How the monies can be invested

I. Philosophy and Strategy

Households daily face economic decisions concerning activities such as saving, consumption and retirement. Some individuals are earning more than they currently wish to spend.

In the high-earnings periods the investor can put its savings in financial assets such as stocks or bonds. In low-earning periods the investor can sell these assets to provide him funds for the consumption needs.

The role of the financial advisor should be designed a portfolio depends on the buyers and seller needs, goals and expectations about the market. The effective investor have to structure the right strategy of investments such as the way to buy, how long keep the investment in the portfolio and when is the key moment to sell.

II. Passive and active Investors

Passive investors believe that price is basically right they maintain a risk return balance and they are immunizing against the changes in interest rates, they attempt simply to duplicate their respective universe of investments.

Active investors suggest that the market provides sufficient inefficiencies to be successfully exploited by the astute investor. Active investing has to do with achieve returns that are more reasonable with the risk. Forecast in interest rate is essential to predict the movement for instance in the bond’s market this method allow the investor to identify anomalies in prices. They believe that they are able to consistently identify enough high-performing investments.

The active and passive management method should be addressed only after a solid investment concept of investment has been build. A solid preparation consists of identification, synchronization of various financial planning aspects, and development of an investment policy based on specific goals and risk tolerance.

The ownership of stock has been transformed from being dominated by individual investors to one dominated by institutional investors. Larger institutional investors are more likely to put pressure on the management of the firm to make sure that the managers are maximizing the wealth of the owners of the firm. The client is the centre of the investment firm and the goal is to maximize the client returns by minimizing the probability of the risk in the market.



III. WHERE THE MONIES WILL BE INVESTED

Designing an investment portfolio requires skill and care. A portfolio is essentially the sum of all different investments. The monies can be invested to achieve the dual goals of growth and safety by the diversification of the resources among the three major asset classes; equity, fixed income and cash. Investing in all three will minimize the probability against losses. Stock, bonds, and cash investments tend to provide strongest returns at different times. In most cases, if one asset class is performing poorly, the other two are doing better.

3.1 Bonds

Bonds are fixed incomes instruments, they are characterized by cash flow, i.e. a series of cash payments (C1 ….C2) at times t= 1, 2, 3, .T. A generic instrument of this type has non-negative coupons payments and positive redemption value. When defining the yield on a fixed income instrument we might assume that all cash payments in the cash flows are non-negative.

The sensitivity of a bond’s price depends on the changes in interest rates that are influenced by factors such as; maturity, coupon rate, and yield to maturity. The bonds tend to rise and fall less dramatically than stocks that means that the prices fluctuate less, the bonds provide a level of income stability and bonds such as US treasury bonds will provide both key factors stability and liquidity.

3.2 Stocks

A stock means ownership. As an owner, the investors have a claim on the assets and earnings of the company as well as rights (Vote) with your shares. Stocks represent equity and they are considered riskier investments and the investors require a higher rate of return.

Stocks can be classified in two categories; the common stock and preferred stock, which differ in the rights that they confer upon their owners. But stocks can also be classified according to a company size and company sector.

The risk associated with stocks depends upon what other kind of investments are in the investor’s portfolio. The risk associated in stocks is greater than the risk associated with investing in bonds.