February 28 2012 Test 3 Chapter 12 I Mutual Funds a Opinions i Do not try to trade stock individually ii Know this area its good for later in life b A portfolio and something where a secondary investment is involved i It would have a secondary quality if it is bought on your behalf 1 No control over specific investment 2 You select specific categories a Growth income b Big small cap c In the 1990s there were more mutual funds than listed stock i Go with big firms because of this d Qualified Plan i Tax free 1 IRA a 401k e Pool Diversification i Professional management to tap into ii Almost no downside iii You don t need the best funds you just have to be in the game iv Non correlated categories f Management Fees i How mutual funds derive their income 1 Want to put more away 2 You wont have control over the menu inside each of the funds will be management fees 3 Based on a percentage of assets under management a If you have 1 000 000 and they get 1 then 10 000 b The return that it shows is already after they deducted the management fees ii Types of people 1 Management company mutual fund 2 Investment advisor 3 Distributor can be the stock jock these are distribution issues a No load no commission funds slim non existant b Loaded commission use stock brokers as commission c These two do not go as part of management fees or to the institution 4 Custodian take care of nuts and bolts of mutual funds 5 Transfer agent moves money around g Open end and Closed end i Open End 1 Continue to take funds and the size of the money under management can continue to grow 2 Happy to accept new dollars 3 More desireable you know the fees going into it 4 A type of mutual fund that does not have restrictions on the amount of shares the fund will issue If demand is high enough the fund will continue to issue shares no matter how many investors there are Open end funds also buy back shares when investors wish to sell 5 The majority of mutual funds are open end By continuously selling and buying back fund shares these funds provide investors with a very useful and convenient investing vehicle It should be noted that when a fund s investment manager s determine that a fund s total assets have become too large to effectively execute its stated objective the fund will be closed to new investors and in extreme cases be closed to new investment by existing fund investors ii Closed End 1 You can buy this on the secondary market 2 Buy it just like you would with any other stock 3 Raised through IPO and raises a fixed amount 4 They need to issue more shares to issue more capital 5 Price changes when you buy and sell you have to pay a commission every time you buy and sell 6 The former raises a prescribed amount of capital only once through an IPO by issuing a fixed number of shares which are purchased by investors in the closed end fund as stock Unlike regular stocks closed end fund stock represents an interest in a specialized portfolio of securities that is actively managed by an investment advisor and which typically concentrates on a specific industry geographic market or sector The stock prices of a closed end fund fluctuate according to market forces supply and demand as well as the changing values of the securities in the fund s holdings h ETF exchange traded fund i A security that tracks an index a commodity or a basket of assets like an index fund but trades like a stock on an exchange ETFs experience price changes throughout the day as they are bought and sold ii Because it trades like a stock an ETF does not have its net asset value NAV calculated every day like a mutual fund does iii By owning an ETF you get the diversification of an index fund as well as the ability to sell short buy on margin and purchase as little as one share Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund When buying and selling ETFs you have to pay the same commission to your broker that you d pay on any regular order iv One of the most widely known ETFs is called the Spider SPDR which tracks the S P 500 index and trades under the symbol SPY i Index ETF not a lot of management fees because they are just buying stocks on the index CHEAP good because it will allow them to make money i Try to beat the index but they can t because there are too many factors 1 Pay for performance 2 From management fees the non index firm pays more 3 Cant beat the index because they have to beat it by their fees just to break even for an ETF ii Exchange traded funds that follow a specific benchmark index as closely as possible Index ETFs are much like index mutual funds but whereas the mutual fund shares can only be redeemed at one price daily the closing net asset value NAV index ETFs can be bought and sold throughout the day on exchanges Through an index ETF investors get exposure to a large number of securities in a single transaction Index ETFs can cover U S and foreign markets specific sectors or a specific class of stock i e small caps ADRs etc but all incorporate a passive investment strategy only making portfolio changes when changes occur in the underlying index j NAV Net Asset Value i A mutual fund s price per share or exchange traded fund s ETF per share value In both cases the per share dollar amount of the fund is calculated by dividing the total value of all the securities in its portfolio less any liabilities by the number of fund shares outstanding k UIT unit investment trust i Static portfolio just lays there doesn t do anything ii An investment company that offers a fixed unmanaged portfolio generally of stocks and bonds as redeemable units to investors for a specific period of time It is designed to provide capital appreciation and or dividend income l Funds will be loaded or not loaded i Loads commissions 1 Compensating stock broker for the advice a Hear about it b When you have money 2 Back end loads a B share specific amount c You have to sit still for 5 years 3 Front Loads a Front A share b If you leave after a certain time then you will get a i If you invest 100 in front loaded A share and get receipt for 95 ii Takes money upfront iii Not popular b Back Longer B share i If you leave after a certain time then you will get a specific amount ii You have to sit still for 5 years c Back Shorter C …
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