{"id":493,"date":"2023-12-19T19:10:30","date_gmt":"2023-12-19T19:10:30","guid":{"rendered":"https:\/\/pressbooks.ccconline.org\/accinvestments\/?post_type=chapter&#038;p=493"},"modified":"2023-12-19T19:10:45","modified_gmt":"2023-12-19T19:10:45","slug":"1-2-investment-characteristics-and-attributes","status":"publish","type":"chapter","link":"https:\/\/pressbooks.ccconline.org\/accinvestments\/chapter\/1-2-investment-characteristics-and-attributes\/","title":{"raw":"1.2: Investment Characteristics and Attributes","rendered":"1.2: Investment Characteristics and Attributes"},"content":{"raw":"<p class=\"lt-biz-79463\"><iframe id=\"iFrameResizer0\" title=\"Chapter 01 - Slides 01-14 - Introduction: What is an Investment?\" src=\"https:\/\/wonderprofessor.com\/123\/Chap01\/Chap01_Slides_01_to_14\/Chap01_Slides_01_to_14.html\" width=\"640\" height=\"480\" allowfullscreen=\"allowfullscreen\" data-mce-fragment=\"1\"><\/iframe><\/p>\r\n<p class=\"lt-biz-79463\"><a class=\"inline_disabled\" href=\"https:\/\/wonderprofessor.com\/123\/Chap01\/Chap01_Slides_01_to_14\/Chap01_Slides_01_to_14.html\" target=\"_blank\" rel=\"noopener\">Video<\/a>\u00a0-\u00a0<a class=\"inline_disabled\" href=\"https:\/\/wonderprofessor.com\/123\/Chap01\/Chap01_Slides_01_to_14\/Chap01_Slides_01_to_14.mp3\" target=\"_blank\" rel=\"noopener\">Audio<\/a>\u00a0-\u00a0<a class=\"inline_disabled\" title=\"https:\/\/wonderprofessor.com\/123\/Chap01\/Chap01_YouTube_01_14.html\" href=\"https:\/\/wonderprofessor.com\/123\/Chap01\/Chap01_YouTube_01_14.html\" target=\"_blank\" rel=\"noopener\">YouTube<\/a>\u00a0-\u00a0<a class=\"instructure_file_link inline_disabled\" href=\"https:\/\/docs.google.com\/presentation\/d\/1jvqzrOV6FJh37FwQD_tlNIrJvc8ENBfknKW9Zak5MU8\/\" target=\"_blank\" rel=\"noopener\">Presentation File<\/a>\u00a0<em>(Material for this section begins on slide 5.)<\/em><\/p>\r\n<p class=\"lt-biz-79463\">As you work through the material in this introductory chapter, remember that this is an Introduction to Investments class. Don\u2019t worry about all the jargon and buzzwords and proclamations and sexy graphics and silly antics that you may have heard or seen from the talking heads on the financial media outlets. Please forget anything and everything your brother-in-law, the self-appointed Expert-On-All-Things-Including-How-To-Invest, told you at the Thanksgiving dinner table. What follows is a list of general characteristics and attributes about investments. Study these terms, write them down, print the chapter 1 Study Guide, and watch and listen to the first lecture presentation for chapter 1 on the class\u00a0<a class=\"link-https\" title=\"https:\/\/wonderprofessor.com\/123\/\" href=\"https:\/\/wonderprofessor.com\/123\/\" target=\"_blank\" rel=\"external noopener nofollow\">website<\/a>. This is all you need to learn and know for now.<\/p>\r\n\r\n<div id=\"section_1\" class=\"mt-section\">\r\n\r\n&nbsp;\r\n<h2 class=\"lt-biz-79463 editable\">Securities, Property, and Personal Investments<\/h2>\r\n<p class=\"lt-biz-79463\">There are three broad categories of investments: securities, property, and personal. According to\u00a0<a class=\"link-https\" href=\"https:\/\/en.wikipedia.org\/wiki\/Security_(finance)\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Wikipedia<\/u><\/a>, a \u201csecurity\u00a0is a tradable financial asset.\u201d\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/s\/security.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Investopedia<\/u><\/a>\u00a0goes into more detail and defines a \u201csecurity\u00a0as a fungible, negotiable financial instrument that holds some type of monetary value.\u201d The fancy words\u00a0<em>fungible<\/em>\u00a0and\u00a0<em>negotiable<\/em>\u00a0mean that the\u00a0security\u00a0can be traded and its value can be negotiated. Another popular definition of\u00a0security\u00a0is \u201can\u00a0investment that represents debt or ownership or the legal right to acquire or sell an ownership interest.\u201d This last definition introduces the three main categories of securities that we will detail later. The word\u00a0security\u00a0is an unfortunate term. Many people don\u2019t have a clear picture of what is meant by the word\u00a0security. Our class used to be titled, \u201cInvestments and Securities.\u201d Students would say, \u201cI\u2019m not an Administration of Justice major. I don\u2019t need to take this class.\u201d No, not that type of\u00a0security! For now, please understand that a\u00a0security\u00a0is a financial asset that can be traded and whose value changes over time.<\/p>\r\n<p class=\"lt-biz-79463\">Property investments are sometimes referred to as hard assets or tangible assets. They include gold and other\u00a0precious metals,\u00a0art\u00a0and other\u00a0collectibles\u00a0such as cars, commodities such as basic foodstuffs and materials, and real estate. We will discuss property investments toward the end of our journey together. They are important options but for the vast majority of us, securities are the best choice for prudent,\u00a0long-term investments. This class concentrates on securities.