Chapter 13

Investments

Section 13.1

INVESTMENT CHARACTERISTICS

Investment Terms

• Return-the income that an investment produces.• Some investments pay returns at

regular intervals while you own them, similar to the way a savings account pays interest. Another way to gain a return is t sell an investment for profit.

Liquidity

• Liquidity—the ease with which assets can be converted to cash.

Volatility

• Volatility—the degree t which an investment’s return or value may change. Some investments are quite volatile; their value swings up and down often, and can change suddenly and drastically.

Risk

• Risk—is the possibility of variation in the return on your investment.• Some investments are considered

conservative, r lower in risk. These tend to produce lower returns.

• More risk means often means more possible gain.

Principles of Investing

• Questions to ask…• Do you follow a well-planned budget?• Have you set aside enough savings to

cover emergencies and short term goals?

• Is your use of credit under control?

Identify your objective

• Successful investing involves clear purpose and goals.

• Ask yourself—what amount can you affrd to invest, and how much do you hpe to end up with?• What is your time line…how long do you

have until you need the money?• With a longer time line you can choose

investments that are less liquid, more volatile, and higher in risk?

Three basic types of investment …

• Income—this strategy involves putting money into investments that pay relatively dependable returns at regular intervals.

• Growth—if you’re more concerned with the future value of your investments than in receiving present income, you would probably follow a growth strategy.

• Tax Reeducation- for some people, reducing their income tax obligation is a primary goal of investing.

Diversify your Investments

• Diversification—is a strategy of making a variety of investments in order t reduce your exposure to risk.

• Wise investors develop a portfolio, or collection of investments, that is both diversified and well balanced.

• Asset allocation is the process of developing an overall plan for balancing an investment portfoli0.

Learning about Investing

• Reliable media sources• Courses in financial planning • Investment clubs• Professional Advisors

Section 13.2

RETIREMENT PLANNING

Social Security

• Social Security is a fund administered by the federal government and funded through a tax paid by citizens who are currently working.

• Benefits are influenced by how long you work, your earned income, and the age at which you apply.

• The earliest you can apply for benefits is age 62, however if you apply before full retirement age which is now age 67 your benefits will be greatly reduced.

Pension Plans

• A pension plan is any retirement plan offered to a company’s employees. A retirement fund is set aside for each employee who participates. Money in the fund is contributed by the employer, the employee or both. The money in the fund grows over time, and the contributions and earnings are not taxed until the employee draws from the retirement account.

Pension Plan Types

• Defined-benefit plan—In this type of plan, a company pays its retiring employees a specified amount each month, based on each employee’s salary history and years of employment.

• Defined-contribution plan—In this type of plan, employees can contribute to a retirement fund that is invested on their behalf. In some cases, the employer also contributes. Since the amount the employee recieves depends on the investment results, the employee assums all risk.

401(k) Plans

• 401(k) plan is a type of defined contribution pension plan t which the employee contributes on a pretax basis. By directly contributing to the plan, the employee reduces the amount of income that is subjest to tax. In addition, some employers will match 401(k) contributions up to a certain percentage.

• Most plans require that the investor keeps their money in the plan until they reach a certain age.

• Many of these are portable, so it is able to be transferred from job to job.

403 (b) Plans

• A 403 (b) plan is similar to a 401 (k) however, only certain types of employees may contribute. Such as teachers, and some doctors and nurses.

Other Defined-contribution plans…

• Profit –sharing– the employer allocates a portion of the company’s annual profits to each participating employee.

• Employee Stock Ownership—Instead of profits, employers give participants shares of the stock in their company. These shares may not be sold until the employee leaves the company or retires.

Individual Retirement Accounts…

• IRA’s are personal savings plans that enable workers and their spouses t set aside money for retirement.• Traditional IRA—Contributions to this IRA may

be tax-deductible. Instead of counting as taxable income in the year earned, money put into this IRA will be subjected to tax when it is withdrawn in retirement.

• Roth IRA—contributions are not tax-deductible, however, earning accumulated are tax-free.

Keogh Plans

• Is a federally approved, defined-contribution, tax-deferred retirement plan designed specifically for self-employed people. Contributions are fully tax-deductible.

Secrets to success!!!!

• Start early—time is the best component to a great retirement plan.

• Set goals• Make estimates and calculations• Adjust your plan if needed.

