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1
Chapter 13
Investments
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Section 13.1Investment Strategies
• Objectives• Explain factors to consider when evaluating investments;• Describe principles for investing wisely; and• Identify ways to learn more about investing.
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Investing - means putting money to work so that it makes even
more money for you over time Basic Characteristics to Evaluate Investments
•Return - income that an investment producesPay returns at regular intervals Sell an investment for a profitTax advantage
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Basic Characteristics to Evaluate Investments Continued
•Liquidity - ease of which assets can be converted to cash
•Volatility - degree to which an investment’s return or value may change (Figure 13-1)
•Risk - possibility of variation in the return on your investment; investments do not come with guarantees
Conservative – lower risk, lower returnsRelated to Volatility and LiquidityInflation
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Principles of Investing Continued
1. Identify Your Objectives
• Amount you can afford to invest
• Timeline Shorter – less risk; lower returns Longer – more volatile; higher risk; potential for
better returns
• More than one goal
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Principles of Investing Continued
2. Focus on a Strategy
• Income – pay relatively dependable returns at regular intervals
• Growth – put money into investment that may not pay now, but will grow in value in time
• Tax reduction
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Principles of Investing Continued
3. Diversify your Investments – invest in a variety of
investments to reduce your risk
• Portfolio – collection of investments that is diversified and well balanced
• Asset Allocation – percentage of your portfolio for each type of investment
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Learning About Investing
• Reliable media sources – books, magazines, newspapers, radio, TV shows, websites
• Courses in financial planning – credit and noncredit courses
• Investment clubs – group of people who meet regularly to learn about investing and to make
investments together Pool money, share risks and rewards, split task of
researching investments, vote, experience investors help new investors NAIC
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• Professional advisors – banks, brokerage firms, and independent financial planners
Check credentials Evaluate the advice Decide how you want to invest your money
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Section 13.2Retirement Planning
Objectives• Compare and contrast investment options designed for retirement planning; and
• Explain the need to take an active role in retirement planning.
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Social Security Retirement Benefits
• Administered by the federal government• Funded through a tax paid by citizens who are currently
working
Benefits are influenced by:• How long you work• Earned income• Age at which you apply
Earliest you can apply is 67, applying early will reduce benefits
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Pension Plans – retirement plan offered to a company’s employees
• Both contribute, not taxed until employee draws on the account Defined-benefit plan: (Not Common) employer
assumes all risk; employer pays retiring employee a specific amount each month based on salary history and years of employment
Defined-contribution plan: employee assumes all risk; employee chooses to contribute into a retirement fund that is invested on their behalf. Employers may contribute.
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401 (K) Plans – type of defined-contribution pension plan to which employee contributes on a pretax basis. • By having a percentage of your pay put into the plan, you
reduce the amount of income that is subject to tax
• Some employers will match up to a certain percentage• 59 ½• If you leave, you can transfer benefits into another
retirement plan• Vested - entitled to keep plan benefits; must work with
company for a certain number of years to become fully vested
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Other Defined-Contribution Plans
• Profit-sharing plan – employer allocates a portion of the company’s annual profits to each
participating employee; added - incentive to work toward achieving company’s goal
• Employee Stock Ownership Plan (ESOP) – give participants shares of stock in the company; may not sell until you leave company or retire; disadvantage – not diversified
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Personal Investments
• Individual Retirement Accounts (IRA) – personal savings plan that enables workers to set aside money for retirement; limited by law to specific dollar amount Traditional – Tax-deductible; taxed when
withdrawn; made up to 70 1/2 & withdrawals must begin; prior to 59 ½ subject to penalties
Roth – not tax-deductible, but earnings are tax-free; can make tax free withdrawals after 5 yrs, if 59 ½ or can use the money to become first time home owner
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Personal Investments Continued
• Keogh Plans – is a federally approved, defined-contribution, tax-deferred retirement plan designed specifically for self-employed people. Early withdrawals are subject to penalties.
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Taking Charge of Retirement Planning
• Start Early Final balance in your retirement account is
determined not so much by the total amount invested, but by the number of years the investment is allowed to grow.
• Review Your Plan Regularly Set your goals
When to retire? How much of your income? How long this income will need to last?
