Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options.
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Transcript of Chapter 11 Investing for Your Future Investing Fundamentals Exploring Investment Options.
Chapter 11
Investing for Your Future
Investing FundamentalsExploring 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.
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”
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!
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!
Reasons for Investing
Investing helps beat inflation.Investing increases wealth.Investing is fun and challenging.
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
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!
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
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
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
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
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/
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
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.
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
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
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
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
Investment Options
Low risk: low-to-medium returnMedium risk: medium returnHigh risk: high return
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
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
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
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
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!
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