<\/p>\r\n<p class=\"lt-biz-79463\">Finally, personal investments are endeavors we undertake to better ourselves. Examples include education, training, and travel. Many say that their personal investments such as college or traveling the world were often the best investments they ever made. I agree. We will do our best to make our time together one of the best, if not the best, personal investments you will ever make. None other than Benjamin Franklin said, \"An\u00a0investment\u00a0in education pays the best\u00a0interest.\"<\/p>\r\n\r\n<\/div>\r\n<div id=\"section_2\" class=\"mt-section\">\r\n\r\n&nbsp;\r\n<h2 class=\"lt-biz-79463 editable\">Primary Assets versus\u00a0Derivative Assets<\/h2>\r\n<p class=\"lt-biz-79463\">Investments fall into either primary or\u00a0derivative\u00a0assets. For the vast majority of our time together, we will be covering primary assets. Primary assets fall into two categories: debt and\u00a0equity. Debt investments are investments where investors lend their money to someone else. Examples of these include bonds and savings accounts.\u00a0Equity\u00a0investments are investments where the investor has full or partial ownership of the entity. Examples include stocks, real estate, and partnerships. Debt investors are loaners.<\/p>\r\n\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Equity investors are owners.<\/div>\r\n<p class=\"lt-biz-79463\">On the other hand, derivatives are securities that derive their value from other assets. Examples of derivatives are options and futures. With derivatives, you can make a whole lot of money quickly and then lose a whole lot of money quickly. In fact, you can lose the whole value of your<\/p>\r\n\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">derivative investment\u00a0overnight. Many in the industry do not categorize derivatives as investing. According to Mr. Graham\u2019s definition above, derivatives would certainly be regarded as speculative. As we will see, in the\u00a0investment\u00a0world, \u201cspeculative\u201d is a euphemism for the word \u201cgambling.\u201d We will discuss options and futures in detail at the very end of our journey together. Before we impress upon you just how dangerous these speculations are, if anyone tries to entice you with riches beyond your wildest dreams trading in options or futures, please tell them you are waiting until the end of the Introduction to Investments class before you make a decision one way or the other. (Spoiler alert: Unless you enjoy losing money quickly, stay away from derivatives of all forms! They are hazardous to your financial well-being.)<\/div>\r\n<\/div>\r\n<div id=\"section_3\" class=\"mt-section\">\r\n\r\n&nbsp;\r\n<h2 class=\"lt-biz-79463 editable\">Direct Investments versus Indirect Investments<\/h2>\r\n<p class=\"lt-biz-79463\">Direct investments are investments for which you have control of the underlying\u00a0investment\u00a0assets. Your name is on the title or the account. You are in control of the asset. Examples of these types of investments include stocks, bonds, real estate, and hard assets. With an indirect\u00a0investment, someone else is making the decision about what underlying\u00a0investment\u00a0will be chosen. You may have some input into the decision but more often than not, you have no control of what assets will be chosen. Examples of these investments are mutual funds, limited partnerships, and Real Estate\u00a0Investment Trusts (REITs). With indirect investments, you choose the\u00a0mutual fund\u00a0or limited\u00a0partnership or REIT, and the manager or general partner chooses the underlying investments in stocks or bonds or real estate.<\/p>\r\n\r\n<\/div>\r\n<div id=\"section_4\" class=\"mt-section\">\r\n<h3 class=\"lt-biz-79463 editable\">Investment Domesticity<\/h3>\r\n<p class=\"lt-biz-79463\">Domesticity describes the location of an\u00a0investment. There are three categories:\u00a0domestic,\u00a0global, and\u00a0international. The first category is easy; a\u00a0domestic investment\u00a0is domiciled inside the United States. There is a subtle but important distinction with regard to the second two categories. A\u00a0global investment\u00a0means that it could be based anywhere in the world, including the United States. An\u00a0international investment\u00a0is based outside the United States. Please pay attention to this important difference.\u00a0International\u00a0investments are also often called\u00a0foreign investment\u00a0or\u00a0overseas\u00a0investments.<\/p>\r\n<p class=\"lt-biz-79463\">Until the 1970\u2019s, the differences between these categories were important. However, as globalization has evolved since the 1980\u2019s, the differences have become much less pronounced. Greg Ireland, a successful\u00a0mutual fund manager with over 35 years of experience once said, \u201cThe world is a very small place economically.