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Chapter 11.2 notes Why invest?

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Page 1: Chapter 11.2 notes Why invest?. Basic Investment Considerations Risk-return relationship – the more your risk, the higher the potential return Investment

Chapter 11.2 notes

Why invest?

Page 2: Chapter 11.2 notes Why invest?. Basic Investment Considerations Risk-return relationship – the more your risk, the higher the potential return Investment

Basic Investment Considerations

• Risk-return relationship – the more your risk, the higher the potential return

• Investment objectives – retirement, vacations, college fund?

• Simplicity – don’t invest in something you don’t understand

• Consistency – invest consistently over long periods of time

Page 3: Chapter 11.2 notes Why invest?. Basic Investment Considerations Risk-return relationship – the more your risk, the higher the potential return Investment

diversification

• Putting money into different investments, different risk levels, etc.

Page 4: Chapter 11.2 notes Why invest?. Basic Investment Considerations Risk-return relationship – the more your risk, the higher the potential return Investment

Chapter 11.3 notes

Stocks

Page 5: Chapter 11.2 notes Why invest?. Basic Investment Considerations Risk-return relationship – the more your risk, the higher the potential return Investment

The basics

• You invest in a stock at a certain price per share

• You make money when the price goes up

• Called capital gains

Page 6: Chapter 11.2 notes Why invest?. Basic Investment Considerations Risk-return relationship – the more your risk, the higher the potential return Investment

2 types of stock

• Common – gives voting rights

• Preferred – gives a share of profits, but no voting rights

Page 7: Chapter 11.2 notes Why invest?. Basic Investment Considerations Risk-return relationship – the more your risk, the higher the potential return Investment

Organized Stock Exchanges

• Stock is sold through exchanges• Securities Exchanges – places where

buyers and sellers meet to trade securities• New York Stock Exchange (NYSE) –

oldest and largest original exchange; in NYC; use auctioning process through face to face trading; now a lot of trades are electronic

Page 8: Chapter 11.2 notes Why invest?. Basic Investment Considerations Risk-return relationship – the more your risk, the higher the potential return Investment

What it looks like

Outside on Wall St. Inside on the floor

Page 9: Chapter 11.2 notes Why invest?. Basic Investment Considerations Risk-return relationship – the more your risk, the higher the potential return Investment

Over-the-Counter Markets • OTC – electronic marketplace for securities

that are not traded on an organized exchange.

• National Association of Securities Dealers Automated Quotation (NASDAQ)

• most important OTC• largest electronic stock market• trading is done w/ a computer and

telecommunications network that connects investors in over 80 countries

• over 4,000 stocks

Page 10: Chapter 11.2 notes Why invest?. Basic Investment Considerations Risk-return relationship – the more your risk, the higher the potential return Investment

Measures of Stock Performance

• Dow-Jones Industrial Average – most popular and widely publicized measure of stock performance. 30 stocks including B of A, Exxon, Coke, GE, Wal-mart and Disney; measured in points

• Standard and Poor’s 500 – measures price changes of 500 stocks

Page 11: Chapter 11.2 notes Why invest?. Basic Investment Considerations Risk-return relationship – the more your risk, the higher the potential return Investment

Bull vs. Bear

• Bull v. Bear Markets – Bull = strong w/ prices going up for a while; Bear = “mean” market, w/ prices falling sharply for several months

Page 12: Chapter 11.2 notes Why invest?. Basic Investment Considerations Risk-return relationship – the more your risk, the higher the potential return Investment

The Bronze Bull