Financial Terms related to Investment

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INVESTMENT
Alternative investments

• Are usually investments other than mutual funds, certificates of deposit, or direct
investments in equities and bonds. Some of these alternatives are: art, collectibles,
commodities, commodity funds, commodity pools, derivatives, foreign exchange,
hedge funds, oil and gas, precious metals, and real estate ventures.

Association for investment management and research

• The Association for Investment Management and Research (AIMR)'s Performance

Presentation Standards Implementation Committee is charged with the responsibility
to interpret, revise and update the AIMR Performance Presentation Standards
(AIMR-PPS(TM)) for portfolio performance presentations.

Balanced investment strategy

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• A method of portfolio allocation and management aimed at balancing risk and

return; a balanced portfolio may combine stocks, bonds, packaged products, and
cash equivalents.

Closed end investment company

• An investment company that issues a fixed number of shares in an actively

managed portfolio of securities. The shares may be of several classes; they are
traded in the secondary marketplace, either on an exchange or over the counter.
The market price of the shares is determined by supply and demand, and not by net

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asset value. See also: Mutual Fund.

Closed end investment company or fund

• Is an investment vehicle that issues shares in a fashion similar to other

corporations. The number of shares outstanding is relatively fixed unlike open end
investment funds which tend to have variable shares outstanding. Closed End
shares can trade at a premium or discount to the net asset value.

Dividend reinvestment

• Occurs when a dividend paying organization such as a corporation or mutual fund

automatically reinvest the payable dividend into additional shares of that
organization. There can be tax implications for this activity.

Dividend reinvestment plan

• Abbreviated DRP. Automatic reinvestment of shareholder dividends in more shares

of a company's stock, often without commissions. Some plans provide for the
purchase of additional shares at a discount to market price. Dividend reinvestment
plans allow shareholders to accumulate stock over the Long term using dollar cost
averaging. The DRP is usually administered by the company without charges to the
holder.

• Abbreviated DRIP or DRP. Plan offered by many corporations for the reinvestment
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of cash dividends by purchasing additional shares or fractional shares on the

dividend payment date, occasionally at a discount from market price. Many DRIPs
also allow the investment of additional cash from the shareholder, known as an
Optional Cash Payment or Optional Cash Purchase (OCP). The DRIP is usually
administered by the company without charges or only nominal fees to the
participants, and many allow additional purchases of as little as $10.

• Plans that enable shareholders to use dividends received on the firm's shares to
acquire additional full or fractional shares at no transaction (brokerage) cost.

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Expected return on investment

• The return one can expect to earn on an investment. See: capital asset pricing
model.

Foreign direct investment

• FDI. The acquisition abroad of physical assets such as plant and equipment, with
operating control residing in the parent corporation.

• Abbreviated FDI. The transfer by a multinational firm of capital, managerial, and

technical assets from its home country to a host country.

Future investment opportunities

• The options to identify additional, more valuable investment opportunities in the

future that result from a current opportunity or operation.

Guaranteed investment contract

• Abbreviated GIC. A pure investment product in which a life company agrees, for a
single premium, to pay the principal amount of a predetermined annual crediting
(interest) rate over the life of the investment, all of which is paid at the maturity date.

Guaranteed investment interest contract

• Abbreviated GIC. Debt instrument sold in large denominations often bought for
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retirement plans. The word guaranteed refers to the interest rate paid on the GIC;
the principal is at risk.

Initial investment

• The relevant cash outflow required now, at time zero, for a capital budgeting
project.

Investment account

• Is an account at a financial institution which is held for long term investment or

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capital purposes. This is opposed to the trading or inventory account.

Investment adviser

• (1) Any person who makes investment recommendations in return for a flat fee or
percentage of assets managed. (2) For investment companies, the individual who
has the day-to-day responsibility of investing the cash and securities held in the
fund's portfolio in accordance with the objectives stated in the fund's prospectus.

Investment analysts

• Related: financial analysts

Investment bank

• Financial intermediaries who perform a variety of services, including aiding in the

sale of securities, facilitating mergers and other corporate reorganizations, acting as
brokers to both individual and institutional clients, and trading for their own accounts.
Underwriters.

Investment banker

• A term for investment dealers when performing the underwriting function.

• A firm that engages in the origination, underwriting, and distribution of new issues.

• An institution in the business of raising capital for corporations and municipalities.

An investment banker may not accept deposits or make commercial loans. See also:
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Commercial Bank; Investment Bank.

Investment club

• A group of people who meet periodically to discuss and implement investment

strategies.

Investment company

• Refers to Open End Mutual Funds and Closed End Mutual Funds. It can also refer
to specialized investment firms.

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Investment decisions

• Decisions concerning the asset side of a firm's balance sheet, such as the decision
to offer a new product.

Investment flows

• Cash flows associated with purchase and sale of both fixed assets and business
interests.

Investment grade bonds

• A bond that is assigned a rating in the top four categories by commercial credit
rating companies. For example, S&P classifies investment grade bonds as BBB or
higher, and Moodys' classifies investment grade bonds as Ba or higher. Related:
High-yield bond.

Investment horizon

• Is the actual or expected period that a financial position will be held. Some
organizations and individuals use simple purchase-and-hold strategies, particularly
for fixed income securities. For those parties, the investment horizon would be the
time left to maturity. Other uses of the term are: day, short-term, intermediate-term,
and long-term holdings.

Investment income
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• The revenue from a portfolio of invested assets.

Investment management

• Also called portfolio management and money management, the process of

managing money.

Investment manager

• Also called a portfolio manager and money manager, the individual who manages
a portfolio of investments.