\u201d The influential magazine <a class=\"link-https\" href=\"https:\/\/www.forbes.com\/\" target=\"_blank\" rel=\"external noopener nofollow\"><u><em>Forbes<\/em><\/u><\/a>\u00a0reported that, \u201cSixty-five percent (by value) of the parts in the Ford Mustang come from the U.S. and Canada. Ninety percent of the parts in the Toyota Sienna \u2013 which is built in Indiana \u2013 come from the U.S. and Canada.\u201d Which is the more American car, a Ford Mustang or a Toyota Sienna?<\/p>\r\n<p class=\"lt-biz-79463\">In the presentation, we list seventeen well-known companies and ask, \u201cWhich are\u00a0domestic\u00a0and which are\u00a0foreign?\u201d (Spoiler alert: They are all\u00a0foreign.) In the United States, the issue of globalization has spilled into the political arena and elicited much controversy. At times, this controversy has taken the form of anger, fear, and loathing. This is unfortunate from our viewpoint as investors. Nothing is perfect and that includes our efforts to globalize the economy. However, on balance, globalization has been a tremendous positive for investors around the world and has helped bring hundreds of millions of people out of poverty and into the<\/p>\r\n\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">global\u00a0middle class. The tricky part is ensuring that all enjoy the benefits of the expansion of the\u00a0global\u00a0economy.<\/div>\r\n<p class=\"lt-biz-79463\">Next in the presentation, we list the top 18 countries according to per capita gross\u00a0domestic\u00a0product. We then ask a simple question: Which country had the best average annual return between 1970 and 2021? (No spoiler here! Please watch or listen to the presentations on the class website.) The world is indeed a very small place economically these days.<\/p>\r\n\r\n<\/div>\r\n<div id=\"section_5\" class=\"mt-section\">\r\n\r\n&nbsp;\r\n<h3 class=\"lt-biz-79463 editable\">Time Horizon<\/h3>\r\n<p class=\"lt-biz-79463\">One of the most important, if not the most important, characteristic that we must decide upon before we make an\u00a0investment\u00a0decision is our time horizon, also known as our time frame. When will we need to use the funds from our\u00a0investment? Here are some popular guidelines:<\/p>\r\n\r\n<table class=\"mt-responsive-table\" summary=\"The three major time horizons, short term, intermediate term, and long term.\"><caption>Time Horizons<\/caption><colgroup> <col width=\"160\" \/> <col width=\"174\" \/> <col width=\"185\" \/><\/colgroup>\r\n<thead>\r\n<tr>\r\n<th class=\"mt-align-center\" scope=\"col\">Time Frame<\/th>\r\n<th class=\"mt-align-center\" scope=\"col\">Financial Industry<\/th>\r\n<th class=\"mt-align-center\" scope=\"col\">Life Insurance Industry<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td class=\"lt-biz-79463\" data-th=\"Time Frame\">\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Short-Term<\/div><\/td>\r\n<td class=\"lt-biz-79463\" data-th=\"Financial Industry\">Up to a year or so<\/td>\r\n<td class=\"lt-biz-79463\" data-th=\"Life Insurance Industry\">1 to 3 years<\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"lt-biz-79463\" data-th=\"Time Frame\">\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Intermediate-Term<\/div><\/td>\r\n<td class=\"lt-biz-79463\" data-th=\"Financial Industry\">2 to 5 years<\/td>\r\n<td class=\"lt-biz-79463\" data-th=\"Life Insurance Industry\">3 to 5, 6, or even 7 years<\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"lt-biz-79463\" data-th=\"Time Frame\">\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Long-Term<\/div><\/td>\r\n<td class=\"lt-biz-79463\" data-th=\"Financial Industry\">More than 5 years<\/td>\r\n<td class=\"lt-biz-79463\" data-th=\"Life Insurance Industry\">More than 7 years<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<p class=\"lt-biz-79463\">Before you make an\u00a0investment, we must know our time frame. As we will learn, our time frame will dictate what types of<\/p>\r\n\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">investment\u00a0we can and cannot use.<\/div>\r\n<\/div>\r\n<div id=\"section_6\" class=\"mt-section\">\r\n\r\n&nbsp;\r\n<h3 class=\"glossarizer_replaced\" aria-expanded=\"false\">Liquidity<\/h3>\r\n<p class=\"lt-biz-79463\">No, not how much beer we need for the weekend!\u00a0Liquidity\u00a0refers to how easily your\u00a0investment\u00a0can be turned into cash. Liquid investments are easily and quickly converted into cash. There is a ready market to purchase the\u00a0investment\u00a0and change of ownership happens quickly. Examples include stocks and mutual funds. Go online or call your\u00a0broker\u00a0and you will have your money very quickly, usually within a day or two. Illiquid investments are the exact opposite. The market for the\u00a0investment\u00a0is small or the change of ownership happens slowly, or both. It usually takes some time \u2012 sometimes much time \u2012 to convert your\u00a0investment\u00a0into cash. The poster child for illiquid investments is real estate. Real estate usually takes at least two or three or more months to sell. Other examples of illiquid investments include limited partnerships, fine\u00a0art, and\u00a0collectibles.