InvestingInvestingPrepare For Your FuturePrepare For Your Future

Investing BasicsInvesting Basics

• What is Investing?What is Investing?• If you choose to save in a way that earns If you choose to save in a way that earns

income, then you are investing.income, then you are investing.• Savings accounts, CD’s, money markets, and Savings accounts, CD’s, money markets, and

government bonds are all forms of investing.government bonds are all forms of investing.• You have a wide variety of other investments You have a wide variety of other investments

choices that have the potential earning more choices that have the potential earning more than these options.than these options.

• But, as with other consumer choices, But, as with other consumer choices, investments decisions involve trade-offsinvestments decisions involve trade-offs

Investing BasicsInvesting Basics

• To have a chance to To have a chance to make more income on make more income on your investments, you your investments, you must be willing to must be willing to accept more riskaccept more risk

• Risk and Rate of ReturnRisk and Rate of Return• The chance that an The chance that an

investment will investment will decrease in value is riskdecrease in value is risk

• The income you earn on The income you earn on an investment is called an investment is called your returnyour return

Higher Risk/Higher ReturnsHigher Risk/Higher Returns

Medium Risk/Medium ReturnMedium Risk/Medium Return

Lower Risk/Lower ReturnLower Risk/Lower ReturnLower Risk/Lower ReturnLower Risk/Lower Return

Rate of ReturnRate of Return

• You invest $1,000 in a bicycle repair You invest $1,000 in a bicycle repair business.business.

• At the end of one year, your receive At the end of one year, your receive $100 as your share of the company’s $100 as your share of the company’s profit.profit.

• The $100 is 10% of your $1000 The $100 is 10% of your $1000 investmentinvestment

• Your rate of return is 10%Your rate of return is 10%

Rate of ReturnRate of Return

• Suppose banks are Suppose banks are paying 4 percent paying 4 percent interest on deposits.interest on deposits.

• Your rate of return Your rate of return from investing in the from investing in the bicycle business is 6 bicycle business is 6 percent largerpercent larger

• There is no There is no guarantee that the guarantee that the business may have business may have new competition.new competition.

Evaluate Your RiskEvaluate Your Risk

• A general rule of investing is:A general rule of investing is:• The greater the potential rate of return, the The greater the potential rate of return, the

greater the risk.greater the risk.

• Limit your risk through diversificationLimit your risk through diversification• Investing in various businesses with different Investing in various businesses with different

levels of risk is called diversification.levels of risk is called diversification.• If you are young and have many income-earning If you are young and have many income-earning

years left, you may want to take more risk.years left, you may want to take more risk.• If you are older and have most of the money you If you are older and have most of the money you

will need for retirement, you may not need of will need for retirement, you may not need of want to take risks.want to take risks.

How to Make Investment ChoicesHow to Make Investment Choices

• There is no one right way to invest.There is no one right way to invest.• Which investment choices are right for you Which investment choices are right for you

depends a lot on:depends a lot on:• Your Financial SituationYour Financial Situation

• If you have lots of money to invest then risking some on If you have lots of money to invest then risking some on high rate investments are a good choicehigh rate investments are a good choice

• Your Risk ToleranceYour Risk Tolerance• 1 thru 5 – what is your tolerance1 thru 5 – what is your tolerance• 1 being completely conservative1 being completely conservative

• Your ValuesYour Values• Community or SocialCommunity or Social

QuestionsQuestions

• What is the difference between saving and What is the difference between saving and investing?investing?

• What is an investment’s rate of return, and What is an investment’s rate of return, and how is it measured?how is it measured?

• What is the relationship between risk and What is the relationship between risk and rate of return?rate of return?

• How does diversification limit your overall How does diversification limit your overall risk?risk?

• If you don’t like taking risk, what kinds of If you don’t like taking risk, what kinds of investments should you make?investments should you make?

How to Invest in CorporationsHow to Invest in Corporations

• Corporate StocksCorporate Stocks• A A share of stockshare of stock is a unit of ownership in a is a unit of ownership in a

corporationcorporation• Stockholders Stockholders are the investors who own are the investors who own

the corporation because they own shares the corporation because they own shares of its stock.of its stock.

• Corporations sell shares of stock to Corporations sell shares of stock to investors to raise money for the business.investors to raise money for the business.

