Chapter 11Chapter 11

Investing for Your FutureInvesting for Your Future

Goals for Chapter 11.1Goals for Chapter 11.1Investing fundamentalsInvesting fundamentals

Describe the stages of investing and Describe the stages of investing and the relationship between risk and the relationship between risk and potential return.potential return.

Explain effective investment Explain effective investment strategies, criteria for choosing an strategies, criteria for choosing an investment, and steps for investing investment, and steps for investing wisely.wisely.

Stages of InvestingStages of Investing

Stage 1. Put-and-Take AccountStage 1. Put-and-Take Account Typically a checking account. It is wise to have Typically a checking account. It is wise to have

at least three months income in this account at at least three months income in this account at all times.all times.

Stage 2. Beginning InvestingStage 2. Beginning Investing InvestingInvesting is the use of savings to earn a is the use of savings to earn a

financial return.financial return. At this stage of investing, your savings are At this stage of investing, your savings are

becoming more “permanent”. You do not have becoming more “permanent”. You do not have a lot of money to invest and are typically more a lot of money to invest and are typically more conservative in you investing.conservative in you investing.

Stage 3. Systematic InvestingStage 3. Systematic Investing Each month, you set aside an amount to Each month, you set aside an amount to

be invested, typically in a mutual fund. be invested, typically in a mutual fund. At this stage, your goals are long-term At this stage, your goals are long-term and are investing for financial security.and are investing for financial security.

Stage 4. Strategic InvestingStage 4. Strategic Investing Strategic InvestingStrategic Investing is the careful is the careful

management of investment alternatives management of investment alternatives to maximize the growth of your to maximize the growth of your portfolioportfolio..

Stage 5. Speculative InvestingStage 5. Speculative Investing In this stage, you can make or lose a In this stage, you can make or lose a

significant amount of money in a short significant amount of money in a short period of time.period of time.

Reasons for InvestingReasons for Investing

Investing Helps Beat InflationInvesting Helps Beat Inflation InflationInflation is a rise in the general level of is a rise in the general level of

prices.prices. Investing Increases WealthInvesting Increases Wealth Investing Is Fun and ChallengingInvesting Is Fun and Challenging

Risk and ReturnRisk and Return

RiskRisk is the chance that an is the chance that an investment’s value will decrease. The investment’s value will decrease. The greater the risk you are willing to take, greater the risk you are willing to take, the greater the potential returns.the greater the potential returns.

One way to minimize risk is through One way to minimize risk is through diversificationdiversification, or the spreading of , or the spreading of risk among many types of investments.risk among many types of investments.

Types of RiskTypes of Risk

Interest-Rate RiskInterest-Rate Risk During inflationary times, there is interest rate risk that the During inflationary times, there is interest rate risk that the

return on an investment will not keep pace with the inflation return on an investment will not keep pace with the inflation rate.rate.

Political RiskPolitical Risk Increased taxes and certain regulations, such as costly Increased taxes and certain regulations, such as costly

environmental controls that businesses are required to apply, environmental controls that businesses are required to apply, can make some investments less attractive.can make some investments less attractive.

Market RiskMarket Risk Caused by business declines, sudden national or world Caused by business declines, sudden national or world

events.events. Company or Industry RiskCompany or Industry Risk

Produced by events that afffect only one company or Produced by events that afffect only one company or industry.industry.

Criteria for Choosing an Criteria for Choosing an InvestmentInvestment

Safety (minimal risk of loss)Safety (minimal risk of loss) High Liquidity (getting your money quickly)High Liquidity (getting your money quickly) High dividends or interestHigh dividends or interest Growth in value that exceeds the inflation rateGrowth in value that exceeds the inflation rate Reasonable (low) purchase price (initial cost)Reasonable (low) purchase price (initial cost) Tax benefits (saving or postponing tax Tax benefits (saving or postponing tax

liability)liability)

Wise Investment PracticesWise Investment Practices

Define Your Financial GoalsDefine Your Financial Goals Go SlowlyGo Slowly Follow ThroughFollow Through Keep Good RecordsKeep Good Records Seek Good Investment AdviceSeek Good Investment Advice Keep Investment Knowledge CurrentKeep Investment Knowledge Current Know Your LimitsKnow Your Limits

Goals for Chapter 11.2Goals for Chapter 11.2Exploring Investment OptionsExploring Investment Options

List and describe sources of financial List and describe sources of financial information useful for making information useful for making investment decisions.investment decisions.

