-pools money from multiple investors

-the fund manager invests the money based upon the fund's objective  

Why invest in mutual funds?

-diversification from multiple securities 

-professional management/expertise 

-higher expected returns 

-smaller $ investment 

-easy investing 

-Morningstar: 5 stars(best rating) 1 star(worst)

-Moody's 

-financial publications (WSJ, Consumer Reports, Money Magazine..) rate mutual funds on performance and fees

-vast majority of funds - most mutual funds are setup this way

-mutual fund can sell an unlimited number of shares

-purchase shares through an agent/distributor of the mutual fund

-mutual fund will buy back the shares 

-NAV: Net Asset Value 

Equation: market value of all owned securities minus loans divided by number of shares in the mutual fund 

-very few funds 

-mutual fund can sell a limited number of shares 

-shares trade on stock exchanges, buy and sell with other investors 

-share price determined by NAV and supply & demand (shares typically trade at a slight discount from NAV)

-no real advertising 

-mutual funds that charge a commission 

-up to 8.5% on purchase (or 5% on sale)

-front end-pay commission when you purchase

-back end-pay commission when you sell

-sliding fee scale 

-level load-pay commission annually 

-low load-discounted commission (1-3%)

-mutual funds that do not charge a commission when you buy or sell 

-12b-1 special fees for marketing and advertising (also called a distribution fee)

-load funds can charge up to 1% annually 

-no load funds can charge up to .25% annually 

-annual fee paid to the mutual fund's money manager. Fee doesn't depend on fund's performance. (.5 - 1.5% fee based on total assets)

-all the details about sales fees, managment fees, 12b-1 fees...are in the "fee table"

-classes of shares

Class A - front end costs + fees 

Class B - back end costs + fees 

Class C - level load 

-open or close end 

Mutual fund services 

1. Automatic Investment Plan (bank account/paycheck) 

2. Automatic Reinvestment Plan (for dividends/cap.gains)

3. Systematic Withdrawal Plan - retirement checks 

4. Exchange Privilege - switch funds within the same Family of funds 

-closed end, purchase shares on an exchange

-REIT uses stock proceeds (and sometimes debt) to purchase real estate and mortgages 

-by law, has to pay out 90% of profits as dividends 

-Property REITS (equity REITs) invest in shopping centers, apartments, office buildings...

-Mortgage REITs invest in mortgages 

-Hybrid REITs invest in both 

-an investment that 'derives' its value from the price change of another investment 

-contracts that provide for the later delivery of an actual commodity. In the contract, the seller agrees to deliver the commodity and the buyer agrees to accept it. Both of the parties are locked in. 

-99% of all contracts are closed out before the actual delivery date 

-Commissions may go up to 20% of the down payment (margin)

-the maximum allowable price fluctuation for a commodity (wheat is 20 cents). There is no daily price limit for a contact during its final month.

-Futures and options generally expire on the 3rd Friday of the month 

-Approximately 75% of futures traders lose money 

1. The Product

2. The Trading Exchange 

3. The Size of the Contract (bushels, pounds)

4. The Pricing Unit lb..$/ton, cents/bushel...

5. The Delivery Month 

-Chicago Board of Trade

-founded in 1848 

-(short position)

-suppliers or producers of a product who want to lock in what they believe is the current high price 

-(long position)

-traders who accept the shifting of risk in an attempt to make a profit 

-the option to sell a specified number of shares of common stock for a specified price and for a specified period of time 

-the seller can sell options either 

a) naked -which means the seller doesn't own the underlying stock 

b)covered -which means the seller does own the underlying stock  

1. leverage 

2. limit risk 

1. short life 

2. no current income 

-single family

-condominium 

-town home 

-coop cooperative apartment 

-manufactured home prefab home 

-apartment 

1. pride of ownership 

2. inflation hedge 

3. tax shelter 

4. investment (tax-free capital gains up to...)

1. uncertainty 

2. lack of funds for a down payment 

3. poor credit 

4. waiting for something to become available 

San Fran * med 407k house price medium ncome for san fran is 73k

New York *

Hanalulu*

LA area*

Miami

DC

1. down payment - usually up to 20% of the purchase price. Most lenders will require mortgage insurance if the down payment is less than 20%. Mortgage insurance is protection for the lender (not the buyer). (more money down less likely to walk away)

-Government guaranteed and insured - FHA and VA

-Conventional loans are not guaranteed or insured by the government. PMI - private mortgage insurance 

-EXAMPLE: Purchase a $300,000 home with a down payment of $50,000. PMI account? 

$300,000 x .2 = 60,000-50,000 = 10,000

-In the past, many homeowners would take out a second mortgage (home equity loan or an 80/20 loan) to avoid mortgage insurance

-buyer's deposit or earnest money 

-escrow account (holds money in trust)

-loan application fee

-loan origination fee 

-guarantee of "good title" make sure title is clean "could owe someone for what was done before"

-prorated charges for property taxes...