The Value of Early Investing

Chris and Pat each invest $500 per month in a retirement plan that earns 7% annual yield.

Their Contributions: Chris starts making contributions at age 18 and stops at age 28, leaving the money

invested.

Pat waits until age 38 to start investing and continues making

contributions until age 68.

The Results: Chris contributed one-third as much as Pat. Yet Chris’s ending balance at age 68 is over twice as great.

The Stock Market

Section 13.3

Stock Market Basics

• Stock—Ownership interest in the corporation. It does this by making shares, or individual units of ownership, available for purchase.

• Investors who purchase shares of stocks are called shareholders. Shareholders are actually part-owners of the company.

How stocks are traded…

• When a company first issues stocks, investors buy shares directly from the company in an initial public offering. After that, investors usually buy the stock from other investors who own it and wish to sell it.

• The organized trading of stocks is known as the stock market. It works much like an auction.

• Stocks may be traded at a stock exchange, a central location when stocks are sold on a trading floor. Historically, Wall Street, in Manhattan, housing the New York Stock Exchange.

Stock Market…

• Stocks that are not listed on any stock exchange are called over-the-counter stocks. Instead of being brought and sold on a trading floor, they are traded by phone and computer.

Regulating the Stock Market…

• The securities and Exchange Commission is the federal agency that protects the interest of investors by regulating companies that sell stock. The SEC requires these companies to publicly disclose dishonest practices. The SEC is the final authority over their activities.

Returns on Stocks…

• Investors who own shares of stocks may receive returns in two forms.• Dividends—Owners of stock may

periodically receive a dividend, a payment to shareholders that represents a profits of the company’s net profits.

• Capital gains and losses—If you buy shares when their value is low and sell them when their value is high, your profit is called a capital gain.

Working with a Stockbrker…

• A stockbroker is an individual or firm that will buy and sell stocks for clients according to their instructions.

Other ways to buy stocks…

• It’s possible to invest in the stock market without going through a broker. Money in a 401 (k) plan might be entirely or partly invested in stocks, for example, or an employee might own company stock.

• It also may be possible to buy a company’s stock directly from the company through a direst stock plan.

The risk of owning stocks• Much of the risk involved with stocks comes from

their own voltility. Stock Prices can move up or down in value every day, sometimes dramatically.

• Why stock prices change• The company’s health • Industry Trends• Economic factors• National and World events

Types of Stocks and Their Risk

• Common stocks and preferred stock—Common stock entitle stock holders to vote on any matter affecting the company. Where preferred stock do not give share holders voting rights but carry less risk due to a fixed dividend return.

• Blue ship stocks—these are stocks of large companies with a proven track record f reliable earnings and dividends.

Types of Stocks and Their Risk

• Growth stocks—those companies that re growing rapidly, often because they are new and innovative—these carry more risk.

• Penny stocks—those costing less than a dollar per share, should be avoided because they carry extremely high risk.

Minimizing the risks

• Consider stocks as a long term investment.

• Invest in stocks only as part of a diversified portfolio.

• Make sure to spend time researching and monitoring your stocks.

• Try not to become overly concerned with the daily ups and downs of the stock markets.

Bonds

• Corporations and governments can obtain funds by issuing certificates of debt called bonds.• Types of bonds

• Saving Bonds• Treasury Securities –in addition to savings bonds ,

the U.S. • Municipal bonds—bonds issued by local and states

governments are know as municipal bonds.• Corporate bonds –bonds issued by corporation s can

be purchased though brokers or banks, normally in monimum amounts of $1000.

Section 13.4

Mutual Funds

• A Mutual fund is a group of investments that is held in common by many individual investors. • Diversification—A single fund may hold securities

from hundreds of different companies—something few investors could accomplish on their own.

• Professional management—few individual investors have the knowledge, time, dedication or resources to select stocks and bonds and track their progress. Mutual funds enable a professional to do this for a group at the same time.

Mutual Fund Styles

• Funds with similar objectives can be placed in groups, or styles .• Money market funds—these are restricted

by law to certain types of short-term investments. These are lowest in both risk and returns.

• Bond funds—are called fixed income funds. Their risk and return vary widely depending on the types of bonds in which they invest.

Stock Funds…

• Aggressive Growth Stock—these hold the highest risk.

• Growth funds—like aggressive stocks these seek stock that are expected to rise.

