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Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

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Page 1: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Chapter 11

Investing for Your Future

Investing FundamentalsExploring Investment Options

Page 2: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

GOALSGOALS

Lesson 11.1

Investing Fundamentals

Describe the stages of investing and the relationship between risk and potential return.Explain effective investment strategies, criteria for choosing an investment, and steps for investing wisely.

Page 3: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Stages of Investing

Stage 1. Put-and-take accountFirst get a job

Use your money to pay bills and start an “emergency” fund

Put two paychecks worth into savings to use when car breaks down, medical bills, other larger expenses.

Stage 2. Beginning investingStart conservatively and low risk in your 20sMaybe buy some mutual funds or stocks for “fun”

Page 4: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Stages of Investing

Stage 3. Systematic investingSet aside a specific amount of money to invest each month

Should really start in your 20s and continue into your 30s

Set up an IRA (Individual Retirement Account), contribute to employer-sponsored 401(k)’s and 403(b)’s

Roth IRAInvest post-tax dollarsEarnings grow tax freeWhen you start drawing money at retirement, you are not taxedGET A ROTH IRA AND CONTRIBUTE THE MAXIMUM ALLOWED EACH YEAR!

Page 5: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Stages of Investing

Stage 4. Strategic investingIn your 40s and 50s you need to more actively manage your investments

Move some riskier investments to more conservative as you get closer to retirementPortfolio – your collection of investments

Always want to diversify (or mix up) what you are investing in – reduces risk

Stage 5. Speculative investingFinal stage – make or breakYou have either made or lost a lot of moneyDon’t make a risky investment to try to make up for previous losses!

Page 6: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Reasons for Investing

Investing helps beat inflation.Investing increases wealth.Investing is fun and challenging.

Page 7: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Risk and Return

DiversificationDon’t invest in only one company or one sector of economy (banking, transportation, retail, etc.)

Types of riskInterest-rate risk

Occurs during times of high inflationInflation makes your fixed-rate investments worth lessFixed-rate bond at 3% and inflation rate is 6% - not so goodFixed-rate bond at 6% and inflation rate is 3% - better

Page 8: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Risk and Return

Types of risk (continued)Political risk

Governmental policies can affect business decisionsIncreased taxes on businesses or environmental restrictions can make some investments less attractive

Market riskSudden world events affect entire market

The Great Depression, September 11th

Company or industry riskCertain businesses or industries are affected by national trends

Adkins diet was good for the cattle industry – the price of beef increased!

Page 9: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Criteria for Choosing an Investment

SafetyLittle chance of losing initial investment

Low risk bonds, savings accounts, CDs

High liquidityAccessing your money quickly

Savings account, money market fund, CDs

Low liquidity means that it takes a little longer to cash out of your investment

Real estate, stocks, mutual funds, collectibles

Page 10: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Criteria for Choosing an Investment

High dividends or interestDividends are distributed to shareholders based on company profitsIf dividend is $0.25 per share and you own 100 shares, you would receive a dividend of $25.00Look at previous financial records (annual report) to see dividend history

Growth in value that exceeds the inflation rateInflation has increased 58% since 1982

Page 11: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Criteria for Choosing an InvestmentReasonable purchase price

Stock might be undervaluedGood buying opportunity if you think that it will increase in price

Remember there’s no guarantee!

Tax benefitsYou will have to pay taxes on investment earnings – unless you invest in tax-exempt mutual funds or bonds

Tax-exempt bonds have a lower interest rate, which is offset by the tax benefits

Usually only high-net worth individuals purchase tax-exempt investments

Page 12: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Wise Investment Practices

Define your financial goals.Saving for first home, retirement, college

Go slowly.Research investments – don’t buy on impulse

Follow through.Start saving now - take advantage of the benefits of compound interest!Best bet is to have money taken directly from checking account each month

Page 13: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Wise Investment Practices

Keep good records.Hold on to monthly/quarterly statementsFor tax purposes you will need to have record of the purchase price of investments