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Taking Charge of Retirement Planning Continued
• Make estimates and calculations. Using calculations will allow you to determine if you
need other sources of income to live after retirement
• Adjust your plan if needed Set aside more if needed for a higher return on your
investment
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Objectives• Explain basic concept of stock ownership and the stock market;• Evaluate the risks involved in stock ownership; and• Describe how to research stocks.
Section 13.3The Stock Market
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Stock Market BasicsCompany sells stock instead of borrowing money from a bank.
Stock – ownership interest in the corporationShares – individual units of ownership, available for purchaseShareholders – investors who purchase shares, part owners
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How Stocks are Traded
• Initial public offering – when first put on market to sell, it’s offered by company
• Stock market – organized trading of stocks, like an auction
• Stock exchange – central location where stocks are sold on a trading floor; Wall Street – New
York Stock Exchange (NYSE); American Stock Exchange (AMEX)
• Listed - meet requirements for being traded on a particular stock exchange
• Over the Counter Stocks – not listed; NASDAQ (list stocks) not sold on trading floor, traded
over phone or Internet
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Regulating the Stock Market – Securities and Exchange Commission (SEC) federal agency that protects interests of investors by regulating stock exchanges, OTC stocks, investment advisors, any companies financial records
Returns on Stocks
• Dividends – payment to shareholders that represents a part of the company’s net profits; usually
paid 4 times a year in a check or more stock shares
• Capital gains or losses – buy low sell high = gain; buy high sell low = loss
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Working with a Stockbroker (individual or firm that will buy & sell stock for clients according to their instructions)• Full service – provide investment advice in addition to
handling stock transactions• Discount brokers – offer basic service and less expensive• Internet – make trades; research materials
Other Ways to Buy Stock• 401 K – partially or fully invest in stocks• ESOP • Mutual Funds• Direct stock plan – buy directly from company; fee less
than broker
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The Risks of Owning Stocks - volatility
Why Stock Prices Change - number of people who want to own stock, supply and demand
• The company’s health – well managed and business thriving
• Industry trends – new federal regulations that impose on business
• Economic factors – low interest, during recession stocks fall
• National and world events – election of new leaders, trade legislation, war
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Tracking the Stock Market
• NASDAQ Composite Index – 5,000 domestic stocks• Dow Jones Industrial Average – 30 industries: financial
services, technology, retail, entertainment, and consumer goods
• Standard & Poor’s 500 – 500 prominent industrial, transportation, financial, and utility stocks
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Types of Stock and Their Risks
• Common stock – entitles shareholders to vote on any matter affecting the company; dividends
vary, increasing risk and potential return• Preferred stock – no voting rights; has less risk because
dividend rate is fixed• Blue chip – low in risk because company has proven
track record of reliable earnings and dividends
• Growth stocks – new and innovative companies that are growing – risky
• Penny stocks - less than a dollar a share, high risk-should be avoided
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Minimizing the Risks
• Long term investment – don’t invest money that you’ll need in five years, over ten year period-
stocks offer higher return than any other form of investment
• Diversify portfolio – not just companies, but industries• Research • Don’t worry about day-to-day up and downs – ride out
short-term volatility
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Researching Stocks
• First hand experience - Have you used their product? Did you like it?
• Company’s annual report – look on website; shows goal and results plus financial data
• Stock quotes – ticker symbol uniquely identifies each stock
• Read business magazines and newspapers
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Section 13.4Other Investments
Objectives• Distinguish between different types of bonds;• Explain the advantages of mutual funds;• Describe insurance investment products; and• Evaluate the risks of investing in real estate, commodities, and
collectibles.