• Equity income—these funds are for investors who want current income from their funds.

• Index funds—invest in stocks that are included in an index such as the Standard & poor’s 500. They tend to have lower management fees than other mutual funds..

International Funds

• International funds—invest in either the stocks of foreign corporations or the bonds of foreign governments or agencies.

Choosing a mutual fund..

• Read the prospectus• Check out the fees

Insurance as investment

• Endowment Insurance—an endowment insurance policy can be purchased with a specific investment goal in mind, such as education expenses or retirements.

• Annuities—this is a contrat purchased from an insurance company. The contract guarantees to provide payments at regular intervals later in life.

More investment options…

• Real Estate• Commodities• Collectibles

Estate Planning 13.5

• Estate—The assets and liabilities left behind by a deceased person. (Settling an estate involves paying off liabilities and distributing assets.)

Estate Planning

• Estate planning is the process of making legal and financial arrangements for how one’s property should be administered before and after death.

Steps in Estate Planning• The first step is to review your assets and

liabilities.• Next think about your goals and liabilities• Finally prepare the necessary documents.

Preparing a Will…

• A Will is a legal document in which a person directs how his or her estate is to be distributed after death.

Functions of a will….

• Identify an executor• Identify a guardian for the children if needed.• Give instructions for liabilities.—Outstanding

debts or obligations.• Give instructions for distribution of assets.

– Beneficiary—A person or group designated to receive some or all of a deceased person’s assets.

– WILLS USUALLY MUST BE TYPED AND MUST BE WITTNESSED BY NONE OF THE BENEFICIARIES!!!!

If there is no will…..

• A person who dies without a valid will is said to die intestate. In this case, state law will determine how the estate is to be settled. This process is very time consuming and expensive. It often does not represent the wishes of the deceased.

After preparing a will…

• Make sure to meet state requirements. Most states direct that the will must be typed, dated signed, and witnessed.

Other important documents….

• Living Trust—is a legal arrangement that can serve as an alternative to a will. It transfers control of a living person’s assets to a trustee represents it for him.

• While you live you have use of your assets and when you die, the assets go to your beneficiaries without going through probate (an extensive legal process of filing a will.

Durable power of attorney…

• A legal document assigning someone the right to act on a person’s behalf. (make decisions if you become incapacitated.)

Living Will….

• A legal document that outlines a person’s wishes for medical treatment under specific circumstances.

Funeral Planning

• The average cost of a funeral is close to $10,000.

• The FTC Funeral Rule requires funeral homes to: – Disclose their cost over the telephone

upon request.– Provide itemized price lists outlining

the services available and their cost.

Preplanned Funerals

Advantages Disadvantages

You can plan exactly what type you want.

Your money is tied up for years without earning interest

You can lock in today’s prices If you move you may not be able to transfer your funeral arrangements

Funeral home may go out of business.

MAKING MONEY WORK FOR YOU

THREE IMPORTANT ELEMENTS OF INVESTING

- MONEY- TIME- INTEREST RATE

AMOUNT OF MONEY

$50/MONTH

$400/MONTH

7% 7%

33 YEARS 33 YEARS

$126,398 $1,010,928

AMOUNT OF TIME

8 YEARS 31 YEARSAGE 25 – 33 AGE 33 – 65$2,000/YEAR $2,000/YEAR$18,000 TOTAL INVESTMENT

$62,000 TOTAL INVESTMENT

$909,280 $555,678

INTEREST RATE

SAVINGS ACCOUNT

MUTUAL FUND

$10,000 $10,0005% 14%20 YEARS 20 YEARS$26,533 $137,434

COMPARE INVESTMENTS

NAME ADVANTAGE DISADVANTAGES

PASSBOOD ACCOUNT

*Few restrictions *Unlimited withdrawals

*Low rate of return

NOW ACCOUNTS

*Checking privileges

*High minimum deposit*% rate can drop

MONEY MARKET

Higher interest rate than savings

High minimum depositLimited # of withdrawals

T-BILLS *Interest tax exempt*Easily sold

*High minimum deposit

STOCKS *High gains *High risk*Must track daily

GOLD & SILVER

*Holds value when others don’t

*Doesn’t earn interest*Not always liquid

MUTUAL FUNDS

*Diversified*Professional manager*Easily sold

*Risky