<\/p>\r\n\r\n<h3>Risk vs. Return<\/h3>\r\n<\/div>\r\n<div id=\"section_7\" class=\"mt-section\">\r\n<p class=\"lt-biz-79463\"><em>Do you want to eat well or do you want to sleep well?<\/em>\u00a0In the\u00a0investment world, risk\u00a0is the chance that your actual\u00a0investment\u00a0returns will differ from your expected return. Wait a minute! That is not the typical definition of\u00a0risk. When most people think of\u00a0risk, they think of the possibility of suffering harm or loss. They think of danger. When they think of\u00a0risk\u00a0with regard to investing, they think of losing their\u00a0investment. They think of losing all their money. Instead, in the\u00a0investment world, when we endeavor to measure risk, we calculate the probability that what we receive from our\u00a0investment\u00a0will not match what we expect from our\u00a0investment. It is an imperfect measurement but it can help us to keep a\u00a0long-term perspective and can even help us to take advantage of the risks inherent in an\u00a0investment.<\/p>\r\n<p class=\"lt-biz-79463\">In general, the higher the expectation of\u00a0investment\u00a0returns, the higher the\u00a0risk level we will have to accept. There is no way to negate this relationship. If we want high returns, we are going to have to accept high\u00a0risk. Here is the\u00a0risk versus return spectrum that we will use:<\/p>\r\n\r\n<table class=\"mt-responsive-table\" summary=\"The spectrum of risk and return with regard to investments.\"><caption>\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Risk<\/div>\r\nversus Return Attributes of Investments\r\n\r\n<\/caption><colgroup> <col width=\"160\" \/> <col width=\"174\" \/> <col width=\"175\" \/><\/colgroup>\r\n<thead>\r\n<tr>\r\n<th class=\"mt-align-center\" scope=\"col\">\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Risk<\/div>\r\nLevel<\/th>\r\n<th class=\"mt-align-center\" scope=\"col\">Return Expected<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td class=\"lt-biz-79463\" data-th=\"Risk Level\">Low\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Risk<\/div><\/td>\r\n<td class=\"lt-biz-79463\" data-th=\"Return Expected\">2% to 4%<\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"lt-biz-79463\" data-th=\"Risk Level\">Moderate\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Risk<\/div><\/td>\r\n<td class=\"lt-biz-79463\" data-th=\"Return Expected\">4% to 8%<\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"lt-biz-79463\" data-th=\"Risk Level\">High\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Risk<\/div><\/td>\r\n<td class=\"lt-biz-79463\" data-th=\"Return Expected\">8% to 12%<\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"lt-biz-79463\" data-th=\"Risk Level\">Speculative\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Risk<\/div><\/td>\r\n<td class=\"lt-biz-79463\" data-th=\"Return Expected\">Greater than 12%<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<p class=\"lt-biz-79463\">Unless they are being dishonest, others will use different but ultimately similar spectrums. Please remember that<\/p>\r\n\r\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">speculation\u00a0is not considered investing by many in the industry, Your Humble Author included. As mentioned, we are going to do our best to help you learn how to handle the ups and downs of moderate to high-risk\u00a0investments and at the same time, generate reasonably moderate to high returns over the long term. We want you to eat reasonably well and sleep reasonably well!<\/div>\r\n<p class=\"lt-biz-79463\">It\u2019s time for some checking for comprehension. At the end of the presentation, we list six examples of investments. We want you to ascribe the various characteristics and attributes we covered to the six investments. Again, only concern yourself with what we have covered so far. Relax and have fun. Give my regards to Uncle Harry!<\/p>\r\n\r\n<\/div>\r\n<footer class=\"mt-content-footer\">\r\n\r\n<hr class=\"autoattribution-divider\" \/>\r\n\r\n<div class=\"autoattribution\">\r\n\r\nThis page titled\u00a0<a class=\"internal mt-self-link\" href=\"https:\/\/biz.libretexts.org\/Bookshelves\/Finance\/Introduction_to_Investments_(Paiano)\/01%3A_Chapter_1\/01%3A_Introduction_Overview_and_Risk_versus_Return\/1.02%3A_Investment_Characteristics_and_Attributes\" target=\"_blank\" rel=\"internal noopener\">1.2:\u00a0<\/a>Investment<a class=\"internal mt-self-link\" href=\"https:\/\/biz.libretexts.org\/Bookshelves\/Finance\/Introduction_to_Investments_(Paiano)\/01%3A_Chapter_1\/01%3A_Introduction_Overview_and_Risk_versus_Return\/1.02%3A_Investment_Characteristics_and_Attributes\" target=\"_blank\" rel=\"internal noopener\">\u00a0Characteristics and Attributes<\/a>\u00a0is shared under a\u00a0<a href=\"https:\/\/creativecommons.org\/licenses\/by-nc-sa\/4.0\" target=\"_blank\" rel=\"nofollow noopener\">CC BY-NC-SA 4.0<\/a>\u00a0license and was authored, remixed, and\/or curated by\u00a0<a href=\"https:\/\/wonderprofessor.com\/\" target=\"_blank\" rel=\"nofollow noopener\">Frank Paiano<\/a>.