Finance Essay Paper on Equity Holdings for Individual Investors

Equity Holdings for Individual Investors

  1. Facts about preferred stock

Preferred stocks entail the stock whose dividends are always paid before the dividends of the general shareholders are paid. The preferred stocks has do not contain any voting rights and hence the holder are not entitled to the decision making of the firm at all cost. To this end is very important to note that the preferred stock mostly act as creditors who lend the firm some fund at a fee. The only different is that the dividends are subject to the profit realized. In the event that the firm does not make any profit, the preferred dividend may or may not be issued in accordance with the statutes of the firm regarding the apportionment of the preferred dividends. To this effect I would advice an  investor to invest in the preferred shares more than the ordinary shares especially if the company stipulations are to the fact that the payment of the dividend are fixed regardless of the profit or loss margin. This is simply because the investor will at a position to get the returns regardless of the loss a company incur of not. This will ensure that the risk of loss to the investors is curtailed.  To the stance of cash dividend stock are those shares whose dividends are paid in terms of cash and not in terms of other shares. As we all know that the cash is the most liquid asset and hence the asset with the lowest return and high depreciation rate due to inflation. It is therefore quite imperative t o not that the cash dividend stocks are more preferred when dealing with the various short term investment. On the issue of taxes, it is an n astounding fact that the preferred stocks are not taxable since their dividends are viewed as interest expenses that are deducted from the income before the tax is imputed in the calculation. On the other hand to cash stock dividend, the amount of dividend is taxable because it is deducted after taxation. A potential investor should therefore invest in the preferred stock if he wants a long term investments. On the other hand the investor should invest in the cash dividend if he wants a short term investment with a highly volatile market. Kim and Rich should now not be worried to invest in the preferred stock when they are deemed to have a long term investment because proffered dividends are usually not taxed.

Option A: real estate investment and the investment in the mutual funds

As it is in the American economy, the return on the real estate investment is steadily rising over the years; a good gesture that the industry is sprouting up at a very high rate. To the stance of mutual fund investment returns, there has also been an upward trend of this. This is an indication that it is proper to invest in the mutual funds. A graph of returns on the various long term investments is as shown below for the years 2012, 2013 1nd 2014.

Fig. 1.0 returns on long term investments

From the graph it is evident that it is only the return in real estate and the return on mutual funds that are on an upward trend in terms of growth in the long term investment returns. The other long term investments are on a downward trend which can co notates to Kim and Rich that they not in good stances for investment. The current return rate for the real estate stands at 30% and for the mutual funds stands at 24%. This in itself forms a formidable return for Kim and Rich if they opt to invest in real estate and mutual funds. Looking at the rate of return of the stock of ten companies, that Kim and Rich should invest in, the companies are; AABL, MSFT, QQQ, BPR, FB, F, INTC, GE, BSX, and BAC. Looking at the stocks of these companies, The performance of the shares for the last three years is relatively okay because all the various firms show a positive expected return where PBR has the highest expected return of 20.357 this positive return co notates to us that the company will be a better position to pay up its relevant dues debts and dividends when instinctively due. The BSX firm records the lowest expected returns of 0.5%.  This explicitly shows to a potential investor like Kim and Rich that the firm will not be able to efficiently meet it payment for the dividend or the dividends paid will not be commensurate to the investment made by Kim and Rich. In terms of variability in returns, the variability of the returns is low, for the reason that the risk of the companies ranges from -0.0011 to 0.009504. This is a clear show of high venture potential because of relatively lower risk. Combination of the firms according to weights to which Kim and Rich are supposed to invest in we have; the optimal portfolio weights

 AAPL            =10.40%, MSFT =1.42%, QQQ =8.54%, PBR = 33.20%, FB = 5.4%, F =6.55%,            Gee =3.80%, BSX = 0.93%, BAC = 14.20%.

From the weighs the Kim and Rich should invest more in PBR. Looking at the portfolio weights, The weights of the portfolio are not realistic for the reason that they all hold positive standards and this simply imply that diversification cannot be done here because as you diversify, if risk occurs, it would influence all the investments in the same way and therefore there would be no fall back strategy since as the one firm’s investments goes down the other firm’s investment  would also fall since they positively interrelated and their variation stems to the identical positive bearing. The graph of Minimum Variance Frontier (MVF) below shows that all the firms have positive variation in terms of peril therefore as the risk of one firm rises, the risk of the other firms would also increase evidently, to this effect Kim and Rich should take ardent concern of this non diversity since it brings out a threat of the entire set going into a failure at the juncture of happening of loss. I therefore do not recommend for Kim and Rich not to invest in the companies since it would much riskier.

