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Section 2: Investment Vehicle Characteristics (25% of Series 65)

This section dives deeper into the specific things you can invest in.

1. Fixed Income (Bonds)

When you buy a bond, you are lending money to the issuer. You need to know how bond prices react to the economy.

  • The Teeter-Totter Rule: Bond Prices and Interest Rates move in opposite directions.
    • If the Federal Reserve raises interest rates, the price of existing bonds drops.
    • If the Federal Reserve lowers interest rates, the price of existing bonds goes up.
  • Yield Curve: A graph showing the interest rates of short-term bonds vs. long-term bonds.
    • Normal Curve: Long-term bonds pay higher interest than short-term bonds (because locking your money up for 30 years is riskier than 1 year).
    • Inverted Curve: Short-term bonds pay more than long-term bonds. This is weird and usually predicts a recession!

2. Equity (Stocks)

  • Growth Stocks: Companies that are growing incredibly fast (like young tech companies). They usually don't pay dividends because they reinvest all their profits back into the company to grow faster.
  • Value Stocks: Older, boring companies that are currently priced "cheap" compared to their actual worth. They often pay steady dividends.

3. Pooled Investments

  • Mutual Funds (Open-End Funds): They are constantly issuing new shares to anyone who wants to buy them. They are priced exactly once per day at the end of the trading day.
  • Closed-End Funds: They issue a fixed number of shares just once (like an IPO). After that, the shares trade on the stock market all day long, just like a regular stock.

4. Alternative Investments

  • Options: A contract that gives you the choice (but not the obligation) to buy or sell a stock at a specific price before a certain date.
    • Call Option: You hope the stock price goes UP.
    • Put Option: You hope the stock price goes DOWN.
  • Derivatives: Any investment whose value is "derived" (comes from) something else. Options are derivatives because their value depends entirely on the underlying stock.

Key Terms Glossary

  • Inverted Yield Curve: When short-term interest rates are higher than long-term interest rates.
  • Call Option: A contract giving the right to buy an asset at a set price.
  • Mutual Fund: An investment program funded by shareholders that trades in diversified holdings.

Mini-Quiz

Q1. If the Federal Reserve raises interest rates, what will generally happen to the price of outstanding bonds in the market?

  1. Bond prices will go up.
  2. Bond prices will go down.
  3. Bond prices will remain the same.

Answer: B. Remember the teeter-totter rule: Interest rates and bond prices move in opposite directions.

Q2. Which type of investment is priced continuously throughout the trading day?

  1. An Open-End Mutual Fund
  2. A Closed-End Fund

Answer: B. Closed-end funds trade on an exchange all day like stocks. Mutual funds are priced only once per day.