• If the corporation makes a profit you may If the corporation makes a profit you may expect to receive part of the profit as a expect to receive part of the profit as a dividenddividend

How the Stock Exchanges WorkHow the Stock Exchanges Work

• Investors can buy and sell stocks in two Investors can buy and sell stocks in two ways:ways:• Through a stock exchangeThrough a stock exchange• Through an electronic system called the Through an electronic system called the

NASDAQNASDAQ• TransactionsTransactions are when share are are when share are

bought or soldbought or sold• A A stockbrokerstockbroker is a person who handles is a person who handles

the transfer of stocks and bonds the transfer of stocks and bonds between buyer and seller.between buyer and seller.

How the Stock Exchanges Work, cont.How the Stock Exchanges Work, cont.

• A A brokerage firmbrokerage firm is a company that is a company that specializes in helping people buy and specializes in helping people buy and sell stocks and bonds.sell stocks and bonds.

• A A stock exchangestock exchange is a location where is a location where orders to buy or sell stock are sent and orders to buy or sell stock are sent and carried out.carried out.

How the Stock Exchanges Work cont.How the Stock Exchanges Work cont.

• You want to buy 100 shares of IBMYou want to buy 100 shares of IBM• Place an order with a local office of a Place an order with a local office of a

brokerage firm, such as Merrill Lynch.brokerage firm, such as Merrill Lynch.• The firm owns a membership in a stock The firm owns a membership in a stock

exchange that allows it to carry out trades exchange that allows it to carry out trades on the exchange.on the exchange.

• Another person wants to sell 100 shares.Another person wants to sell 100 shares.• Both brokerage firms would take their orders Both brokerage firms would take their orders

to a trading desk at the NYSE where IBM to a trading desk at the NYSE where IBM transactions are made.transactions are made.

How to Trade on the NASDAQHow to Trade on the NASDAQ

• National Association of Securities National Association of Securities Dealers Automated Quotation SystemsDealers Automated Quotation Systems

• NASDAQ electronically links brokerage NASDAQ electronically links brokerage firms.firms.

• Through this system, stocks can be Through this system, stocks can be bought and sold without using a central bought and sold without using a central locationlocation

How Stockholders Earn ReturnsHow Stockholders Earn Returns

• You can earn returns from your investment You can earn returns from your investment in two ways:in two ways:• As dividendsAs dividends• By selling the stockBy selling the stock

• If a company makes a profit, you will If a company makes a profit, you will probably receive a probably receive a dividenddividend as a return. as a return.

• Suppose you bought 100 shares of stock for Suppose you bought 100 shares of stock for $2.00 per share. $2.00 per share.

• A month later you sell it for $3.00 per shareA month later you sell it for $3.00 per share

How Stockholders Earn ReturnsHow Stockholders Earn Returns

• The profit you earn from selling stock The profit you earn from selling stock at a higher price than you paid for it is at a higher price than you paid for it is called called capital gaincapital gain..

• The amount you lose is called The amount you lose is called capital capital lossloss..

• Why do stock prices change?Why do stock prices change?• High Profits, Higher dividends, higher High Profits, Higher dividends, higher

demanddemand• Lower Profits, lower dividends, lower Lower Profits, lower dividends, lower

demanddemand

Types of StocksTypes of Stocks

• Preferred StockPreferred Stock• A non-voting share that pays a fixed dividendA non-voting share that pays a fixed dividend• No matter how well the company performs, No matter how well the company performs,

preferred stockholders receive the same dividend preferred stockholders receive the same dividend unless the company suffers a loss.unless the company suffers a loss.

• Common StockCommon Stock• A voting share that does not pay a set dividendA voting share that does not pay a set dividend• Each board of directors sets the dividend year to Each board of directors sets the dividend year to

yearyear• The dividend that the board sets depends on the The dividend that the board sets depends on the

corporation's profits and its need for money to corporation's profits and its need for money to reinvest in the businessreinvest in the business

Types of StocksTypes of Stocks

• Common stockholders have the right to Common stockholders have the right to vote on important corporate decisions.vote on important corporate decisions.

• Stockholders normally have one vote Stockholders normally have one vote for each share they own.for each share they own.