Fig. 1.2 Minimum Variance Frontier (MVF)

From the explanations above, I would recommend Kim and Rich to invest in real estate and the mutual funds because they have an upward trend in terms of growth and also they have a relatively high rate of returns that is sufficient enough to cater for the cost of return efficiently. To this end, we looked at the various risks involved in the investment in stocks which proved beyond reasonable doubt to be high; hence the investment in the stocks would be quite detrimental to the company.

2 .Is it a good time to invest in the stock market for Kim and Rich

A keen look at the performance of the individual companies in terms of stock in the stock market, the performance was adequate as shown by the expected prices of the shares in the firms. All the firms depicted a positive profit on venture and thus stands a  good opportunity for magnetism of prospective investors. The maximum expected share price was 98.40 for the AABL firm. This indicates that the firm has an excellent standing and good management practices as well. Additionally, it shows that the firm is at a position to reimburse better dividends to Kim and Rich. The lowest sold share had an expected price of 12.50/= which belonged to the BSX Company. This is a considerably stumpy return as measured to the stock price of AABPL Company. Hence it indicates that the firm’s administration still requires more sophistically superior structure of management for them to ensure better return. However the variability of the industry prices is quite high as depicted by the highest risk measure of around 3.334 and the lowest showing 0.02031. To this effect, it calls for the various hedging methods to bring down the volatility of the marketplace prices. The volatility rates depicted shows that the market profit do vary with a wide variability and thus it co notates that the outlay in stock market now is not a good gesture at this juncture since it is quite unpredictable to know the probable returns thereof.

3. Kim and Rich have a brokerage account with the Bank of America, and –as we noted earlier– they have a small amount of funds in the Vanguard 500 Index. Vanguard also offers a brokerage account. Should they look into other brokerage options such as full cost, discount, or electronic brokerage?

Rich and Kim should look into other brokerage options such as the full cost, the discount and also the electronic brokerage. This is because these costs are the only cost that differentiates the costs of owning a brokerage accounts in these two firms; Bank of America and the Vanguard 500 Index. From the relevant statistics, the brokerage fee per stock of mutual fund in bank of America is $2.7 while that of Vanguard 500 Indexstands at $3 hence my recommendation is that the company should shift from Vanguard 500 Indexto invest in bank of America to realize a much more lower cost implications that would eventually increase their profit to that effect.

Information on various companies selected


This is a listed company in the new York stock exchange with a current stock price of 96.15, over the years , its stock prices have been ranging from, 105 to 95/= per share which is considerably wide.


The company is also listed and has a current stock price of 42. 6 the range of its stock prices stands at 45 and 42 which is itself a small range that is quite considerable for investment


This company listed as well has a current stock price of 94.67 with a range of 100 and 94 which is quite a wide range in this stance bringing in a high standard deviation.


This listed company has a stock price of 15.82 which is quite low and would discourage an investor who would want to invest in these stocks. It has a range of 15 and 20 which is moderately wide and hence considered okay.


 This company which is also listed has a stock price of 72. 76 which is a high stock –price with a range of between 72 and 75, which forms a considerably low 9range for which it is good for investment.


This company listed has the stock price of 16.80 which is quite low –a gesture that it is not so much good to invests in. it has a stock market range of between 16 and 17 which in itself is a probably low range for which investment can be at a good stance.


The company which is also listed in the NYSE has a current rock price of 33.52 with a stock price range of between 35 and 34 which provides a good ambience of investment.


 This listed company has a stock price of 25.35 with a range of between 25 and 26 which provides also a good ambience for investment


The listed company has a stock prices of 12.59 with a price range of between of 12 and 13, a gesture that its standard deviation is considerably low which means it would be less risky to invest in it.


The listed company in the NYSE has stock price of 14.93 with a range of between 16 and 14 which is also quite low for that matter.

Spread sheet summary

%Real Estate% Gold%Stocks/Mutual Funds% Savings/CDs% Bonds
201119  3417    1410
2012202819   198
standard deviationsexpected returns
QQQ 0.950420.357
PBR  0.10313.242
FB     0.21774.079
F       0.17254.05
INTC 0.13182.4
GE           0.10.506
BSX  0.34348.707