-prepaid interest if your first payment is more than a month away 

-termite inspection - lender required 

-recording fees 

-home inspection - look at whole house if seller refuses to fix you can walk away get back earnest 

-home warranty - most will buy a policy that goes with the house 

-a pledge of real property to secure a debt 

-mortgagor - borrower 

-mortgagee - lender 

-fixed rate: "5.5%, 30 year fixed"

-adjustable rate (ARM): the interest rate is tied to a particular index plus a margin. Make sure you cap. 2,6 means an annual adjustment max of 2% with a lifetime max of 6%

-interest only

Monthly payment

-add PMI as 5th component 

P - Principal portion 

I - Interest portion 

T - Property taxes portion 

I - Homeowners insurance portion 

-many homebuyers will pre-qualify or get pre-approved before they start shopping around so that they will know the maximum loan amount available to them 

-Mortgage payment alone: 25-30% of gross monthly income 

-total for all loan payments: 33-38% of gross monthly income 

-Most common: 30 yr loan 

-second most common is 15 yr loan 

-have collateral or a cosigner 

-auto 

-school 

-furniture/household appliances 

-consolidation 

-always remember to shop around for loans/credit 

-banks 

-credit unions 

-finance companies 

-retailers/manufacturers 

1. Annual Percentage Rate or APR

2. Total Value of all Payments 

3. Actual Loan Amount 

4. Total Finance (Interest) Cost 

-what the lender will do if you default 

-court costs 

-raise the interest rate 

-a person's credit score is a single number that summarizes and grades your creditworthiness. The most commonly used score is the FICO score (named after Fair, Isaac & Co.) Your credit score is based upon the following factors: 

1. On-Time payment history (35%)

2. Length of credit history (15%)

3. The amount owed (30%) relative to your credit limit 

4. New credit (10%) Fewer inquiries raise your score 

5. Type of credit used (10%) The more variety of debt used, the higher your score 

-You can obtain a free credit report from all three major credit bureaus at www.annualcreditreport.com

-Generally it is considered good to keep your credit charges at 20% or less of your take home pay 

1. Character - will you repay the loan 

2. Capacity - can you repay the loan 

3. Capital - what are your assets and net worth 

4. Collateral 

5. Conditions - economic conditions and job security 

1. Single payment loans 

2. revolving credit - credit is extended in advance of the actual transaction 

-department store of credit cards 

-VISA (BofA vs. Sierra Club) Affinity cards

-MasterCard 

-American Express 

-Personal line of credit (unsecured)

-home equity line of credit 

-secured credit card requires a deposit 

3. Service Credit - full payment is not required when services are rendered (utility co.)

1. Teaser rates 

2. Default Rates - very high APR's that are assessed whenever certain rules of the account are violated (late payments)

3. Variable interest rate - are fixed rate cards really fixed? 

4. Annual fees and fees for late payments and over the limit charges 

5. liability of lost or stolen cards 

6. Credit card insurance to reimburse you for the first $50 in liability (do not purchase) 

7. Credit life insurance - pay off your balance if you become sick or die ( do not purchase) 

-interest free grace period (usually 20 days or more) 

-record keeping 

-convenience 

-available for emergencies 

-state laws governing interest rates. Arizona has a limit of 36% annual interest 

-Experian (the largest which has over 90 million credit files)

-Equifax 

-TransUnion 

-30 day deadline for fixing mistakes 

-creditors need to provide accurate information 

-job applicant's permission is required to pull a credit report 

-toll - free numbers with employees answering during business hours 

-toll free numbers for removing one self from lists used by credit card companies and direct marketers 

-one free credit report annually from each major credit bureau 

-"Truth in Lending Act"

-accurate disclosure of fees 

-APR

-limited liability of $50 per card 

Where can you get life insurance?

-work: traditional plan set by the employer, flexible plan allows the employee more choice 

-group

-family

-individual plan 

1. Earnings multiple approach is based on your salary and age

2. needs approach uses insurance to cover shortages

-purchase insurance for a particular period of time (5, 10..20 years). Term insurance buys the most insurance coverage for your money. The policy only pays if death occurs during the specified time frame

-level term has a constant death benefit with possibly increasing annual premiums 

-decreasing term has a declining death with constant premiums 

-Make sure that your term policy is 

1. guaranteed renewable 

2. convertible to a whole life policy 

-permanent life insurance up to 100 years of age. Whole life is more expensive with higher premiums that create a cash value (or forced savings account) with a guaranteed rate of return 

-straight life policy: premium is based on your age at inception and remains fixed over the policy life 

-limited life policy: make premium payments for either a set number of years or up to a certain age (65) policy will remain in force until death 

comprehensive major medical offers the most complete coverage 

-the amount the policyholder pays first before any insurance benefits are received 

-calendar year 

-per occurrence 

-the insurance company will pay a stated percentage (80-90%) of the "typical" and reasonable" cost, once you have met your deductible. Co-insurance usually has an upper limit 

EXAMPLE: your policy has $500 deductible with 80% co-insurance on the next $5000. On a vacation, you break your leg and the total bill comes to $6500, what is your cost?

On your next vacation you break an arm and the total cost comes to $4500. How much will you have to pay? 

Health Maintenance Organization (ex: Cigna)

-central facility 

Preferred Provider Organization

-you can go to any doctor or hospital but costs are cheaper if you use a participating doctor/hospital

-typically more expensive than an HMO

Actual cash value is replacement cost minus depreciation 

-replacement value is the current replacement cost 

-dwelling at replacement 

-other structures

-personal property - actual cash value or replacement, personal property floater (floater)

How do you keep a record of your inventory? 

-loss of use

-liability

-medical payments to others 

-bodily injury liability

-property damage liability

-medical payments to others (in your vehicle)

-uninsured/underinsured

-comprehensive coverage: perils 

-collision coverage will pay no matter who is at fault