Investing: Risking money to make money Chapter 2: Saving and
Investing
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Stocks Stock: ownership in a company (Corporation) Shares (I
have shares of stock in Ford) Stockholder: Owner of Stock
Corporation issues certificates showing ownership Why do companies
sell stock? Obtain funds for expansion; more profit IOP = Initial
Price Offering How does Stockholder make money: Dividends: the
money return a stockholder receives Usually paid out biannually or
quarterly Sell Stock when its price rises
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Types of Stocks 1. Common Stock Represents basic ownership in a
corporation Allows share holder to vote in affairs and for board of
directors. Earn money by rising value in the stock Highest risk and
highest reward opportunities 2. Preferred Stock - No voting rights
- Receive a share of profits from common stockholders (dividend) -
If company goes bankrupt shareholders get a part of assets.
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Types of Stock 3. Blue-Chip Stocks - stocks of the biggest
companies in the country (microsoft) - Well established safest to
invest in. 4. Growth Stocks - Companies with profits increasing
quickly. - Tend to put money into growing company not into
dividends. 5. Income Stocks - Stable companies that pay higher than
average dividends - Tend to be large established companies (utility
companies)
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Types of Stocks 6. Cyclical Stocks - Stocks that move up and
down with the business cycle. - These tend to be companies that
sell discretionary goods. - examples- automobiles, toys, boats 7.
Defensive Stocks - Stocks unaffected by changes in business cycle.
- Examples: food, medicine 8. Penny Stocks - Low-priced, highly
speculative stocks, very risky - companies with erratic history of
earnings and losses
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Slide 7
Bonds Bond: Certificate Issued in Exchange for Borrowed money
No ownership Pays a yearly interest rate for a specific period of
time At maturity, bond is paid back in full Can be issued by
Government or Company
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Types of Bonds Municipal (Munis) Sold by Local Government
Benefit: Tax Exempt & Very Safe On both Income Taxes and
Interest taxes Good for the Wealthy Savings Bonds: Issued By the
United States of America Way the government borrows money 50-10,000
Dollars Benefit: Guaranteed by US Government Treasury Bills: Issue
by the US treasury Department Maturity: 3 mos.-1 yr. Minimum
Investment: 10,000 Treasury Notes: Maturity Dates: 2-10 years
Treasury Bonds: Maturity: 10 yrs or greater
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Stocks and Bonds Market NYSE: New York Stock Exchange AMEX:
American Stock Exchange Two Major Stock Exchanging Entities in the
US A corporation selling stock must prove: It is in good financial
condition It takes part in legal business Broker: person who acts
as a go-between between stock buyers and sellers
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Over the Counter Market NASDAQ Not traded in a specific place
You see in the paper: Use a broker E-Trade Bonds and stocks are
sold OTC
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Dow Jones Industrial Average Stock market indicator Shows
movement in the stock market by average Uses 30 stable companies
and a complex formula. Companies come from many different
industries
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Capital Gains and Losses Capital Gains: Money made in the
Market Ex: Spend $20 on one share sell for $30, Ten dollar capital
gains You are taxed on your capital gains Capital Loss: The
Opposite
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Mutual Funds Investment Company pools money from many
individuals to invest Benefit: Small investors get a piece of a big
investment Risk of Loosing money is decreased (professionals make
the decisions) Diversification: Investment in many areas Losses in
one company are made up by gains in another!
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Regulation of the Market Security and Exchange Commission
Requires Companies to provide accurate business information to
buyers Inside Information: Information on the market that no one
else has Illegal to possess and profit from
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Special Savings Plans and Goals A. Retirement Plans 1. Pension
Plans: retirement income - Social Security: Govt plan for the
retired - How does it work? 1. Individual Pension Plans (private
plans) a. Keogh Plan: self-employed people can set up their own
retirement plans. b. Individual Retirement Account (IRA): c. 401 K:
employee/private employer both contribute to plan d. 403 B:
government employee contributes 2. Benefit of these retirement
plans 1. Tax deferred
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Special Savings Plans and Goals B. Real Estate as an Investment
Value has historically increased Undeveloped land is a higher risk
Usually takes time to turn into profit Usually takes a higher
investment
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Special Savings Plans and Goals C. How Much to invest 1. How
much are your fixed expenses? 2. What are your reasons for saving?
3. How much interest will you earn? 4. How much income will you
earn in the future? 5. How much of a risk should I take? -
diversify your portfolio - individual values play a part
