© 2008 Thomson South-Western

CHAPTER 11

INVESTMENT PLANNING

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The Objectives & Rewards

Of Investing Investing—usually considered a long-term

activity. Future values and returns expected to increase through time.

Speculating—usually considered a short-term activity. Future values and returns highly uncertain.

Adequate insurance coverage and cash/savings are investment prerequisites

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How Do I Get Started?

Accumulate money by regularly allocating a portion of your earnings for investing—PAY YOURSELF FIRST!

Take advantage of automatic investment and dividend reinvestment programs.

While saving, learn as much as possible about investments and "play" trading.

Determine your financial objectives.

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What Are Your Investment Objectives?

Supplement current income— appropriate for retired persons

Save for major expenditures— such as college education, down payment on a home, or starting a business

Save for retirement—to live comfortably in your "golden years."

Shelter income from taxes—to preserve more of your earnings.

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Average Annual Returns On Stocks, Bonds, And U.S. T-bills Over Various Holding Periods From 5 - 15 Years

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Different Ways to Invest

1. Common Stock

2. Bonds

3. Preferreds and Convertibles

4. Mutual Funds

5. Real Estate

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Federal and state laws regulate the sale of securities.

Purpose is to provide for adequate and accurate disclosure of financial information.

Securities and Exchange Commission (SEC) is the agency in charge of administering federal securities laws.

Regulating the Securities Markets

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Bull market—generally rising securities prices for an extended period of time.– Reflects investor optimism.– Associated with favorable economy.

Bear market—generally falling securities prices for an extended period of time.– Reflects investor pessimism.– Associated with economic downturn.

Market Trends

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Making Transactions In the Securities Markets - Stockbrokers

Stockbrokers (account executives, financial consultants) buy and sell securities for investors.

Investor can select from full-service, discount, or online broker

Brokerage services Consider brokerage fees when making

securities transactions.

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Types of Brokers

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Executing Trades

Investor must first establish account with broker.

Trades can be executed by phone, at the brokerage firm, or online.

Market orders generally take less than two minutes!

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Investor placesthe order with the broker.

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Investor placesthe order with the broker.

Broker transmitsorder to the market via tele-communications equipment.

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Investor placesthe order with the broker.

Broker transmitsorder to the market via tele-communications equipment.

Order isfilled at themarket byother buyersand sellers.

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Investor placesthe order with the broker.

Broker transmitsorder to the market via tele-communications equipment.

Order isfilled at themarket byother buyersand sellers.

Execution ofthe order isconfirmedto the broker.

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Investor placesthe order with the broker.

Broker transmitsorder to the market via tele-communications equipment.

Order isfilled at themarket byother buyersand sellers.

Execution ofthe order isconfirmedto the broker.

Broker confirms order fulfillment. Investor has 3 days to settle account.

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Margin Trading and Short Sales

Buying on Margin: allows investor to purchase securities on credit by borrowing part of purchase price from broker.

Increases gains when returns are positive.

Increases losses when returns are negative.

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Becoming an Informed Investor

Types of information to follow:

– Economic developments and current events

– Alternative investment vehicles

– Current interest rates and price quotations

– Personal investment strategies

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Available Investment Information

Annual Reports Financial Press

(WSJ and financial magazines) Brokerage Reports Advisory Services Investment Advisors On-Line Resources

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Annual Stockholder Reports

Read the Highlights or Selected Financial Data sections

CEO’s letter to stockholders Discussion of operations in

management’s discussion and analysis section

Review financial statements and notes

Read the auditor’s report

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Tips for Successful Online Trades

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Managing Your Investment Holdings

Build a diversified portfolio of securities based upon your goals and personal situation.

Allocate your assets according to your objectives.

Track your investments and rebalance your portfolio as your needs change.

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Types of Investments Held by Average Individual Investors

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Asset Allocation and Portfolio Management

How to divide portfolio among different types of securities

Total return on a portfolio is influenced far more by its asset allocation plan than by specific security selections.

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Asset Allocation and Portfolio Management

Asset mix:

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Keeping Track of Investments