Investing Prepare For Your Future

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  • 1. Investing Prepare For Your Future

2. Investing Basics

  • What is Investing?
  • If you choose to save in a way that earns income, then you are investing.
  • Savings accounts, CDs, money markets, and government bonds are all forms of investing.
  • You have a wide variety of other investments choices that have the potential earning more than these options.
  • But, as with other consumer choices, investments decisions involve trade-offs

3. Investing Basics

  • To have a chance to make more income on your investments, you must be willing to accept more risk
  • Risk and Rate of Return
  • The chance that an investment will decrease in value is risk
  • The income you earn on an investment is called your return

Higher Risk/Higher Returns Medium Risk/Medium Return Lower Risk/Lower Return 4. Rate of Return

  • You invest $1,000 in a bicycle repair business.
  • At the end of one year, your receive $100 as your share of the companys profit.
  • The $100 is 10% of your $1000 investment
  • Your rate of return is 10%

5. Rate of Return

  • Suppose banks are paying 4 percent interest on deposits.
  • Your rate of return from investing in the bicycle business is 6 percent larger
  • There is no guarantee that the business may have new competition.

6. Evaluate Your Risk

  • A general rule of investing is:
    • The greater the potential rate of return, the greater the risk.
  • Limit your risk through diversification
    • Investing in various businesses with different levels of risk is called diversification.
    • If you are young and have many income-earning years left, you may want to take more risk.
    • If you are older and have most of the money you will need for retirement, you may not need of want to take risks.

7. How to Make Investment Choices

  • There is no one right way to invest.
  • Which investment choices are right for you depends a lot on:
    • Your Financial Situation
      • If you have lots of money to invest then risking some on high rate investments are a good choice
    • Your Risk Tolerance
      • 1 thru 5 what is your tolerance
      • 1 being completely conservative
    • Your Values
      • Community or Social

8. Questions

  • What is the difference between saving and investing?
  • What is an investments rate of return, and how is it measured?
  • What is the relationship between risk and rate of return?
  • How does diversification limit your overall risk?
  • If you dont like taking risk, what kinds of investments should you make?

9. How to Invest in Corporations

  • Corporate Stocks
    • Ashare of stockis a unit of ownership in a corporation
    • Stockholdersare the investors who own the corporation because they own shares of its stock.
    • Corporations sell shares of stock to investors to raise money for the business.
    • If the corporation makes a profit you may expect to receive part of the profit as adividend

10. How the Stock Exchanges Work

  • Investors can buy and sell stocks in two ways:
    • Through a stock exchange
    • Through an electronic system called the NASDAQ
  • Transactionsare when share are bought or sold
  • Astockbrokeris a person who handles the transfer of stocks and bonds between buyer and seller.

11. How the Stock Exchanges Work, cont.

  • Abrokerage firmis a company that specializes in helping people buy and sell stocks and bonds.
  • Astock exchangeis a location where orders to buy or sell stock are sent and carried out.

12. How the Stock Exchanges Work cont.

  • You want to buy 100 shares of IBM
  • Place an order with a local office of a brokerage firm, such as Merrill Lynch.
  • The firm owns a membership in a stock exchange that allows it to carry out trades on the exchange.
  • Another person wants to sell 100 shares.
  • Both brokerage firms would take their orders to a trading desk at the NYSE where IBM transactions are made.

13. How to Trade on the NASDAQ

  • National Association of Securities Dealers Automated Quotation Systems
  • NASDAQ electronically links brokerage firms.
  • Through this system, stocks can be bought and sold without using a central location

14. How Stockholders Earn Returns

  • You can earn returns from your investment in two ways:
    • As dividends
    • By selling the stock
  • If a company makes a profit, you will probably receive adividendas a return.
  • Suppose you bought 100 shares of stock for $2.00 per share.
  • A month later you sell it for $3.00 per share

15. How Stockholders Earn Returns

  • The profit you earn from selling stock at a higher price than you paid for it is calledcapital gain .
  • The amount you lose is calledcapital loss .
  • Why do stock prices change?
    • High Profits, Higher dividends, higher demand
    • Lower Profits, lower dividends, lower demand

16. Types of Stocks

  • Preferred Stock
    • A non-voting share that pays a fixed dividend
    • No matter how well the company performs, preferred stockholders receive the same dividend unless the company suffers a loss.
  • Common Stock
    • A voting share that does not pay a set dividend
    • Each board of directors sets the dividend year to year
    • The dividend that the board sets depends on the corporation's profits and its need for money to reinvest in the business

17. Types of Stocks

  • Common stockholders have the right to vote on important corporate decisions.
  • Stockholders normally have one vote for each share they own.
  • Preferred stock is less risky than common stock
  • Preferred stock holders get paid first for dividends

18. How to Earn Returns

  • All corporations are not equally successful
  • Some earn good profits, Some dont.
  • Some corporations fail even after a long period of good profits.
  • There is no way to be sure which corporation will be successful.
  • If you investigate the financial histories of different corporations, however, you will probably make better investment choices.

19. Two general classes of stocks

  • Blue Chip Stocks
    • This is a well established company
    • Have histories of steady sales and profits
    • Pays most of its returns in dividends
  • Growth Stocks
    • Smaller or younger corporations that produce new products may grow rapidly in their sales and profits.
    • They pay no or very small dividends
    • Pays by increasing in value

20. Short Selling

  • Short sellingis the selling of a stock that the seller doesn't own. More specifically, a short sale is the sale of a security that isn't owned by the seller, but that is promised to be delivered. That may sound confusing, but it's actually a simple concept.

21. Short Selling Continued

  • Still with us? Here's the skinny: when you short sell a stock, yourbrokerwill lend it to you. The stock will come from the brokerage's own inventory, from another one of the firm's customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later you must "close" the short by buying back the same number of shares (calledcovering ) and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money.

22. Corporate Bonds

  • Abondis a written promise to pay interest and a debt by a specified date.
  • May companies raise money by selling bonds
  • Why own Corporate Bonds?
    • Less Risky
    • Corporations must make interest payments and repay their bonds on time, even if they earn no profit.
    • You will receive mone