, Easy to open and access It’s secure

1.1.5. Disadvantage Requires a minimum balance Lower interest rates compared to investments Limits on withdrawals

1.1.6. Example Deposit account, pension account, investment fund, and cash at RBC. The individual opens an account to fund their money into, the bank pays them interest because the bank uses their money to make loans to others.

1.2. GIC's

1.2.1. Definition Guaranteed Investment Certificate is a Canadian investment that offers a promised rate of return over a time period.

1.2.2. Who Issues Trust companies or banks

1.2.3. Time Usually 1 to 5 years, can go up to 10 years

1.2.4. Advantage Not heavily affected by market fluctuations It is very safe Term and interest rates are customizable

1.2.5. Disadvantage Low liquidity Low rate of return After tax return is lower

1.2.6. Example Cashable and non-redeemable GICs at ScotiaBank, these give you the option to withdraw within 30 days.

1.3. Canada Savings Bond

1.3.1. Definition A financial product that Canadians could purchase, it offered a competitive interest rate and a guaranteed minimum rate.

1.3.2. Who Issues The Canadian Government

1.3.3. Time Until maturity or three years

1.3.4. Advantage Easy to buy Fixed interest rate Guaranteed to be cashable at any given time

1.3.5. Disadvantage Discontinued Penalty or lose interest for cashing in bonds too early You can only buy bonds at certain times of the year

1.3.6. Example The bonds were available in a wide range of options such as $100, $500, and $10,000, they were only issued by the Canadian Government.

2. Money Market Instruments

2.1. Treasury Bills

2.1.1. Definition They are debt securities that are generally short term investments, it allows the government to obtain short and medium term liquidity.

2.1.2. Who Issues Provincial and Federal Governments.

2.1.3. Time Less than a year

2.1.4. Advantage Safe Easy to understand Available at affordable prices.

2.1.5. Disadvantage Low interest rates Low yield They mature too quickly

2.1.6. Example The government issues them at different denominations such as $5000, $25,000, and $1 million, the minimum being $1000.

2.2. Commercial Paper

2.2.1. Definition A short term unsecured promissory note.

2.2.2. Who Issues Large corporations

2.2.3. Time 30 days to 1 year

2.2.4. Advantage Quick and cost effective way to raise capital Cheaper than a bank loan Has a wide range of maturity

2.2.5. Disadvantage Its availability is very limited The credit available by banks may get reduced Very closely regulated by the RBI guidelines

2.2.6. Example The Bank of Canada offers this starting from April 2nd 2020 and will operate for 12 months.

2.3. Eurodollars

2.3.1. Definition A U.S. dollar-denominated deposits at foreign banks or at the overseas branches of American banks

2.3.2. Who Issues Overseas company

2.3.3. Time Short term, often less than 6 months

2.3.4. Advantage More competitive Lower interest rates for borrowers Higher interest rate for lenders

2.3.5. Disadvantage Higher risks

2.3.6. Example You can trade them electronically on Chicago Mercantile Exchange.

2.4. Repurchase Agreements

2.4.1. Definition Is a form of short term borrowing for dealers in governments securities.

2.4.2. Who Issues One party sells to another

2.4.3. Time 3-14 days, can be overnight too

2.4.4. Advantage Liquidity High yield Flexible

2.4.5. Disadvantage Are subject to counter party risk Amount of loss can be uncertain Can suffer from loss from principal or interest

2.4.6. Example Trader A sells a specific security to trader B for a set price and agrees to buy back the security for a specified amount at a later date.

2.5. Banker's Acceptance

2.5.1. Definition A negotiable piece of paper where it is promised by the bank for a future payment.

2.5.2. Who Issues Banks

2.5.3. Time Usually 90 days, but can range from 30 to 180 days

2.5.4. Advantage Smaller financial risks A very low cost No payments in advance

2.5.5. Disadvantage You have to go through a financial analysis You have to meet the bank’s standards It involves collaterals

2.5.6. Example Bank of Canada offers this, but you must provide weekly balance sheets

3. Capital Market Securities

3.1. Government Bonds

3.1.1. Definition It is a debt that is used to support government spending and obligations.

3.1.2. Who Issues The government

3.1.3. Time 1 - 30 years

3.1.4. Advantage They pay a steady interest income return Low risk of default for U.S. bonds Exempt from state and local taxes A liquid market for reselling Is assessable through mutual funds and ETFs

3.1.5. Disadvantage Offer low rates of return Fixed income falls behind with rising inflation Carry risk when market interest rates increase Default and other risks on foreign bonds

3.1.6. Example Federal government bonds Treasury bills Treasury notes Treasury bonds Zero-coupon bonds Municipal bonds.

3.2. Corporate Bonds

3.2.1. Definition It is a debt that is issued by a firm which is sold to investors.

3.2.2. Who Issues A Firm

3.2.3. Time If short term (less than three years), medium term (four to 10 years), or long term (more than 10 years)

3.2.4. Advantage Bond holders generally rank higher as a creditor than shareholders Bond coupon payments are structured Some can convert into stock Typically have a better return than other bonds Pricing of corporate bonds is typically stable.