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Investment opportunities schedule ios

• A ranking of investment possibilities from best (highest returns) to worst (lowest

returns). The graph that plots project IRRs in descending order against required total
dollar investment.

Investment product line ipml

• The line of required returns for investment projects as a function of beta (non
diversifiable risk).

Investment quality

• Denotes high quality bonds. Investment quality means BBB or higher bond rating.
Banks are not allowed to invest in "predominantly speculative" securities (below BBB
ratings).

Investment tax credit

• Abbreviated ITC. An incentive for businesses in various regions of the country to

purchase certain types of assets or undertake certain types of research and
development activities; results in a direct reduction of federal taxes that would
otherwise be payable.

• Proportion of new capital investment that can be used to reduce a company's tax
bill (abolished in 1986).
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Investment trust

• A closed-end fund regulated by the Investment Company Act of 1940. These funds
have a fixed number of shares which are traded on the secondary markets similarly
to corporate stocks. The market price may exceed the net asset value per share, in
which case it is considered at a premium. When the market price falls below the
NAV/share, it is at a discount. Many closed-end funds are of a specialized nature,
with the portfolio representing a particular industry, country, etc. These funds are
usually listed on US and foreign exchanges.

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• Commonly known as a Closed-End Fund. Closed-end funds invest in other
securities (like a Mutual Fund) but have a fixed number of shares and are traded
similarly to stocks. The market price may exceed the Net Asset Value (NAV) per
share, in which case the fund is selling at a Premium. When the market price falls
below the NAV, the fund is selling at a Discount.

Investment value

• Related: straight value.

Investments

• As a discipline, the study of financial securities, such as stocks and bonds, from the
investor's viewpoint. This area deals with the firm's financing decision, but from the
other side of the transaction.

Legal investments

• Investments that a regulated entity is permitted to make under the rules and
regulations that govern its investing.

Local government investment pool lgip

• The aggregate of all funds from political subdivisions that are placed in the custody
of the State Treasurer for investment and reinvestment, I.E., LAIF.
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Mutually exclusive investment decisions

• Investment decisions in which the acceptance of a project precludes the

acceptance of one or more alternative projects.

Net investment

• Gross, or total, investment minus depreciation.

Net present value of future investments

• The present value of the total sum of NPVs expected to result from all of the firm's

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future investments.

Open end investment company

• Is a mutual fund that offers and redeems its shares on a daily basis. These funds
can be no-load funds which do not charge fees for the initial investment or
redemption. These funds can be load funds which do charge fees for investment or
redemption according to a published schedule. Compare to Closed End Fund.

Open ended investment company

• See Mutual Fund.

Passive investment management

• Buying a well-diversified portfolio to represent a broad-based market index without

attempting to search out mispriced securities.

Passive investment strategy

• See: passive management.

Real estate investment trust

• Abbreviated REIT. REITs sell like stocks on the major exchanges, and invest in
real estate either directly through properties or mortgages. REITs receive special tax
considerations, and typically offer investors high yields as well as a highly liquid
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method of investing in real estate.

• Abbreviated REIT. A pool of real properties marketed to individual investors, similar

to a closed-end mutual fund.

• Is a special structure which holds real properties. These properties can be

apartments, shopping malls, office buildings or other acceptable real assets. The
trust must distribute 95 percent of its income to the shareholders in order to qualify
for special tax treatment.

• Real estate investment trust, which is similar to a closed-end mutual fund. REITs

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invest in real estate or loans secured by real estate and issue shares in such
investments.

Real estate mortgage investment conduit

• Is a vehicle to minimize double taxation of income from a pooling of mortgages.

Reinvestment

• Using dividends, interest, and capital gains earned in a mutual fund investment to
purchase additional shares, rather than receiving the distributions in cash. In the
case of stocks: using dividends to purchase additional shares instead of receiving
payments in cash.

Reinvestment rate

• (1) The rate at which an investor assumes interest payments made on a debt
security can be reinvested over the life of that security. (2) Also, the rate at which
funds from a maturity or sale of a security can be reinvested. Often used in
comparison to give-up yield.

• The rate at which an investor assumes interest payments made on a debt security
can be reinvested over the life of that security.

Reinvestment risk
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• Is the situation whereby prepaid principal amounts will be reinvested in lower

yielding securities.

• The risk that proceeds received in the future will have to be reinvested at a lower
potential interest rate.

Remic real estate mortgage investment conduit

• A pass-through tax entity that can hold mortgages secured by any type of real
property and issue multiple classes of ownership interests to investors in the form of
pass-through certificates, bonds, or other legal forms. A financing vehicle created

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under the Tax Reform Act of 1986.

Return on investment

• Abbreviated ROI. The profit or loss resulting from a security transaction, often
expressed as an annual percentage rate.

• Abbreviated ROI. Generally, book income as a proportion of net book value.

Short term investment services

• Services that assist firms in making short-term investments.

Underinvestment problem

• The mirror image of the asset substitution problem, wherein stockholders refuse to
invest in low-risk assets to avoid shifting wealth from themselves to the debt holders.

Unit investment trust

• Money invested in a portfolio whose composition is fixed for the life of the fund.
Shares in a unit trust are called redeemable trust certificates, and they are sold at a
premium above net asset value.

• Is an investment vehicle which is funded at the beginning and once investments

are acquired acts like a liquidating investment. For example, corporate bonds,
sovereign bonds, or mortgage backed securities would be acquired. The interest,
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principal repayments and accelerated payments would be passed on to the

investors. These funds would not be retained by the fund for further investment. It is
more nearly analogous to a closed-end fund and different from an open-ended fund.

Zero investment portfolio

• A portfolio of zero net value established by buying and shorting component

securities, usually in the context of an arbitrage strategy.

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