Personal Finance – Unit 5

1. Which best describes your feeling about investing?

A.Better safe than sorryB.Moderation in all thingsC.Nothing ventured, nothing

gained

2. Which is the most important to you as an investor?

A.You receive a steady incomeB.You receive a steady income

and growthC.The price of your investments

rises rapidly

3. You won! Which prize would you pick?

A.$4,000 in cashB.A 50% chance to win

$10,000C.A 20% chance to win

$100,000

4. The stocks you own have dropped 20% since last quarter. The market experts are optimistic. What would you do?

A. Sell to avoid more lossB. Keep stocks, wait for reboundC. Buy more stocks b/c they’re

cheaper now

5. The stocks you own have gone up 20% since last quarter. You have no further information. What would you do?

A. Sell & take gainsB. Keep stocks, hope it goes up higherC. Buy more stocks b/c they might go

higher

6. Would you borrow money to take advantage of a good investment opportunity?

A.NeverB.MaybeC.Yes

7. How would you characterize yourself?

A. I don’t like taking risksB. I’m a moderate risk takerC.I enjoy taking risks

1 Points for all “As”2 Points for all “Bs”3 Points for all “Cs”

7-11: you’re a conservative investor who prefers to minimize financial risks

12-16: You’re a moderate risk taker

17-21: You’re comfortable taking risks in pursuit of greater returns

Let’s Get Started!

Starting to InvestReasons for Investing

How to Choose an InvestmentWise Investment Practices

Risk and ReturnTypes of Retirement Plans

Put-and-Take Account

Money left in savings/checking for you to use as needed

Should include an emergency emergency fund fund (6-9 months of salary)

Financial emergencies can come in the form of a job loss, significant medical expenses, home or auto repairs or something you’ve never dreamed of. The last thing you want to do is be forced to rely on credit cards or a loan which could simply compound the problem.

Systematic Investing

Investing on a regular and planned basis

Regularly set aside money each month for investing to meet long-term goals

Higher risk in the beginning, lowest risk near retirement

Retirement-planning

1. Helps beat inflation2. Increases wealth3. Fun and challenging

1. Safety (minimal risk of loss)2. High LIQUIDITY (getting

your money quickly)3. High dividends or interest4. Growth in value that

exceeds the inflation rate5. Reasonable (low) purchase

price (initial cost)6. Tax benefits (saving or

postponing tax liability)

Define your financial goal Go slowly Follow through Keep good records Seek Good Investment Advice Keep investment knowledge current

Know your limits – risk tolerance, how much you can afford to lose

Stay within your

“Circle of Competence”

RISK is the chance that an investment’s value will decrease.

All investments have riskGREATER RISK = GREATER POTENTIAL RETURNS

DIVERSIFICATION means spreading risk among many types of investment

Interest-Rate Risk – The chance that the investment’s return will not keep pace with inflation

Market Risk – caused by business declines, national/world events, interest rate fluctuations

Political Risk – Gov. actions that may decrease the success of an investment

Company/Industry Risk – actions that affect one company/industry

The US government puts sanctions on China, causing the price of Chinese companies’ stock to decrease

Your stock portfolio only saw returns of 1.5% last year, but your 60 Month Bank CD is earning 2% interest.

NEW YORK (CNNMoney) -- As it attempts to revive a once-great luxury brand, Ford's is renaming its Lincoln division as the Lincoln Motor Co., the automaker said Monday (12/3/2012)

“Americans unexpectedly pared spending in October as superstorm Sandy depressed wages, showing the world’s largest economy is cooling as lawmakers seek ways to avoid the so-called fiscal cliff. “ (BusinessWeek, 11/30/12)

But what can you INVEST in?

Up NEXT: TYPES OF RETIREMENT PLANS!

Government Sponsored

Personal Plans

AnnuitiesEmployer Sponsored

SOCIAL SECURITYSOCIAL SECURITY How it works:

People contribute while they are working and get a portion of it back when they reach age 65

An insurance product that pays out income, and can be used as part of a retirement strategy

A popular choice for investors who want to receive a steady stream of income in retirement

You make an investment in the annuity, and it then makes payments to you on a future date or series of dates

Company retirement plans in which a retired employee receives a specific amount based on salary history and years of service, and in which the employer bears the investment risk. The employee, the employer, or both may make contributions.

PENSIONSWorkers pay a percentage of their salary towards the pension each paycheck. This is typically three to five percent per paycheck. In turn, the company the employee works for will help the employee finance his retirement.The government guarantees pension benefits to a certain extent

The employer and/or employee make contributions, and the final benefits depend on how much was in the account and the rate earned by the account's investments. The federal government does not guarantee a participant's benefits; instead, the plan is "participant-directed", meaning that the employee makes the investment decisions based on the employer's options.

Most common type of employer-sponsored plan

Used with for-profit companies

Allows employees to save pre-tax dollars

Some companies MATCH employee contributions

MAX contribution <50 is $15,500/year

Similar to 401(k), but used for non-profit organizations

Usually not matched by employer

An employer alone makes contributions based on an employee's current-year compensation.