\r\n\r\n<\/div>\r\n<\/footer>","rendered":"<p class=\"lt-biz-79463\"><iframe loading=\"lazy\" id=\"iFrameResizer0\" title=\"Chapter 01 - Slides 01-14 - Introduction: What is an Investment?\" src=\"https:\/\/wonderprofessor.com\/123\/Chap01\/Chap01_Slides_01_to_14\/Chap01_Slides_01_to_14.html\" width=\"640\" height=\"480\" allowfullscreen=\"allowfullscreen\" data-mce-fragment=\"1\"><\/iframe><\/p>\n<p class=\"lt-biz-79463\"><a class=\"inline_disabled\" href=\"https:\/\/wonderprofessor.com\/123\/Chap01\/Chap01_Slides_01_to_14\/Chap01_Slides_01_to_14.html\" target=\"_blank\" rel=\"noopener\">Video<\/a>\u00a0&#8211;\u00a0<a class=\"inline_disabled\" href=\"https:\/\/wonderprofessor.com\/123\/Chap01\/Chap01_Slides_01_to_14\/Chap01_Slides_01_to_14.mp3\" target=\"_blank\" rel=\"noopener\">Audio<\/a>\u00a0&#8211;\u00a0<a class=\"inline_disabled\" title=\"https:\/\/wonderprofessor.com\/123\/Chap01\/Chap01_YouTube_01_14.html\" href=\"https:\/\/wonderprofessor.com\/123\/Chap01\/Chap01_YouTube_01_14.html\" target=\"_blank\" rel=\"noopener\">YouTube<\/a>\u00a0&#8211;\u00a0<a class=\"instructure_file_link inline_disabled\" href=\"https:\/\/docs.google.com\/presentation\/d\/1jvqzrOV6FJh37FwQD_tlNIrJvc8ENBfknKW9Zak5MU8\/\" target=\"_blank\" rel=\"noopener\">Presentation File<\/a>\u00a0<em>(Material for this section begins on slide 5.)<\/em><\/p>\n<p class=\"lt-biz-79463\">As you work through the material in this introductory chapter, remember that this is an Introduction to Investments class. Don\u2019t worry about all the jargon and buzzwords and proclamations and sexy graphics and silly antics that you may have heard or seen from the talking heads on the financial media outlets. Please forget anything and everything your brother-in-law, the self-appointed Expert-On-All-Things-Including-How-To-Invest, told you at the Thanksgiving dinner table. What follows is a list of general characteristics and attributes about investments. Study these terms, write them down, print the chapter 1 Study Guide, and watch and listen to the first lecture presentation for chapter 1 on the class\u00a0<a class=\"link-https\" title=\"https:\/\/wonderprofessor.com\/123\/\" href=\"https:\/\/wonderprofessor.com\/123\/\" target=\"_blank\" rel=\"external noopener nofollow\">website<\/a>. This is all you need to learn and know for now.<\/p>\n<div id=\"section_1\" class=\"mt-section\">\n<p>&nbsp;<\/p>\n<h2 class=\"lt-biz-79463 editable\">Securities, Property, and Personal Investments<\/h2>\n<p class=\"lt-biz-79463\">There are three broad categories of investments: securities, property, and personal. According to\u00a0<a class=\"link-https\" href=\"https:\/\/en.wikipedia.org\/wiki\/Security_(finance)\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Wikipedia<\/u><\/a>, a \u201csecurity\u00a0is a tradable financial asset.\u201d\u00a0<a class=\"link-https\" href=\"https:\/\/www.investopedia.com\/terms\/s\/security.asp\" target=\"_blank\" rel=\"external noopener nofollow\"><u>Investopedia<\/u><\/a>\u00a0goes into more detail and defines a \u201csecurity\u00a0as a fungible, negotiable financial instrument that holds some type of monetary value.\u201d The fancy words\u00a0<em>fungible<\/em>\u00a0and\u00a0<em>negotiable<\/em>\u00a0mean that the\u00a0security\u00a0can be traded and its value can be negotiated. Another popular definition of\u00a0security\u00a0is \u201can\u00a0investment that represents debt or ownership or the legal right to acquire or sell an ownership interest.\u201d This last definition introduces the three main categories of securities that we will detail later. The word\u00a0security\u00a0is an unfortunate term. Many people don\u2019t have a clear picture of what is meant by the word\u00a0security. Our class used to be titled, \u201cInvestments and Securities.\u201d Students would say, \u201cI\u2019m not an Administration of Justice major. I don\u2019t need to take this class.\u201d No, not that type of\u00a0security! For now, please understand that a\u00a0security\u00a0is a financial asset that can be traded and whose value changes over time.<\/p>\n<p class=\"lt-biz-79463\">Property investments are sometimes referred to as hard assets or tangible assets. They include gold and other\u00a0precious metals,\u00a0art\u00a0and other\u00a0collectibles\u00a0such as cars, commodities such as basic foodstuffs and materials, and real estate. We will discuss property investments toward the end of our journey together. They are important options but for the vast majority of us, securities are the best choice for prudent,\u00a0long-term investments. This class concentrates on securities.<\/p>\n<p class=\"lt-biz-79463\">Finally, personal investments are endeavors we undertake to better ourselves. Examples include education, training, and travel. Many say that their personal investments such as college or traveling the world were often the best investments they ever made. I agree. We will do our best to make our time together one of the best, if not the best, personal investments you will ever make. None other than Benjamin Franklin said, &#8220;An\u00a0investment\u00a0in education pays the best\u00a0interest.