Upload
flynn-sweeney
View
63
Download
0
Embed Size (px)
DESCRIPTION
CHAPTER 11 INVESTMENT PLANNING. The Objectives & Rewards Of Investing. Investing —usually considered a long-term activity. Future values and returns expected to increase through time. Speculating —usually considered a short-term activity. Future values and returns highly uncertain. - PowerPoint PPT Presentation
Citation preview
© 2008 Thomson South-Western
CHAPTER 11
INVESTMENT PLANNING
11-2
The Objectives & Rewards
Of Investing Investing—usually considered a long-term
activity. Future values and returns expected to increase through time.
Speculating—usually considered a short-term activity. Future values and returns highly uncertain.
Adequate insurance coverage and cash/savings are investment prerequisites
11-3
How Do I Get Started?
Accumulate money by regularly allocating a portion of your earnings for investing—PAY YOURSELF FIRST!
Take advantage of automatic investment and dividend reinvestment programs.
While saving, learn as much as possible about investments and "play" trading.
Determine your financial objectives.
11-4
What Are Your Investment Objectives?
Supplement current income— appropriate for retired persons
Save for major expenditures— such as college education, down payment on a home, or starting a business
11-5
Shelter income from taxes—to preserve more of your earnings.
Save for retirement—to live comfortably in your "golden years."
What Are Your Investment Objectives?
11-6
Coming Up With the Capital
How much money will it take? Do you have a lump sum to invest now,
or will you systematically save toward your goal?
Your investment plan provides direction in helping you attain your goal
11-7
Average Annual Returns On Stocks, Bonds, And U.S. T-bills Over Various Holding Periods From 5 - 15 Years
11-8
11-9
Different Ways to Invest
1. Common Stock
2. Bonds
3. Preferreds and Convertibles
4. Mutual Funds
5. Real Estate
11-10
1. Common Stock– Represents a share of ownership in a company.– Greater potential returns, but at a higher level of
risk.
2. Bonds– Represent the debt of a company.– Provide current income. – Lower level of risk than stocks, but with lower
expected returns as well.– Bond valuations inversely related to changes in
prevailing interest rates.
Different Ways to Invest
11-11
3. Preferred Stock– An equity security that behaves like debt—provides
current income and possible price appreciation.– However, company has no legal obligation to
declare dividends.Convertible Bonds– Usually offer lower interest rates than regular
bonds, but —– Can be converted into common stock.– Risk that common stock will not do well and
investor simply gets lower return.
Different Ways to Invest
11-12
– Collection of professionally managed securities offered by an investment company.
– Returns and level of risk depend on characteristics of underlying portfolio.
5. Real Estate– Can invest directly or through buying shares
of a REIT. – Estimating risk and expected return can be
difficult. Investors must be aware of economic cycles.
4. Mutual Funds
Different Ways to Invest
11-13
Securities Markets
Securities market: place (not always physical) where financial instruments are traded.– Capital market—where long-term
securities (with maturities greater than 1 year) are traded.
– Money market—where low-risk, short-term securities (with maturities less than 1 year) are traded.
11-14
Secondary market—for trading previously issued securities. – Securities exchanges– NASDAQ– OTC Market
Primary market—for new issues which are available for the very first time. – Investment bank underwrites– Issuing company gets proceeds– Prospectus
Securities Markets
11-15
Dealer market— the buyer and seller are never brought together directly; their buy/sell orders are executed separately through securities dealers, who act as market makers
Broker market— the two sides to the transaction, the buyer and the seller, are brought together and the trade takes place at that point: the seller, Party A, sells securities directly to the buyer, Party B.
Broker and Dealer Markets
11-16
Broker and Dealer Markets
11-17
Bid price— the price at which a security can be sold
Ask price — the price at which a security can be bought
Dealer Markets
11-18
– Organized securities exchanges exist in more than 100 countries worldwide.
– Found in major industrialized nations such as Japan, Great Britain, Germany and Canada.
– Also found in emerging economies around the globe.
Foreign Securities Markets
11-19
Federal and state laws regulate the sale of securities.
Purpose is to provide for adequate and accurate disclosure of financial information.
Securities and Exchange Commission (SEC) is the agency in charge of administering federal securities laws.
Regulating the Securities Markets
11-20
Securities Act of 1933 Securities Exchange Act of 1934 Investment Company Act of 1940 The Sarbanes-Oxley Act of 2002 Others:
– Maloney Act of 1938• Created the NASD
– The Securities Investor Protection Act of 1970• Created the SIPC
Regulating the Securities Markets
11-21
Bull market—generally rising securities prices for an extended period of time.– Reflects investor optimism.– Associated with favorable economy.