This is called the cost basis

Seek good investment advice.If need be, hire a certified financial plannerListen to Money Talk on the radio

http://www.bobbrinker.com/

Page 14: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Wise Investment Practices

Keep investment knowledge current.Again, listen to Money TalkGood investments now, may not be good investments in the futureWatch world events and pay attention to economic changes

Know your limits.Know your risk tolerance and what you can affordBe weary of “get rich quick” investments that sound too good to be true

Page 15: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

GOALSGOALS

Lesson 11.2

Exploring Investment Options

List and describe sources of financial information useful for making investment decisions.List and define basic investment options, rated by risk.

Page 16: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Sources of Financial Information

Newspapers have financial pages that keep track of the financial market

Papers that are specific for the financial market

Wall Street Journal, Barron’s, The Bond Buyer

Investor’s services provide extensive data to clients

Moody’s Investors Services and Standard & Poors

Page 17: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Sources of Financial InformationFinancial Magazines

Fortune, Business Week

Full-service brokerProvide clients with investment advice based on their specific needs/risk tolerance

Raymond James, Merrill Lynch, Smith Barney

Discount brokersBuy and sell securities for customers at a reduced costLittle or no advice

Ameritrade, TD Waterhouse

Page 18: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Sources of Financial Information

Financial AdvisorTrained professional investment plannersLook at your goals, age, net worth, occupation, etc to determine what investments you should make

Annual ReportsSummary of a company’s financial resultsSecurities and Exchange Commission (SEC) requires all corporations to provide to stockholders each year

Page 19: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Sources of Financial Information

Trade yourself online (E-trade)You do your own researchCosts about $5 a trade, but you are limited to only 10 trades a year

More than 10 trades and its more expensive

Costs to buy and sell (trade) depend on several factors

Commission, flat rate or per trade cost

Page 20: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Investment Options

Low risk: low-to-medium returnMedium risk: medium returnHigh risk: high return

Page 21: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Low Risk:Low-to-Medium Return

Corporate and municipal bondsU.S. government savings bondsTreasury securities

Treasury bills – mature in one year or lessAlso referred to as t-bills

Treasury notes – mature in 2 to 10 yearsTreasury bonds – mature from 10 to 30 years

Page 22: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Medium Risk:Medium Return

Mutual fundsAnnuities

Contract sold by an insurance company that provides the investor with a series of regular paymentsThese have ENOURMOUS fees!

Self-managed retirement accountsThe risk of the IRA depends on the particular investments

Real estate

Page 23: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

High Risk:High Return

StocksOwner is called the stockholderWhen the company makes a profit this is paid to stockholders in the form of dividends

FuturesBuy and sell commodities or stocks for a date in the future

You can also buy just commodities When you sell you are betting the price will go down, when you buy you are betting the price will go uphttp://www.bloomberg.com/markets/commodities/cfutures.html

OptionsPuts and callsThe right (not obligation) to buy or sell a commodity or stock for a specific price for a set amount of time

Page 24: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

High Risk:High Return

Penny stocksExtremely low priced stocks of small companies with or without a proven track recordUsually costs less than a dollar

Many fail and become worthless

CollectiblesYou need to make sure that there is a buyer for what you are collecting

Page 25: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Annual Reports

Published by “public” companies for shareholders to view

Legally required and shows all financial records

Important parts to look atIncome statement

Are sales (revenue) increasing?Do they have low operating expenses?

Building, payroll, maintenance, etc.

Do they have a lot of interest expense/income?What’s their net income (revenue – expenses)?

One of most important items for a stockholder!

Page 26: Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options

Stock

Common StockOwn share of company and have a voting rightOnly receive dividends if company makes profit

Preferred StockOwn share of company but have no voting rightsPay dividend monthly or yearly regardless of the profitability of company

Shares OutstandingNumber of shares available for tradingCompanies can change this amount

Effects supply and demand which in turns affects the price of the stock