Lecture notes 1
The Investment
Environment
The Investment Environment
Learning Goals in this topic
1. Understand the term investment and list the attributes that
distinguish one investment from another.
2. Describe the investment process and types of investors.
3. Discuss the principal types of investments.
4. Describe the steps in investing, review fundamental tax
considerations, and discuss investing over the life cycle.
5. Describe the most common types of short-term
investments.
6. Describe some of the main careers available to people with
financial expertise and the role that investments play in
each.
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1. What is an Investment?
Investment: any asset into which funds
can be placed with the expectation that it
will generate positive income and/or
increase its value
Return: the reward for owning an
investment
Income from investment
Increase in value of investment
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Saving, Investment and Speculation1
Saving:
Emphasis on safety and security instead of high yield
2
Investment:
- Yield is often as important as safety
- Used as component of diversified3portfolio4
Speculation:
- A risky investment; the return is highly uncertain
- May involve borrowed money and leveraging5
(margin6 trading) 1.投機 2.回報率 3.分散 4.投資組合
5.使用槓桿 6.孖展
- Short-term trading activities
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Attributes1 of Investments
Securities2 or Property3
4 5
Securities: stocks , bonds , options*
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Real Property: land, buildings
Tangible Personal Property: gold, artwork,
antiques7, collectables8
Direct or Indirect
Direct: investor directly owns a claim on a
security or property
Indirect: investor owns an interest in a
professionally managed collection of securities or
properties. E.g., Investing through mutual funds9
1.特質 2.證券 3.物業 4.股票
5.債券 6.期權 7.古董 8.收藏品 9.互惠基金
*In some jurisdictions (countries), the term explicitly excludes financial 5
instruments other than stocks and fixed income instruments.
Figure 1.1 Direct Stock Ownership by
Households
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Attributes of Investments (cont'd)
Debt1, Equity2 or Derivative Securities3
Debt: investor lends funds in exchange for interest
income and repayment of loan4 in future. E.g., bonds or
loans
Equity: represents ongoing ownership in a business or
property (common stocks or shares)
Derivative Securities: neither debt nor equity; derive
value from an underlying asset (E.g., futures5, call/put
options6, call/put warrants7, callable bull/bear contracts8.)
1.債 2.股本投資 3. 衍生證券 4.貸款
5.期貨合約 6.認購/認沽期權 7.認購/認沽窩輪 8.牛/熊證
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A Put Warrant (29716) of HSBC (5)
The underlying security The derivative
If you think the share price of HSBC (00005) is going to fall, you
will buy its put warrant（29716). It will expire on 5th June.
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Attributes of Investments (cont'd)
Low Risk1 or High Risk
2
Risk: the uncertainty surrounding the return that a
particular investment will generate. E.g., measured in the
standard deviation of the rate of return.
Short-Term or Long-Term
Short-Term: mature within one year
3
Long-Term: maturities of longer than a year
Domestic or Foreign
Domestic: U.S.-based companies (for US people)
H.K. Based companies (for HK people)
Foreign: foreign-based companies 1.風險 2.不確定性 3.到期日
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2. The Investment Process
Suppliers and Demanders of Funds
Government
Federal, state and local projects & operations
Typically net demanders of funds
Business
Investments in production of goods and services
Typically net demanders of funds
Individuals
Some need for loans (house, auto)
Typically net suppliers of funds
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Figure 1.2 The Investment Process
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Types of Investors
Individual Investors
Invest for personal financial goals
(retirement, house)
Institutional Investors1
Paid to manage other people’s money
Trade large volumes of securities
Include: banks, life insurance companies2,
mutual funds, pension funds3
1.機構投資者 2. 保險公司 3.退休基金 12
3. Types of Investments
Short-term Investments
Conservative investments with lives of 1 year or less
Provide high liquidity1 and less risk but lower rate of returns
E.g., passbook saving account2, time deposit3, certificate of
deposit4, treasury bills5, money market mutual funds6, etc.
Common Stock
Represents an ownership share of a corporations
Return comes through dividends7 and capital gains8
Fixed-income Securities
Bonds (Debts)
1.流動性 2.儲蓄存款 3.定期存款 4.存款證
Convertible Securities9 5.國庫券 6.貨幣市場互惠基金 7.股息
Preferred Stock10 8.資本升值 9.可換股債劵 10.優先股
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Types of Investments (cont.)
Mutual funds
Portfolio of stocks, bonds, and other securities created by pooling
the funds of many different investors
Allow investors to construct diversified portfolios without investing
a lot of money
Exchange-traded funds (ETFs)1
Like mutual funds, except ETF shares trade on exchanges, so
investors can buy and sell them at any time that exchanges are
open for trading
1.交易所買賣基金
E.g., Tracker Fund, A-50, etc. 2.對冲基金
Hedge Funds2
Funds that pool resources from different investors, but usually
have higher minimum investments and are less regulated than
mutual funds 14
Types of Investments (cont.)
