Investment Basics Essay Example | Topics and Well Written Essays - 750 words

Investment Basics - Essay Example Creating portfolio involved asset allocation, asset selection decision, and asset execution. In asset allocation, the investors will decide on what marketable securities will he be investing, either in equities, fixed-income securities, and real assets (physical or identifiable assets). After the allocation, investors need to select on what are his asset preferences between stocks, bonds, and many more. The selection will be followed by the execution of investment portfolio and investment strategy. The final part of the process is performance evaluation wherein investment is constantly monitored by the investors themselves or through a portfolio manager. The Four Investments for Consideration in any Investment Portfolio Bonds (Municipal & Corporate). It is a debt instrument with specific return, interest and principal, and maturity date (Brigham & Ehrhardt, 2008, p. 157). Municipal bonds are debt securities issued by the government level whose maturity date is in a long-term basis. T hese bonds are considered to be secured and these are issued in order to support government operations and projects for the common good. Municipal bonds are known to be tax-exempt but it depends upon the purpose and jurisdiction. Corporate bonds are debt securities issued by corporations or business firms to finance variety of private purposes. These bonds are subject to a much higher interest rate for it is a risky investment (Brigham & Houston, 2009, p. 196). Stocks (Common and Preferred). These are issued securities that represent ownership. Ownership through the purchased of stocks are called stockholders which these are represented by stock certificates. Usually, stock prices of companies who are financially stable are high compared to those who are poor in performance because the higher is the value of the stocks the greater is the return of investment. There are two types of stocks, the common and the preferred stocks. In terms of the declaration of dividend and bankruptcy, p referred stockholders are satisfied first before the common shareholders (Investors Business Daily, 1996, p. 36). Both stocks running after income, the only difference is the risk involved. Preferred stocks are less risky but the growth income is fairly dependable while common stocks assumed higher risk but unlimited growth in income and capital gain (Rini, 2003, p. 33). Mutual Funds. It is an investment that used money â€Å"from a group of people with common investment goals to buy securities such as stocks, bond, money market instruments, a combination of these investments, or other funds† (Mobius, 2007, p. 3). These groups of investment securities are put together in a portfolio and it is appropriately managed by a portfolio manager. More often, investors prefer to invest in mutual funds because of access to a diversified portfolio, liquidity, and expertise by professional fund managers; however, mutual funds shared almost the same risk with investment in individual stock s, and drawbacks are always present. Derivatives. It is a financial instruments based on financial measurement of other assets that usually comes in contracts (Bragg, 2002, p. 156). Some of derivative instruments are forward, future, options, and swaps. The value of derivatives is based on the prices of some underlying assets or instruments. It also involved contracts between a seller and a buyer wherein the value is based on bargaining power (Rezaee, 20001, p. 390). Risk