• Preferred stock is less risky than Preferred stock is less risky than common stockcommon stock

• Preferred stock holders get paid first Preferred stock holders get paid first for dividendsfor dividends

How to Earn ReturnsHow to Earn Returns

• All corporations are not equally successfulAll corporations are not equally successful• Some earn good profits, Some don’t.Some earn good profits, Some don’t.• Some corporations fail even after a long Some corporations fail even after a long

period of good profits.period of good profits.• There is no way to be sure which corporation There is no way to be sure which corporation

will be successful.will be successful.• If you investigate the financial histories of If you investigate the financial histories of

different corporations, however, you will different corporations, however, you will probably make better investment choices. probably make better investment choices.

Two general classes of stocksTwo general classes of stocks

• Blue Chip StocksBlue Chip Stocks• This is a well established companyThis is a well established company• Have histories of steady sales and profitsHave histories of steady sales and profits• Pays most of its returns in dividendsPays most of its returns in dividends

• Growth StocksGrowth Stocks• Smaller or younger corporations that Smaller or younger corporations that

produce new products may grow rapidly in produce new products may grow rapidly in their sales and profits.their sales and profits.

• They pay no or very small dividendsThey pay no or very small dividends• Pays by increasing in valuePays by increasing in value

Short SellingShort Selling

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

Short Selling ContinuedShort Selling Continued

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

Corporate BondsCorporate Bonds

• A A bondbond is a written promise to pay interest is a written promise to pay interest and a debt by a specified date.and a debt by a specified date.

• May companies raise money by selling bondsMay companies raise money by selling bonds• Why own Corporate Bonds?Why own Corporate Bonds?

• Less RiskyLess Risky• Corporations must make interest payments and Corporations must make interest payments and

repay their bonds on time, even if they earn no repay their bonds on time, even if they earn no profit.profit.

• You will receive money before stockholdersYou will receive money before stockholders

Corporate BondsCorporate Bonds

• Junk BondsJunk Bonds• Higher risk investmentsHigher risk investments• Offer higher interest ratesOffer higher interest rates• Also called Also called high-yield bondshigh-yield bonds

• Bond Rating ServicesBond Rating Services• Look at the bond’s rate of returnLook at the bond’s rate of return

• The higher promised rate of return, the higher risk.The higher promised rate of return, the higher risk.

• Moody’s or Standard and Poor’s are two of the Moody’s or Standard and Poor’s are two of the most popular bond rating services.most popular bond rating services.

• Bonds Rated AAA are the safestBonds Rated AAA are the safest• The riskiest are C or D bondsThe riskiest are C or D bonds

QuestionsQuestions

• Why do corporations sell stock?Why do corporations sell stock?• What are the differences in how the What are the differences in how the

stock exchange and NASDAQ work?stock exchange and NASDAQ work?• What are the two ways in which you What are the two ways in which you

can earn a return from owning stock?can earn a return from owning stock?• What are the differences between What are the differences between

preferred and common stock?preferred and common stock?• Why are blue chip stocks less risky Why are blue chip stocks less risky

than growth stocks?than growth stocks?

QuestionsQuestions

• Why do corporations sell bonds?Why do corporations sell bonds?• Why should you invest only part of Why should you invest only part of

your money in highly risky stocks?your money in highly risky stocks?• Why does buying a corporate bond Why does buying a corporate bond

involve less risk than buying stock in involve less risk than buying stock in the same corporation?the same corporation?

• What service do Moody’s and Standard What service do Moody’s and Standard and Poor’s provide?and Poor’s provide?

Mutual FundsMutual Funds

• A mutual fund is a group investment A mutual fund is a group investment owned by many investors.owned by many investors.

• Investors buys shares of the mutual Investors buys shares of the mutual fund, and the fund pools their money fund, and the fund pools their money to buy a variety of stocks and other to buy a variety of stocks and other investments.investments.

• Mutual funds usually require a Mutual funds usually require a minimum investment of $1000 or minimum investment of $1000 or more.more.

Cost of Mutual FundsCost of Mutual Funds

• All Mutual Funds charge annual maintenance All Mutual Funds charge annual maintenance fees for their service.fees for their service.

• These fees can be as little as 0.2% of the These fees can be as little as 0.2% of the value of your investment or a large as 3 value of your investment or a large as 3 percent or more.percent or more.

• In addition to maintenance fees, some In addition to maintenance fees, some mutual funds have a load.mutual funds have a load.