Derivatives
Include options and futures contracts
Securities that derive their value from
some underlying asset (e.g., a share of
stock or a commodity)
Other Popular Investments
Real estate
Tangibles
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4. Steps in Investing
Step 1: Meeting Investment Prerequisites (Basics)
a. Adequately provide for necessities of life, including
funds for meeting emergency cash needs
b. Adequate protection against various common risks,
such as death, illness, disability
Step 2: Establishing Investment Goals
Examples include:
a. Accumulating retirement funds
b. Enhancing income
c. Saving for major expenditures
d. income for taxes
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Steps in Investing (cont'd)
Step 3: Adopting an Investment Plan
a. Develop a written investment plan
b. Specify target date and risk tolerance
(acceptance) for each goal
Step 4: Evaluating Investments
a. Assess potential return and risk
b. We will cover risk in detail
Step 5: Selecting Suitable Investments
a. Research and gather information on specific
investments
b. Make investment selections
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Steps in Investing (cont'd)
Step 6: Constructing a Diversified Portfolio
a. Use portfolio comprised of different
investments
b. Diversification can increase returns or
decrease risks (We will cover diversification
later)
Step 7: Managing the Portfolio
a. Compare actual behavior with expected
performance
b. Take corrective action when needed
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5. Investing Over the Life Cycle
Investors tend to follow different investment philosophies as they
move through different stages of the life cycle.
Where are you in the life cycle?
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Investing Over the Life Cycle (cont'd)
Growth-oriented youth stage
Twenties and thirties
Growth-oriented investments
Higher potential growth; Higher potential risk
capital gains v.s. current income
Middle-Aged Consolidation Stage
Ages 45 to 60
Family demands & responsibilities become important
(education expenses, retirement savings)
Move toward less risky investments to preserve capital
Transition to higher-quality securities with lower risk
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Investing Over the Life Cycle (cont'd)
Retirement Stage
Ages 60 and older
Preservation of capital becomes primary goal
Highly conservative investment portfolio
Income needed to supplement retirement income
What are some investments for each stage?
Growth-oriented: Common stocks, options or futures
Middle-age: Low-risk growth and income stocks, preferred
stocks, high-grade bonds
Income-oriented: Low-risk income stocks and Low risk
mutual funds, government bonds, quality corporate bonds,
bank certificates of deposit
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Young Investors Tend to Hold more Stocks in their
Investment Portfolios
Stocks (%) in the Portfolio of the US Investors with Different Ages
Age of investors: 20s 30s 40s 50s 60s
In general, older investors hold less stocks whereas the
younger investors hold more stocks.
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6. Investments and the Business Cycle
Investments are affected by conditions in the U.S. (and
local) economy
The business cycle reflects the current status of several
common economic indicators: gross domestic product
(GDP)1, industrial production, disposable2 income,
unemployment rate
A strong economy is reflected by an expanding business
cycle3
Stock prices tend to rise during expanding
business cycles and fall during declining
business cycles
1.本地生產總值 2.可用所得 3.經濟週期
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Business Cycles and Stock Market Cycles in HK
Stock Market leads GDP Growth Rate
by One Quarter
Hang
Seng
HK GDP Index
growth rate (HSI)
Asian
Financial Financial
Crisis SARS Tsunami
Recession: negative growth rate of GDP for two consecutive quarters.
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General Market Conditions
Bull Market1 (Stock Prices are Rising in an Uptrend2)
Favorable markets
Rising prices
Investor/consumer optimism3
Economic growth and recovery4
Government stimulus5
Bear Market6 (Stock prices are Falling in a Downtrend7)
Unfavorable markets
Falling prices
Investor/consumer pessimism8
Economic slowdown
1.牛市 2.上升趨勢 3.樂觀情緒
Government restraint9 4.復蘇 5.刺激 6.熊市
7.下降趨勢 8.悲觀 9.限制 26
Investments and the Business Cycle (cont’d)
Bonds and other forms of fixed-income securities are
also affected by the business cycle since their values
are tied to interest rates, which are affected by
economics conditions
One type of Interest rates : yield1 of bond
Interest rates and bond prices move in opposite
directions; rising interest rates mean falling bond
prices and vice versa2.
1.孶息 2.反之亦然
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7. Careers in Finance (Optional)
Commercial banking – generally employs more
people than any other part of financial services
industry
Corporate finance – requires broad understanding of
functional areas of a business
Financial planning – professionals in this area often
acquire the Certified Financial Planner® certification
Insurance – usually involves risk management or
asset management
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Careers in Finance (cont'd)
Investment banking – assists organizations in raising
capital1
Investment management – involves managing money for
clients2
practitioners often have the Certified Financial
Analyst3 (CFA) certification
Some may have the Financial Risk Manager
(FRM) now
1.資本 2.顧客 3.分析員
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7. Taxes in Investing Decisions
“It’s not what you make, it’s what
”
you keep that is important.”
Tax Planning Involves:
The desired return after-taxes
Type of income received from investments
Timing of profit-taking and loss recognition
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Capital Gains and Losses
Asset: property owned and used by
taxpayer, including securities and personal
residence
Capital Gain: amount by which the
proceeds from the sale of a capital asset
are more than its original purchase price
Capital Loss: amount by which the
proceeds from the sale of a capital asset
are less than its original purchase price
Any Capital gain tax?
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