Bear market—generally falling securities prices for an extended period of time.– Reflects investor pessimism.– Associated with economic downturn.
Market Trends
11-22
Making Transactions In the Securities Markets - Stockbrokers
Stockbrokers (account executives, financial consultants) buy and sell securities for investors.
Investor can select from full-service, discount, or online broker
Brokerage services Consider brokerage fees when making
securities transactions.
11-23
Types of Brokers
11-24
Brokerage Fees
11-25
Odd or Round Lots
ODD LOT: A quantity of fewer than 100 shares of a stock.– Odd-lot dealer– Odd-lot differential
ROUND LOT: A quantity of 100 shares of stock, or multiples thereof.
11-26
Securities Investor Protection Corp. (SIPC) protects customer accounts against financial failure of brokerage firm
SIPC insures accounts up to $500,000 Guarantees securities or cash held by
broker will be replaced (does not guarantee dollar value of securities)
Arbitration used to settle disputes between brokerage firm and clients
Investor Protection
11-27
Executing Trades
Investor must first establish account with broker.
Trades can be executed by phone, at the brokerage firm, or online.
Market orders generally take less than two minutes!
11-28
Investor placesthe order with the broker.
11-29
Investor placesthe order with the broker.
Broker transmitsorder to the market via tele-communications equipment.
11-30
Investor placesthe order with the broker.
Broker transmitsorder to the market via tele-communications equipment.
Order isfilled at themarket byother buyersand sellers.
11-31
Investor placesthe order with the broker.
Broker transmitsorder to the market via tele-communications equipment.
Order isfilled at themarket byother buyersand sellers.
Execution ofthe order isconfirmedto the broker.
11-32
Investor placesthe order with the broker.
Broker transmitsorder to the market via tele-communications equipment.
Order isfilled at themarket byother buyersand sellers.
Execution ofthe order isconfirmedto the broker.
Broker confirms order fulfillment. Investor has 3 days to settle account.
11-33
Types of Orders
Market order—trade now at best available price.
Limit order—trade when a specified price or better is reached; investor is seeking opportunity.
Stop-loss order—sell if price drops to certain price; investor is seeking to limit losses.
11-34
Margin Trading and Short Sales
Buying on Margin: allows investor to purchase securities on credit by borrowing part of purchase price from broker.
Increases gains when returns are positive.
Increases losses when returns are negative.
11-35
Short Sale Transactions
Allows investor to sell securities borrowed from the broker or broker's accounts.
Before period is over, investor must replace the borrowed securities.
Investor loses if security’s price has increased.
Investor profits if security’s price has declined.
11-36
To profit from short selling: Not only must the price of the security fall, but it must do so within the given time period.
Short Sale Transactions
11-37
Becoming an Informed Investor
Types of information to follow:
– Economic developments and current events
– Alternative investment vehicles
– Current interest rates and price quotations
– Personal investment strategies
11-38
Available Investment Information
Annual Reports Financial Press
(WSJ and financial magazines) Brokerage Reports Advisory Services Investment Advisors On-Line Resources
11-39
Annual Stockholder Reports
Read the Highlights or Selected Financial Data sections
CEO’s letter to stockholders Discussion of operations in
management’s discussion and analysis section
Review financial statements and notes
Read the auditor’s report
11-40
Financial Press
Economic data Market data
– DJIA
– S&P indexes
– NYSE, NASDAQ, and other market indexes
11-41
Financial Press
Industry data Company data Stock quotes
11-42
Other Sources
Brokerage reports Subscription advisory services Investment advisors
11-43
Analyst Reports
11-44
Online Investing
Online services Educational
material Investment
tools– Investment
planning
– Research and screening
– Portfolio tracking
Day trading
11-45
Tips for Successful Online Trades
11-46
Managing Your Investment Holdings
Build a diversified portfolio of securities based upon your goals and personal situation.
Allocate your assets according to your objectives.
Track your investments and rebalance your portfolio as your needs change.
11-47
Types of Investments Held by Average Individual Investors
11-48
Investor Characteristics
Level and stability of income Family factors Investment horizon Net worth Investment experience and age Disposition toward risk
11-49
Investor Objectives
Trade-off between earning a high current income from an investment and
Obtaining significant capital appreciation from it.
11-50
Asset Allocation and Portfolio Management
How to divide portfolio among different types of securities
Total return on a portfolio is influenced far more by its asset allocation plan than by specific security selections.
11-51
Asset Allocation and Portfolio Management
Asset mix:
11-52
Asset Allocation and Portfolio Management
Reevaluate asset allocations regularly, especially when:– A major change in personal
circumstances– Proportion of an asset rises or fall
considerably– You’re close to reaching a particular
goal
11-53
Keeping Track of Investments