Definition Core satellite investing is a hybrid investment strategy that aims to balance stability and growth by combining a foundation of core investments with a selection of satellite investments. The core typically consists of low-cost, diversified index funds or bonds that provide steady returns, while the satellites may include actively managed funds, individual stocks or other alternative assets aimed at capturing higher returns.
Components of Core Satellite Investing Core Portfolio: This is the backbone of the investment strategy, usually composed of index funds or ETFs that track the overall market.
Definition Dividend reinvestment is an investment strategy where dividends paid by a stock are automatically used to purchase additional shares of the same stock. This approach allows investors to capitalize on the power of compounding, where the reinvested dividends generate further dividends, ultimately increasing the total investment value over time. It is often facilitated through a Dividend Reinvestment Plan (DRIP), which many companies offer.
Key Components Dividends: These are portions of a company’s earnings distributed to shareholders.
Definition Income investing is a strategy designed to generate a steady stream of income from investments, rather than focusing solely on capital appreciation. This approach often involves investing in assets that pay regular dividends or interest, thereby providing a reliable cash flow. It is particularly appealing to retirees or those seeking to supplement their income without selling assets.
Key Components of Income Investing Income investing typically involves various financial instruments that provide returns in the form of cash flow.
Definition A pension fund is a type of investment pool that collects and manages funds contributed by employers and employees to provide retirement income. Essentially, it serves as a safety net, ensuring that individuals have a reliable source of income once they retire. The money is invested in various assets to grow over time, providing a sustainable income stream for beneficiaries.
Components of a Pension Fund Understanding the components of a pension fund can help decipher how they operate:
Definition An annuity is a financial product designed to provide a steady stream of income, typically used for retirement planning. When you purchase an annuity, you make a lump-sum payment or a series of payments to an insurance company, which then promises to make periodic payments back to you at a later date. This can be a great way to secure your financial future and ensure you have a reliable income during your retirement years.
Definition Asset-Backed Securities (ABS) are financial instruments that represent a claim on the cash flows generated by a pool of underlying assets. These assets can be anything from auto loans and credit card debt to student loans and mortgages. By bundling these assets together, issuers can create securities that investors can buy, which allows for a more fluid market for these types of loans.
Components of ABS Underlying Assets: The core of ABS is the portfolio of assets that generates cash flows.
Definition Bank loans are financial products offered by banks and other financial institutions to borrowers, enabling them to obtain funds for various purposes, such as buying a home, financing a business or consolidating debt. The borrower agrees to repay the principal amount along with interest over a specified period.
Syndicated loans, on the other hand, involve a group of lenders who collectively provide a loan to a single borrower. This approach allows lenders to share the risk and pool their resources for larger sums, which can be beneficial for borrowers needing significant capital.
Definition A Certificate of Deposit (CD) is a financial product offered by banks and credit unions that allows individuals to deposit money for a fixed term in exchange for a higher interest rate compared to regular savings accounts. The catch? Your money is tied up for the duration of the term, which can range from a few weeks to several years.
Key Components of CDs Interest Rate: This is the rate at which your money earns interest.
Definition Commercial paper refers to an unsecured, short-term debt instrument issued by corporations to meet immediate financing needs. Think of it as a quick loan that companies use to cover operational costs, like payroll or inventory purchases. It typically has a maturity period ranging from a few days to up to 270 days.
Key Components Issuers: Usually large corporations with strong credit ratings, as commercial paper is deemed risky for lower-rated firms.
Definition Commodities are essential goods that can be bought and sold, typically categorized into two main groups: hard and soft commodities. Hard commodities are natural resources that are mined or extracted, like oil and gold. Soft commodities are agricultural products or livestock, including wheat, coffee and cattle.
The importance of commodities in the financial world cannot be overstated; they serve as a hedge against inflation and are often viewed as a safe haven during economic downturns.