Contributions are discretionary and may vary year-to-year, may also include stock options

A type of profit sharing plan, where contributions are made in the form of company stock.

2,800 firms are listed on the NYSE (thousands more on the AMEX, and NASDAQ)

Out of all this companies, how does one pick the stocks most likely to increase in price?

1. Recognize that you cannot know it all2. Select a few companies to research,

then follow their progress closely3. Find a few good places to get stock

information.

NEWSPAPERS Financial pages of local newspapers

The Wall Street Journal

Barron’s

INVESTOR SERVICES Companies that provide extensive

financial data to investors◦Moody’s Investor Services (

www.moodys.com)◦Standard and Poor’s Reports (

www.standardandpoors.com)◦Motley Fool (www.fool.com)◦Forbes (www.forbes.com)◦Yahoo Finance (www.yahoo.com)

FINANCIAL MAGAZINES

BusinessWeek, Forbes, Money, Fortune, Kiplinger’s Personal Finance, The Economist

FULLSERVICE BROKERS: provide clients with analysis and opinion based on their judgments and the opinions of experts at the company

DISCOUNT BROKER: buy and sell securities for clients at a reduced commission, with little or no investment advice, may be online

Read the article from Fools.com to find out how to choose an online discount broker

FINANCIAL ADVISORS

Liberty Investment Management31 Buffalo StreetHamburg, NYWaring Financial Group38 Lake StreetHamburg, NYAleksandrowicz & Associates Inc265 Union St # 102Hamburg, NYSaperston Asset Management172 Lake StreetHamburg, NY

Gallagher Bassett41 Maple AvenueHamburg, NYClark & Co Wealth Management LLC12 Norwood AvenueHamburg, NYDavis Financial6101 S Park Ave # 1Hamburg, NYThe Evans Agency5999 South Park AvenueHamburg, NY

work at financial institutions to help guide investors

SOURCES OF FINANCIAL INFO.ANNUAL REPORTS

AND FINANCIAL STATEMENTS

An ANNUAL REPORT

is a summary of a company’s financial results for the year and prospects for the future

Filed with the Securities and Exchange Commission (SEC)

SOURCES OF FINANCIAL INFO.ONLINE INVESTOR

EDUCATION

www.teenvestor.com www.fool.com www.investopedia.com

1. Visit all the sites mentioned in class today.

2. Browse the sites to see which you find easy to navigate and informative.

3. Choose three stocks that you think might be worth the investment and write down the names and stock symbols of the company.

Time Value of MoneySimple InterestCompound InterestThe Rule of 72Return on Investment

The relationship among time, money and rate of interest.◦ Example: You put $100 in your dresser drawer

and keep it for one year. At the end of the year, you still have $100. But in a year, $100 may buy less than it does now because of INFLATION.

Amount you will earn on an investment if you don’t let the interest compound (rollover from one year to the next)

Principal Balance X Interest Rate X Time in Years = Earned Interest

PRT = I

The idea of earning interest on interest. You put $100 into an investment that earns

10% a year. At the end of the year, you have $110 in the account. That $110 stays in the account for a year and earns another 10%, now you have $121 in the account. This keeps going and going…

See how it works!

A = P (1 + i) n

A = Amount in accountP = Principal Investmenti = Interest raten = Number of years

Used to find out how long it will take you to double your money at a certain interest rate.

Example: How long will it have an investment to double if it is earning 7% a year? =

72/7 = 10.2 years.

72 ÷ Interest Rate = number of years

The amount of money you make on an investment, expressed as a percentage of your initial investment.

A ROI over 100% means that you are doubling money.

Return = (Ending Value – Beginning Value) Beginning Value

Form of ownership in a corporation

Stockholders get dividends and appreciated stock value

Corporations get EQUITY CAPITAL ($ they can use for anything they need)

COMMON STOCK - what most of us own. Unit of ownership in a corp. Entitles holder to voting privileges and

dividends (sometimes)PREFFERED STOCK - a type of stock that

gives the owner a set dividend Preferred stockholders receive their dividends

BEFORE common stock holders Sometimes have limited voting rights

GROWTH STOCK – company reinvests profits in an attempt to grow their business. Stockholders, therefore, rarely receive dividends.

VALUE STOCK – the company is well established and not trying to grow market share, so it usually gives dividends to stockholders.

BLUE CHIP STOCK – from large companies with a long history of strong market performance

PENNY STOCK – stocks usually trading at less than $1.00, but never more than $5.00. They have high volatility.