&#8221;<\/p>\n<\/div>\n<div id=\"section_2\" class=\"mt-section\">\n<p>&nbsp;<\/p>\n<h2 class=\"lt-biz-79463 editable\">Primary Assets versus\u00a0Derivative Assets<\/h2>\n<p class=\"lt-biz-79463\">Investments fall into either primary or\u00a0derivative\u00a0assets. For the vast majority of our time together, we will be covering primary assets. Primary assets fall into two categories: debt and\u00a0equity. Debt investments are investments where investors lend their money to someone else. Examples of these include bonds and savings accounts.\u00a0Equity\u00a0investments are investments where the investor has full or partial ownership of the entity. Examples include stocks, real estate, and partnerships. Debt investors are loaners.<\/p>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Equity investors are owners.<\/div>\n<p class=\"lt-biz-79463\">On the other hand, derivatives are securities that derive their value from other assets. Examples of derivatives are options and futures. With derivatives, you can make a whole lot of money quickly and then lose a whole lot of money quickly. In fact, you can lose the whole value of your<\/p>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">derivative investment\u00a0overnight. Many in the industry do not categorize derivatives as investing. According to Mr. Graham\u2019s definition above, derivatives would certainly be regarded as speculative. As we will see, in the\u00a0investment\u00a0world, \u201cspeculative\u201d is a euphemism for the word \u201cgambling.\u201d We will discuss options and futures in detail at the very end of our journey together. Before we impress upon you just how dangerous these speculations are, if anyone tries to entice you with riches beyond your wildest dreams trading in options or futures, please tell them you are waiting until the end of the Introduction to Investments class before you make a decision one way or the other. (Spoiler alert: Unless you enjoy losing money quickly, stay away from derivatives of all forms! They are hazardous to your financial well-being.)<\/div>\n<\/div>\n<div id=\"section_3\" class=\"mt-section\">\n<p>&nbsp;<\/p>\n<h2 class=\"lt-biz-79463 editable\">Direct Investments versus Indirect Investments<\/h2>\n<p class=\"lt-biz-79463\">Direct investments are investments for which you have control of the underlying\u00a0investment\u00a0assets. Your name is on the title or the account. You are in control of the asset. Examples of these types of investments include stocks, bonds, real estate, and hard assets. With an indirect\u00a0investment, someone else is making the decision about what underlying\u00a0investment\u00a0will be chosen. You may have some input into the decision but more often than not, you have no control of what assets will be chosen. Examples of these investments are mutual funds, limited partnerships, and Real Estate\u00a0Investment Trusts (REITs). With indirect investments, you choose the\u00a0mutual fund\u00a0or limited\u00a0partnership or REIT, and the manager or general partner chooses the underlying investments in stocks or bonds or real estate.<\/p>\n<\/div>\n<div id=\"section_4\" class=\"mt-section\">\n<h3 class=\"lt-biz-79463 editable\">Investment Domesticity<\/h3>\n<p class=\"lt-biz-79463\">Domesticity describes the location of an\u00a0investment. There are three categories:\u00a0domestic,\u00a0global, and\u00a0international. The first category is easy; a\u00a0domestic investment\u00a0is domiciled inside the United States. There is a subtle but important distinction with regard to the second two categories. A\u00a0global investment\u00a0means that it could be based anywhere in the world, including the United States. An\u00a0international investment\u00a0is based outside the United States. Please pay attention to this important difference.\u00a0International\u00a0investments are also often called\u00a0foreign investment\u00a0or\u00a0overseas\u00a0investments.<\/p>\n<p class=\"lt-biz-79463\">Until the 1970\u2019s, the differences between these categories were important. However, as globalization has evolved since the 1980\u2019s, the differences have become much less pronounced. Greg Ireland, a successful\u00a0mutual fund manager with over 35 years of experience once said, \u201cThe world is a very small place economically.\u201d The influential magazine <a class=\"link-https\" href=\"https:\/\/www.forbes.com\/\" target=\"_blank\" rel=\"external noopener nofollow\"><u><em>Forbes<\/em><\/u><\/a>\u00a0reported that, \u201cSixty-five percent (by value) of the parts in the Ford Mustang come from the U.S. and Canada. Ninety percent of the parts in the Toyota Sienna \u2013 which is built in Indiana \u2013 come from the U.S. and Canada.\u201d Which is the more American car, a Ford Mustang or a Toyota Sienna?