Unit 15 Ethics, Recommendations, and Taxation

Value Investing

- seeks to actively invest in securities that are selling at a discount to their book value and out of favor with the market.

dollar cost averaging

-A formula timing plan that consists of periodic purchases of a fixed dollar amount of stock regardless of price -calls for the investor to make regular purchases over a long period

Asset Allocation

-An investment adviser who switches among investment classes based upon anticipated market changes is using a technique

Balanced or Moderate Growth

-Blue Chip Stock

Income

-Bonds, but not zero-coupons

Growth

-Common Stock -Common Stock Mutual Funds

High-Yield Income

-Corporate Bonds -Corporate Bonds Funds

registered representative's responsibilities

-Determining the suitability of various investments for individual customers. -Describing the characteristics and benefits of various securities products.

Preservation of Capital; and Safety

-Government Securities -Ginnie Maes

Liquidity

-Money Market Funds

Tax-free Income

-Municipal Bonds -Municipal Bonds Funds

From an income-oriented stock portfolio

-Preferred Stock -Utility Stock

Keep Pace w/ Inflation

-Stock Portfolio

municipal original issue premium bonds

-The original issue premium must be amortized -If the bond is held to maturity, there will be no capital loss reportable -The cost basis of the bond is adjusted downward by the amortized amount.

Portfolio Insurance

-The purchase of index puts to protect a portfolio

Dollar Cost Averaging

-a method of acquiring shares at a lower average cost over time and is not an investment style

Indexing

-a passive strategy that makes no attempt to anticipate market moves. -An index strategy reflects an underlying index with the adviser keeping securities in the portfolio in proportion to their weight in the underlying index

regressive tax

-all persons pay the same percentage tax regardless of their income such as cigarettes taxes that stay the same

Wash

-an investor swaps identical issues of stock to establish a loss that is disallowed -disallows claiming a tax loss on the sale of stock if the investor purchases a substantially identical security within 30 days either before or after the date of such sale.

Tactical asset allocation

-attempts to capitalize on short-term market swings -a market timing strategy

Beta

-is a benchmark and does not indicate anything about market movement as a whole. -It only measures the movement of a particular security or portfolio as compared to the movement of the entire market. -it serves as a benchmark for measuring the relative volatility of a stock or portfolio against the movement of the market itself. -it is by definition equal to 1

Selling short against the box

-is a strategy that is used to lock in a capital gain that will be deferred into a later tax period. -For the deferral to be allowed, the IRS requires certain criteria to be met.

The alternative minimum tax (AMT)

-is assessed against high annual income earners. -When calculating adjusted gross income some deductions and exemptions are disallowed resulting in a higher taxable adjusted gross income (AGI)

Capital Risk

-is generally associated with equity instruments, such as common stock, and equity-related derivatives, such as options. It is the risk that invested dollars can be lost as the result of circumstances unrelated to an issuer's financial strength.

Share identification

-is the most flexible of the three methods. -The investor keeps track of the cost of each share purchased and specifies which shares to sell based on his anticipated year-end tax needs. -For investors, the idea is to minimize tax liability if able by limiting gains or maximizing loses in anticipation of what one's year-end tax liability might be.

Duration

-measures a bond's price volatility by weighting the length of time it takes for a bond's cash flow to pay for itself. -If two bonds with differing coupon rates have identical maturities, the one with the lower coupon has the longer duration. -The cash flow from an interest-bearing bond makes its duration shorter than its maturity. -Bonds with longer duration carry greater price volatility. -is expressed in years (time) rather than in percentage.

corporate bond which

-offers a higher yield than a government bond with a similar maturity.

Systematic risk

-refers to the impact the overall market has on an equity portfolio's value. -Index options help insure portfolios against ___________

Reinvestment risk

-the danger that after purchasing a bond, interest rates will fall. This means that the fixed interest payments received over the remaining life of the bond will be reinvested at lower rates. The good news is that the price of the bond has probably risen due to falling rates.

Interest rate risk

-the danger that interest rates will rise and adversely affect a bond's price -This risk is greatest for long-term bonds; short-term debt securities are affected the least

progressive tax

-the percentage amount increases as the taxable amount increases such as income and estate taxes.

Accretion

-the process of adjusting the cost basis each year upwards, until maturity. -At maturity the cost basis will equal PAR.

Tax preference items

-used for the purpose of computing the alternative minimum tax. They include: -excess intangible drilling costs (wages, fuel, repairs). -accelerated depreciation. -percentage depletion in excess of basis.

discounts

are accreted

Premiums

are amortized

Zero-coupon bonds .

pay no interest until maturity and therefore are not suitable for someone seeking current income

straight line amortization

the annual reduction of a municipal bond's cost basis purchased at a premium