• A load is a sales fee that you pay when you A load is a sales fee that you pay when you invest in a mutual fundinvest in a mutual fund• Front-end loadFront-end load• Back-end loadBack-end load• No-load funds – no sales fee – no sales personNo-load funds – no sales fee – no sales person

Mutual Fund Investment ObjectivesMutual Fund Investment Objectives

• Some mutual funds Some mutual funds invest in safe stocks, invest in safe stocks, such as blue chips.such as blue chips.

• Others aim for higher Others aim for higher rates of return.rates of return.

• TypesTypes• GlobalGlobal• IndexIndex• BondBond• Social responsibilitySocial responsibility• Environment FundsEnvironment Funds

GrowthGrowthFundsFunds

Growth and Growth and Income FundsIncome Funds

Income Funds and Income Funds and Tax Fee FundsTax Fee Funds

QuestionsQuestions

• What is a mutual fund?What is a mutual fund?• What benefits do mutual funds offer What benefits do mutual funds offer

investors?investors?• What is the difference between a load What is the difference between a load

and a non-load fund?and a non-load fund?• What are several investment objectives What are several investment objectives

mutual funds follow?mutual funds follow?• How can your own investment How can your own investment

objectives help you select a mutual objectives help you select a mutual fund?fund?

How to Find Investment InformationHow to Find Investment Information

• Printed Sources of InformationPrinted Sources of Information• Fortune, Forbes, Kiplinger’s Personal Fortune, Forbes, Kiplinger’s Personal

Finance Magazine, and Money evaluate Finance Magazine, and Money evaluate and compare mutual funds at least once a and compare mutual funds at least once a year and stocks.year and stocks.

• The Wall Street journal and most local The Wall Street journal and most local papers are more current.papers are more current.

• Information on the InternetInformation on the Internet• Smart Money InteractiveSmart Money Interactive

How to Find Investment InformationHow to Find Investment Information

• Request Information from CompaniesRequest Information from Companies• All mutual funds are required by law to All mutual funds are required by law to

provide investors with a publication that provide investors with a publication that describes how the fund is operated.describes how the fund is operated.

• The publication is called a The publication is called a prospectus.prospectus.

• Ask a StockbrokerAsk a Stockbroker• A A full-service stock brokerfull-service stock broker is a stock-broker is a stock-broker

who provides information and advice in who provides information and advice in addition to trading stocks and bonds for addition to trading stocks and bonds for customerscustomers

Investment SchemesInvestment Schemes

• Don’t take unnecessary risksDon’t take unnecessary risks• Look for:Look for:

• Unrealistic high promised return with low Unrealistic high promised return with low riskrisk

• Unknown seller that won’t supply contact Unknown seller that won’t supply contact informationinformation

• Demands for immediate paymentDemands for immediate payment• Suggestion the seller knows something no Suggestion the seller knows something no

one else knows.one else knows.• If it sounds too good to be true, it probably If it sounds too good to be true, it probably

is.is.

Investment RegulationInvestment Regulation

• Securities and Exchange Commission Securities and Exchange Commission (SEC)(SEC)

• The SEC us responsibly for enforcing The SEC us responsibly for enforcing the laws concerning the trading of the laws concerning the trading of stocks and bonds.stocks and bonds.

• Congress created the SEC in 1929 Congress created the SEC in 1929 because ofbecause of• The stock market crashThe stock market crash• Over a few months stocks lost as much as Over a few months stocks lost as much as

two-thirds of their value.two-thirds of their value.

Insider TradingInsider Trading

• Insider trading is trading stock based Insider trading is trading stock based on information that is not available to on information that is not available to the general public.the general public.

QuestionsQuestions

• What kinds of information can you get What kinds of information can you get form the Wall Street Journal or form form the Wall Street Journal or form financial magazines?financial magazines?

• What is the differences between a full-What is the differences between a full-service broker and a discount broker?service broker and a discount broker?

• Why should you look at a fund’s Why should you look at a fund’s performance over more than one year?performance over more than one year?

QuestionsQuestions

• What are several ways that you can tell What are several ways that you can tell an investment offer may be dishonest?an investment offer may be dishonest?

• What is the SEC and how does it work?What is the SEC and how does it work?• What is insider trading, and why is it What is insider trading, and why is it

legal?legal?