3.2.5. Disadvantage It may not diversify your portfolio It does not generally provide capital growth Having interest rates rise can make corporate bonds less profitable.

3.2.6. Example Convertible bond Callable bond Investment-grade bond Junk bond.

3.3. Preferred Stocks

3.3.1. Definition It is a stock that entitles the holder to a fixed dividend.

3.3.2. Who Issues Corporation

3.3.3. Time Five years

3.3.4. Advantage High dividend rates Non-cyclical Graded by rating agencies Qualified Dividends Taxed at Capital Gains Rate

3.3.5. Disadvantage Lack of voting rights Dividends can be cut or suspended Limited upside potential Interest rate sensitivity

3.3.6. Example On July 22, 2016, the three-month Libor was 0.6541%, calculating the quarterly dividend for the Goldman Sachs Series D Preferred Stock to be $0.26 per share or 4.13%, slightly above the minimum 4% guaranteed ($0.25 per quarter, $1 per year) dividend.

3.4. Common Stocks

3.4.1. Definition It is a type of security that represents ownership of equity in a company.

3.4.2. Who Issues Companies

3.4.3. Time Must exceed 60 days throughout the 120-day period

3.4.4. Advantage Huge gain yields Restricted legal liabilities Is an easy purchase and sale.

3.4.5. Disadvantage Investment with high risk Inability to control Gets paid last

3.4.6. Example A company had 100 shares outstanding, one share would be equal to one percent ownership of the company.

4. Derivatives Markets

4.1. Futures

4.1.1. Definition A standardized legal agreement to buy or sell something at a predetermined price at a specified time in the future

4.1.2. Who Issues Commodity FuturesTrading Commission (CFTC).

4.1.3. Time It is identified by their expiration month.

4.1.4. Advantage It allows you to pay on margin, so you’re only putting down a small percentage of your contract price when you enter the stock futures contract It offers some protection against price fluctuations It can be a valuable part of a total investment strategy

4.1.5. Disadvantage It can be risky By entering in a contract for a fixed price, you may miss out on the benefits of major price movements

4.1.6. Example If a day trader buys a natural gas futures contract (NG) at 2.065, and sells it later in the day for 2.105, they made a profit.

4.2. Options

4.2.1. Definition A contract which gives the buyer the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price prior to or on a specified date, depending on the form of the option.

4.2.2. Who Issues The employer company on its own stock.

4.2.3. Time About 2.5 years

4.2.4. Advantage Provides higher potential returns Provides great leverage Is a strategic investment alternative.

4.2.5. Disadvantage Options’ trading is very complex Higher spreads Difficult to get information such as quotes and analytics Lose the value of an option due to time decay when closing to the expiry date.

4.2.6. Example If an option has a premium of 35 cents per contract, buying one option would cost $35 ($0.35 x 100 = $35)

5. Investment Funds

5.1. Exchange-Traded Funds

5.1.1. Definition A type of security that involves a collection of securities such as stocks that often tracks an underlying index

5.1.2. Who Issues Corporations Governments Banks

5.1.3. Time 1 to 3 years.

5.1.4. Advantage Access to many stocks across various industries Low expense ratios and fewer broker commissions Risk management through diversification They exist that focus on targeted industries

5.1.5. Disadvantage Actively-managed ETFs have higher fees Single industry focus ETFs limit diversification Lack of liquidity hinders transactions.

5.1.6. Example SPDR S&P 500 (SPY)

5.2. Mutual Funds

5.2.1. Definition It is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.

5.2.2. Who Issues Corporations Governments Banks

5.2.3. Time 1 to 3 years.

5.2.4. Advantage Liquidity Diversification Minimal investment requirements Professional management Variety of offerings

5.2.5. Disadvantage High fees Commissions Other expenses Large cash presence in portfolios No FDIC coverage Difficulty in comparing funds Lack of transparency in holdings

5.2.6. Example One of the most famous mutual funds in the investment universe is Fidelity Investments' Magellan Fund (FMAGX).

6. Value Investing

6.1. Definition

6.1.1. It is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.

6.2. Advantages

6.2.1. Big profits

6.2.2. Low risks

6.2.3. High reward

6.2.4. Cool approach

6.2.5. The power of compounding

6.2.6. Reliable blue chips

6.3. Disadvantage

6.3.1. Value companies hide

6.3.2. Patience

6.3.3. The pitfalls of waiting

6.3.4. Rowing against the stream

6.3.5. Poor diversification

6.4. 6 Factors of Methodology

6.4.1. Company performance

6.4.2. Company debt

6.4.3. Profit margins

6.4.4. Is the company public?

6.4.5. Commodity reliance

6.4.6. Is it cheap?

6.5. Example

6.5.1. Berkshire Hathaway is a multinational holding company that has invested in many businesses to which it has expanded their portfolio, one of their investments being Dairy Queen.