<\/p>\n<p class=\"lt-biz-79463\">In the presentation, we list seventeen well-known companies and ask, \u201cWhich are\u00a0domestic\u00a0and which are\u00a0foreign?\u201d (Spoiler alert: They are all\u00a0foreign.) In the United States, the issue of globalization has spilled into the political arena and elicited much controversy. At times, this controversy has taken the form of anger, fear, and loathing. This is unfortunate from our viewpoint as investors. Nothing is perfect and that includes our efforts to globalize the economy. However, on balance, globalization has been a tremendous positive for investors around the world and has helped bring hundreds of millions of people out of poverty and into the<\/p>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">global\u00a0middle class. The tricky part is ensuring that all enjoy the benefits of the expansion of the\u00a0global\u00a0economy.<\/div>\n<p class=\"lt-biz-79463\">Next in the presentation, we list the top 18 countries according to per capita gross\u00a0domestic\u00a0product. We then ask a simple question: Which country had the best average annual return between 1970 and 2021? (No spoiler here! Please watch or listen to the presentations on the class website.) The world is indeed a very small place economically these days.<\/p>\n<\/div>\n<div id=\"section_5\" class=\"mt-section\">\n<p>&nbsp;<\/p>\n<h3 class=\"lt-biz-79463 editable\">Time Horizon<\/h3>\n<p class=\"lt-biz-79463\">One of the most important, if not the most important, characteristic that we must decide upon before we make an\u00a0investment\u00a0decision is our time horizon, also known as our time frame. When will we need to use the funds from our\u00a0investment? Here are some popular guidelines:<\/p>\n<table class=\"mt-responsive-table\" summary=\"The three major time horizons, short term, intermediate term, and long term.\">\n<caption>Time Horizons<\/caption>\n<colgroup>\n<col width=\"160\" \/>\n<col width=\"174\" \/>\n<col width=\"185\" \/><\/colgroup>\n<thead>\n<tr>\n<th class=\"mt-align-center\" scope=\"col\">Time Frame<\/th>\n<th class=\"mt-align-center\" scope=\"col\">Financial Industry<\/th>\n<th class=\"mt-align-center\" scope=\"col\">Life Insurance Industry<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td class=\"lt-biz-79463\" data-th=\"Time Frame\">\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Short-Term<\/div>\n<\/td>\n<td class=\"lt-biz-79463\" data-th=\"Financial Industry\">Up to a year or so<\/td>\n<td class=\"lt-biz-79463\" data-th=\"Life Insurance Industry\">1 to 3 years<\/td>\n<\/tr>\n<tr>\n<td class=\"lt-biz-79463\" data-th=\"Time Frame\">\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Intermediate-Term<\/div>\n<\/td>\n<td class=\"lt-biz-79463\" data-th=\"Financial Industry\">2 to 5 years<\/td>\n<td class=\"lt-biz-79463\" data-th=\"Life Insurance Industry\">3 to 5, 6, or even 7 years<\/td>\n<\/tr>\n<tr>\n<td class=\"lt-biz-79463\" data-th=\"Time Frame\">\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Long-Term<\/div>\n<\/td>\n<td class=\"lt-biz-79463\" data-th=\"Financial Industry\">More than 5 years<\/td>\n<td class=\"lt-biz-79463\" data-th=\"Life Insurance Industry\">More than 7 years<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p class=\"lt-biz-79463\">Before you make an\u00a0investment, we must know our time frame. As we will learn, our time frame will dictate what types of<\/p>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">investment\u00a0we can and cannot use.<\/div>\n<\/div>\n<div id=\"section_6\" class=\"mt-section\">\n<p>&nbsp;<\/p>\n<h3 class=\"glossarizer_replaced\" aria-expanded=\"false\">Liquidity<\/h3>\n<p class=\"lt-biz-79463\">No, not how much beer we need for the weekend!\u00a0Liquidity\u00a0refers to how easily your\u00a0investment\u00a0can be turned into cash. Liquid investments are easily and quickly converted into cash. There is a ready market to purchase the\u00a0investment\u00a0and change of ownership happens quickly. Examples include stocks and mutual funds. Go online or call your\u00a0broker\u00a0and you will have your money very quickly, usually within a day or two. Illiquid investments are the exact opposite. The market for the\u00a0investment\u00a0is small or the change of ownership happens slowly, or both. It usually takes some time \u2012 sometimes much time \u2012 to convert your\u00a0investment\u00a0into cash. The poster child for illiquid investments is real estate. Real estate usually takes at least two or three or more months to sell. Other examples of illiquid investments include limited partnerships, fine\u00a0art, and\u00a0collectibles.<\/p>\n<h3>Risk vs. Return<\/h3>\n<\/div>\n<div id=\"section_7\" class=\"mt-section\">\n<p class=\"lt-biz-79463\"><em>Do you want to eat well or do you want to sleep well?