Retirement and Other InvestmentsRetirement and Other Investments

• In the past, some companies had In the past, some companies had pension plans for their employees, pension plans for their employees, funded completely by the company.funded completely by the company.

• After spending most of their working After spending most of their working years at one company, workers retired years at one company, workers retired and lived on their pensions.and lived on their pensions.

• Today pension plans are less common.Today pension plans are less common.• Workers must take more responsibility Workers must take more responsibility

for their retirement.for their retirement.

Trade-offs of Retirement PlansTrade-offs of Retirement Plans

• The main benefit of retirement plans The main benefit of retirement plans are their tax advantages.are their tax advantages.

• Most are taxed-deferred.Most are taxed-deferred.• The trade-off for receiving the tax The trade-off for receiving the tax

benefits is that you cannot withdraw benefits is that you cannot withdraw money from your tax-deferred account money from your tax-deferred account before you reach retirement age before you reach retirement age without paying a large penalty.without paying a large penalty.

Trade-offs of Retirement PlansTrade-offs of Retirement Plans

• There are some exceptions to this rule.There are some exceptions to this rule.• Some plans allow withdraws without Some plans allow withdraws without

penalty for child’s college tuition or for penalty for child’s college tuition or for medical emergencies.medical emergencies.

• Some kind of retirement plan should be Some kind of retirement plan should be part of your overall saving plan.part of your overall saving plan.

401(k) Plans401(k) Plans

• A 401(k) plan is a taxed-deferred A 401(k) plan is a taxed-deferred retirement savings plan offered to retirement savings plan offered to employees by their employer.employees by their employer.

• Only employees at that company may Only employees at that company may participate in the company’s 401(k) participate in the company’s 401(k) plan.plan.

• Your employer automatically withholds Your employer automatically withholds a percentage (that you designate) from a percentage (that you designate) from your paycheck. your paycheck.

401(k) Plans401(k) Plans

• Then your employer invests the money Then your employer invests the money in a professionally managed in a professionally managed investment account.investment account.

• Some have Employer Matching Some have Employer Matching ProgramsPrograms• You give $50, then you company will give You give $50, then you company will give

$50.$50.

IRA PlansIRA Plans

• An Individual Retirement Account (IRA) An Individual Retirement Account (IRA) is a retirement savings plan with is a retirement savings plan with special tax benefits.special tax benefits.

• Savings in a traditional IRA are taxed Savings in a traditional IRA are taxed deferred.deferred.

• Savings in a Roth IRA are not taxed Savings in a Roth IRA are not taxed deferred.deferred.• You pay taxes on your income before You pay taxes on your income before

investinginvesting

IRA PlansIRA Plans

• The law specifies the maximum about The law specifies the maximum about you can put into an IRA in one year.you can put into an IRA in one year.

• Currently, the maximum is $4,000 for Currently, the maximum is $4,000 for single people.single people.

• Married people can invest more.Married people can invest more.• Since IRAs are not employer-Since IRAs are not employer-

sponsored, there would be no matching sponsored, there would be no matching money.money.

Other Investment OptionsOther Investment Options

• Investment ClubsInvestment Clubs• Clubs that invest togetherClubs that invest together• You should never invest all your money in You should never invest all your money in

a club because they are not professionalsa club because they are not professionals

• Real EstateReal Estate• Your Home as an InvestmentYour Home as an Investment• Investing in Other Types of Real EstateInvesting in Other Types of Real Estate• Real Estate Risks and ResponsibilitiesReal Estate Risks and Responsibilities

• RentersRenters

Other Investment OptionsOther Investment Options

• CollectiblesCollectibles• These is no guarantee that the value of These is no guarantee that the value of

collectibles will go up.collectibles will go up.• Unless the plan to put in the time and Unless the plan to put in the time and

effort to become and expert, don’t invest effort to become and expert, don’t invest more in your collection than you are more in your collection than you are willing to lose. willing to lose.

QuestionsQuestions

• What does tax-deferred mean?What does tax-deferred mean?• How is an IRA different from a 401(k) How is an IRA different from a 401(k)

plan?plan?• What is the difference between a What is the difference between a

traditional IRA and a Roth IRA?traditional IRA and a Roth IRA?• How can you earn returns from How can you earn returns from

investing in real estate?investing in real estate?• What are the risks involved in real What are the risks involved in real

estate investing?estate investing?