List and define basic investment List and define basic investment options, rated b risk.options, rated b risk.

Sources of Financial Sources of Financial InformationInformation

NewspapersNewspapers Investor Services and NewslettersInvestor Services and Newsletters

Standard and Poor’s, Value LineStandard and Poor’s, Value Line Financial MagazinesFinancial Magazines BrokersBrokers

Full Service BrokersFull Service Brokers provide clients with analysis provide clients with analysis and opinions based on their judgments and the and opinions based on their judgments and the opinions of experts at the company.opinions of experts at the company.

Discount BrokersDiscount Brokers buy and sell securities for buy and sell securities for clients at a reduced commission, but offer little clients at a reduced commission, but offer little or no advice.or no advice.

Financial AdvisorsFinancial AdvisorsProfessional investment planners are Professional investment planners are

called called financial advisorsfinancial advisors..Annual Reports and Financial Annual Reports and Financial

StatementsStatementsAn An annual reportannual report is a summary of a is a summary of a

corporation’s financial results for the corporation’s financial results for the year and prospects for the future.year and prospects for the future.

Investment OptionsInvestment Options

Low Risk/Low-to-Medium ReturnLow Risk/Low-to-Medium Return BondsBonds are debt obligations of corporations or are debt obligations of corporations or

state or local governments.state or local governments. U.S. Government Savings BondsU.S. Government Savings Bonds

Discount BondsDiscount Bonds are purchased at a discount to face are purchased at a discount to face value and pay no interest. You receive face value at value and pay no interest. You receive face value at maturity.maturity.

Treasury SecuritiesTreasury Securities U.S. Treasury bills U.S. Treasury bills are available in are available in

denominations of $10,000 and then in denominations of $10,000 and then in increments of $5,000 or more. The bill is increments of $5,000 or more. The bill is usually a three-month, six-month, or one-year usually a three-month, six-month, or one-year government obligation.government obligation.

Treasury NotesTreasury Notes are issued in units of are issued in units of $1,000 or $5,000. Maturities range $1,000 or $5,000. Maturities range from two years to ten years.from two years to ten years.

Treasury BondsTreasury Bonds are issued in are issued in minimum units of $1,000 with minimum units of $1,000 with maturities ranging from 10 to 30 maturities ranging from 10 to 30 years.years.

Medium Risk/Medium ReturnMedium Risk/Medium Return

You can buy shares in a large, You can buy shares in a large, professionally managed group of professionally managed group of investments called a investments called a mutual fundmutual fund..

An An annuityannuity is a contract sold by an is a contract sold by an insurance company that provides the insurance company that provides the investor with a series of regular investor with a series of regular payments, usually after retirement.payments, usually after retirement.

Real EstateReal Estate

High Risk/High ReturnHigh Risk/High Return

StockStock is a unit of ownership in a is a unit of ownership in a corporation.corporation.

FuturesFutures are contracts to buy and sell are contracts to buy and sell commodities or stocks for a specified price commodities or stocks for a specified price on a specified date in the future.on a specified date in the future.

An An optionoption is the right, but not the is the right, but not the obligation, to buy or sell a commodity or obligation, to buy or sell a commodity or stock for a specified price within a stock for a specified price within a specified time period.specified time period.

Penny stocksPenny stocks are low-priced stocks of are low-priced stocks of small companies that have no track record.small companies that have no track record.