CYLICAL STOCK – stock from companies that are very much affected by the whims of the market

DEFENSIVE STOCK – stock from companies that maintain their value even through recession because people NEED their products

NYSE– Euronext“New York Stock Exchange” Largest stock exchange in the world Over 8,000 listings Total capitalization of $14.2 trillion Only exchange that still has brokers on the floor

NASDAQ“National Association of Securities Dealers Automated

Quotations” Second-largest stock exchange in the world 2,711 listings, Total capitalization of over $4.5 trillion. The NASDAQ has more trading volume than any

other electronic stock exchange in the world.

Caters to well-established companies (IBM, FORD, etc…)

At least 1.1 million shares of stock outstanding

Boast pre-tax profits of $10 million or more over the last three years

Have a global MARKET CAPITALIZATION (number of shares outstanding X stock price) of at least $750 million

Gained prominence by trading cool high tech companies (Microsoft, Intuit, Dell)

Sometimes called OVER THE COUNTER (OTC) Market – no trading floor to see

At least 1.25 million shares outstanding Pre-tax income of at least $11 or more

over the last three years Market cap of $70 million or more

NASDAQ – about 4,000 common stocks in tech and biotech

Dow Jones Industrial Average – 30 blue-chip common stocks

S&P 500 – 500 large cap stocks BULL – going up! BEAR – going down

CORPORATE BOND

a corporation’s written pledge to repay a specific amount of money, along with interest.

GOVERNMENT BOND

written pledge of a government or municipality (city) to repay a specific sum of money with interest

An investment in which investors pool their money to buy stocks, bonds and other securities selected by professional managers who work for an investment company◦All securities in a MF usually are within a common industry

◦MF are only traded at the end of the day (4pm)

MANGEMENT FEE: fee levied annually for professional mutual fund services provided; paid regardless of the performance of the portfolio; usually around 1%

RATINGS: Morningstar Advisors base MF on a star rating = BAD = GREAT

How to Choose a Winner:◦Low Fees (1% or less)◦High Returns◦Manager with Experience◦Stars (5 is best)◦BETA 1 = moving with market benchmark, +1 greater volatility than market, -1 less volatility than market

1. Professional Management: A portfolio manager and team of researchers analyze and purchase suitable investments for the fund

2. Cost Efficiency: Fund managers can buy and sell securities for a fraction of the cost that individual investors pay, and spread the cost of research over thousands of investors

3. Diversification: Most funds own stock from dozens (usually 25-100) of companies – possibly across industries

4. Reasonable Investment Minimums: Usually $1,000 or less. Some funds even offer monthly investment plans

TRADE TIME

End of day4:00pm

Basket of securities (stocks/bonds like mutual funds, or commodities)

Traded throughout the day, not at closing

Lower management fee than MFs Smaller initial investment DESIGNED TO TRACK A SPECIFIC INDEX OR BENCHMARK

Standard & Poor’s Depository Receipt (SPDR). Called Spiders

Basket of stocks is the S&P 500 index. Quick and easy significant diversification. Relatively inexpensive compared to what it

would cost to create this type of portfolio yourself.

Symbol

Name Index Holdings

SPY (SPDR)

S&P 500 S&P 500 Apple, EXXON, IBM, MS, GE

DIA Dow Jones Industrial Average

DOW IBM, Chevron, Caterpillar, McDonalds

USO US Oil Fund West Texas Intermediate (WTI) light, sweet crude oil

Morgan Stanley Inst Liquidity Gov Inst, Future Contract On Wti Crude Future Apr12

XLF Financial Select Sector The Financial Select Sector Index

Wells Fargo, JP Morgan, Berkshire Hathaway

COMMODITIES

Types: Objects that come out of the earth

People buy and sell commodities based on speculation.

Example, if you thought hurricanes over Latin America were going to destroy much of the coffee crop, you would call your commodity broker and have them purchase as much coffee as possible.

Grains (wheat, corn, soybeans)

Energy (crude oil, gasoline, heating oil, natural gas)

Metals (gold, silver, copper) Softs (many food products,

like cocoa, coffee, sugar, cotton)

Livestock (cattle, hogs)

Chicago and NY Board of Trades, NY Mercantile

Traded on:

FUTURES CONTRACTS

Also called OPTIONS Designed for

commercial businesses, NOT individuals

Legal agreements to buy or sell a commodity on a specific date or during a specific month

WHY DO IT?1.Set amount and

price today2.Take possession in

the future3.Sell the product for

MORE than you paid for it

Try to “corner the market” on a single

commodity by trading with others

FIRST TEAM TO 150 POINTS WINS!!!

Break class into 8 teams Deal cards and distribute First team to collect all nine cards of a

single commodity rings the bell, wins that round and gets those points!

TRADING: can only trade equal number of cards with another team

BULL card BULL card – wild card! Get 8 cards of a single commodity and this and you win round! Get caught with the BULL when another team rings the bell and you LOSE 40 points!

Buying real estate with the hope that the value will increase

Buying real estate and renting it for additional income

Assets that appreciate in value because they are rare and in demand

Examples: coins, fine art, sports cards, antiques, jewelry, precious metals

Stay within your CIRCLE OF COMPETENCE (Buffett)