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Bonds - corporation and government can obtain funds by issuing
certificates of debts
• Issue bond – borrow money• Buy bond – invest money and receives original
investment plus additional amount by a certain date = maturity date
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Types of Bonds
1. Savings bonds – very safe; thought of as a form of savings instead of investment
2. Treasury securities – Guaranteed by U.S. government, not taxed; auctioned like stocks (Figure
13-16)
3. Municipal bonds - issued by local and state government; federal tax free and maybe state and local
taxes
4. Corporate bonds – minimum $1000; higher rate than government bond, but riskier
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Bond Ratings – S & P’s Rating Service & Moody’s Investor Service • Rate the issuer’s ability to repay the debt with interest• Rate from AAA (highest) to Aaa (lowest) risk• Highest = investment-grade bonds• Lowest = high-yield bonds (return) or junk bonds (high
risk) Mutual Funds – group of investments that is held in common
by many individual investors
Advantages Diversification Professional management
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Mutual Fund Styles
Money market funds – restricted to certain types of short-term investment; maintain value of investment amount
Bond funds – fixed-income funds; risk and return vary depending on type of bonds invested
Stock funds – Aggressive growth funds- highest risk; growth funds – expected to rise; equity
income – current income from their funds; index funds – included on an index, lower management fee
International funds – foreign companies or governments
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Choosing a mutual fund
• Read the prospectus – legal document that provides potential investors with information about a mutual fund or other security
• Check out the fees Load – sales charge for fund transaction
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Insurance as an investment
Endowment Insurance
• Education or retirement• Paying for so many years or reach a certain age, paid a
benefit equal to the face value• If you die, benefit is paid to the benefactors
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Insurance as an investment Continued
Annuities – contract purchased from an insurance company
• After 59 ½, provide regular payments • If you die, benefit is paid to the benefactors• Not high return, but safe
Fixed – fixed rate of return
Variable – variable rate of return depending on how well insurance companies performed
Equity-indexed – guaranteed minimum with chance of higher returns based on the stock market index
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More Investment Options
Real Estate – land and any structures on it
homes, apartment buildings, office and retail space, rentals
• Usually rises with inflation• Disadvantage – not liquid, time consuming and
expensive to maintain property, irresponsible renters, not diversified
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More Investment Options Continued
Commodities – basic economic goods bought and sold in quantity
• Wheat, corn, iron ore, natural gas, precious metals• Future contract- agreement to deliver a particularly
commodity at a specific price at a certain date in the future
• Chicago Board of Trade – largest commodities exchange in U.S.
• Regulated by Commodities Futures Trading Commission (CFTC)
• Risky, but high return
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More Investment Options Continued
Collectibles
• Examples• Might be sold for profit, but usually the value does not
go up often• Have to find a willing buyer• Enjoy collection more so than value of investment
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Objectives• Explain the benefits of estate planning;• Describe the purpose of a will and other estate planning
documents; and• Compare ways to plan for funeral expenses.
Chapter 13.5Estate Planning
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What is Estate Planning? Estate – The assets and liabilities left behind by a deceased
person Estate Planning – is the process of making legal and financial
arrangements for how one’s property should be administered before and after death• Helps people provide financially for loved ones,
favorite organization, or cause• Reduce the time and legal complications• Addresses what happens if a person becomes incapable
of making financial and health decisions
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Steps in Estate Planning
1. Review your assets and liabilities by creating a balance sheet
2. Think about objectives and gather information3. Prepare the necessary legal and financial documents
(with an attorney)
Preparing a Will Will – a legal document in which a person directs how his or
her estate is to be distributed after death
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Functions of a Will
• Identify an executor Executor – is the individual who is in charge of
handling the affairs of an estate
• Identify a guardian for children Younger than 18 years old
• Give instructions for liabilities Outstanding debts or obligations must be paid
• Give instructions for assets Beneficiary – a person or group designated to
receive some or all of a deceased person’s assets
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If there is No Will
• Intestate – person who dies without a valid will • Time consuming and expensive • May not be deceased persons wishes
After Preparing the Will
• Requirement: Must be typed, signed, and dated Witnesses (not beneficiaries) of signing Kept in a place accessible to your executor A copy in a safe place (deposit box) Codicil – legal amendment to a will (changes)
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Prepared Other Documents
Living Trust – legal arrangement that can serve as an alternative to a will
• Trustee – someone who holds and manages assets for someone else
• Probate – legal process involved in filing a will
Durable Power of Attorney – a legal document assigning someone the right to act on a person’s behalf
Living Will – legal document that outlines a person’s wishes for medical treatment under
specific circumstances
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Funeral Planning
Prepaid Funerals
Advantages• Consumers can pay today’s prices instead of inflated
future pricesDisadvantages• The money is tied up for years and earns no interest• May not be transferable if you relocate• Funerals may go out of business
Insurance Policies• Coverage for funeral cost
Letter of Final Instructions• Leave in a place for the people to find