<\/em>\u00a0In the\u00a0investment world, risk\u00a0is the chance that your actual\u00a0investment\u00a0returns will differ from your expected return. Wait a minute! That is not the typical definition of\u00a0risk. When most people think of\u00a0risk, they think of the possibility of suffering harm or loss. They think of danger. When they think of\u00a0risk\u00a0with regard to investing, they think of losing their\u00a0investment. They think of losing all their money. Instead, in the\u00a0investment world, when we endeavor to measure risk, we calculate the probability that what we receive from our\u00a0investment\u00a0will not match what we expect from our\u00a0investment. It is an imperfect measurement but it can help us to keep a\u00a0long-term perspective and can even help us to take advantage of the risks inherent in an\u00a0investment.<\/p>\n<p class=\"lt-biz-79463\">In general, the higher the expectation of\u00a0investment\u00a0returns, the higher the\u00a0risk level we will have to accept. There is no way to negate this relationship. If we want high returns, we are going to have to accept high\u00a0risk. Here is the\u00a0risk versus return spectrum that we will use:<\/p>\n<table class=\"mt-responsive-table\" summary=\"The spectrum of risk and return with regard to investments.\">\n<caption>\n<\/caption>\n<\/table>\n<\/div>\n<p>versus Return Attributes of Investments<\/p>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Risk<\/div>\n<p>Level<br \/>\nReturn Expected<\/p>\n<p>Low<\/p>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Risk<\/div>\n<p>2% to 4%<\/p>\n<p>Moderate<\/p>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Risk<\/div>\n<p>4% to 8%<\/p>\n<p>High<\/p>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Risk<\/div>\n<p>8% to 12%<\/p>\n<p>Speculative<\/p>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">Risk<\/div>\n<p>Greater than 12%<\/p>\n<p class=\"lt-biz-79463\">Unless they are being dishonest, others will use different but ultimately similar spectrums. Please remember that<\/p>\n<div class=\"glossarizer_replaced\" aria-expanded=\"false\">speculation\u00a0is not considered investing by many in the industry, Your Humble Author included. As mentioned, we are going to do our best to help you learn how to handle the ups and downs of moderate to high-risk\u00a0investments and at the same time, generate reasonably moderate to high returns over the long term. We want you to eat reasonably well and sleep reasonably well!<\/div>\n<p class=\"lt-biz-79463\">It\u2019s time for some checking for comprehension. At the end of the presentation, we list six examples of investments. We want you to ascribe the various characteristics and attributes we covered to the six investments. Again, only concern yourself with what we have covered so far. Relax and have fun. Give my regards to Uncle Harry!<\/p>\n<footer class=\"mt-content-footer\">\n<hr class=\"autoattribution-divider\" \/>\n<div class=\"autoattribution\">\n<p>This page titled\u00a0<a class=\"internal mt-self-link\" href=\"https:\/\/biz.libretexts.org\/Bookshelves\/Finance\/Introduction_to_Investments_(Paiano)\/01%3A_Chapter_1\/01%3A_Introduction_Overview_and_Risk_versus_Return\/1.02%3A_Investment_Characteristics_and_Attributes\" target=\"_blank\" rel=\"internal noopener\">1.2:\u00a0<\/a>Investment<a class=\"internal mt-self-link\" href=\"https:\/\/biz.libretexts.org\/Bookshelves\/Finance\/Introduction_to_Investments_(Paiano)\/01%3A_Chapter_1\/01%3A_Introduction_Overview_and_Risk_versus_Return\/1.02%3A_Investment_Characteristics_and_Attributes\" target=\"_blank\" rel=\"internal noopener\">\u00a0Characteristics and Attributes<\/a>\u00a0is shared under a\u00a0<a href=\"https:\/\/creativecommons.org\/licenses\/by-nc-sa\/4.0\" target=\"_blank\" rel=\"nofollow noopener\">CC BY-NC-SA 4.0<\/a>\u00a0license and was authored, remixed, and\/or curated by\u00a0<a href=\"https:\/\/wonderprofessor.com\/\" target=\"_blank\" rel=\"nofollow noopener\">Frank Paiano<\/a>.<\/p>\n<\/div>\n<\/footer>\n","protected":false},"author":33,"menu_order":3,"template":"","meta":{"pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-493","chapter","type-chapter","status-publish","hentry"],"part":485,"_links":{"self":[{"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/pressbooks\/v2\/chapters\/493","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/wp\/v2\/users\/33"}],"version-history":[{"count":2,"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/pressbooks\/v2\/chapters\/493\/revisions"}],"predecessor-version":[{"id":495,"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/pressbooks\/v2\/chapters\/493\/revisions\/495"}],"part":[{"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/pressbooks\/v2\/parts\/485"}],"metadata":[{"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/pressbooks\/v2\/chapters\/493\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/wp\/v2\/media?parent=493"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/pressbooks\/v2\/chapter-type?post=493"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/wp\/v2\/contributor?post=493"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/accinvestments\/wp-json\/wp\/v2\/license?post=493"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}