INVESTING D ECIDING TO I NVEST Before investing, make sure: You are living within your means You are not paying finance charges or credit card debt- charges and interest will be higher than any earnings on investments You have adequate insurance protection You have emergency savings of 6-12 months of living expenses. continued D ECIDING TO I NVEST Investing is purchasing a financial product or valuable item with the goal of increasing wealth over time Investments offer greater returns than savings You risk losing some or all of your investment, but gains usually exceed losses over time continued Reasons people invest: To increase wealth through appreciation To earn a steady income To beat inflation To take advantage of tax benefits; capital gain is income earned when the selling price is greater than purchase price To preserve wealth in unstable economic times D ECIDING TO I NVEST continued D ECIDING TO I NVEST Investment characteristics: Degree of volatility Potential rate of return Level of risk Liquidity Risk tolerance is the amount of uncertainty you can handle T YPES OF I NVESTMENTS Securitya type of investment issued by a corporation, government, or other organization Securities include stocks bonds mutual funds TRUTH IN LENDING ACT The Act that requires financial institutions to provide information about costs and interest- earning accounts in uniform terms Provides Safeguards for the consumer so they understand the terms of their loans/investments S TOCKS Corporations sell stock to pay costs of start-up, continuing operations, and expansion Stock is a share of ownership in a company continued S TOCKS Stockholders have equity in a company share in profits after debts, taxes, and operating expenses are paid arent responsible for company debt if company fails, but can lose their investment continued S TOCKS Stockholders make money in several ways: Dividend income- The profit payout per quarter made by the company to the shareholders Capital Gain- P rofit from the sale of assets such as stocks, bonds, or real estate The money made from successful sale of stocks due to increased stock value Stock splits S TOCK C LASSIFICATIONS Common stock Stockholders can vote in election of company directors and other matters Increases in value more than preferred Preferred stock Less risk; stockholders have first claim on assets if company fails No voting privileges continued S TOCK C LASSIFICATIONS Blue-chip Income Growth Defensive Cyclical Penny S TOCK T RADING Stocks are bought and sold by stockbrokers in a securities exchange or stock market Stockbrokers charge commissions on buy and sell transactions Place where most stocks are bought and sold. Major exchanges: NASDAQ New York Stock Exchange Euronext S TOCK E XCHANGE O VER - THE -C OUNTER M ARKETS Stocks not listed on securities exchanges can be bought and sold at over-the-counter (OTC) markets An electronic network allows dealers and brokers to conduct business lacks regulations of securities exchanges presents more risk for investors I NITIAL P UBLIC O FFERING An initial public offering (IPO) is a companys first sale of stock to the public to raise capital for expansion become publicly traded Investment banks charge a commission to sell securities to investors; rest of money goes to the company Can be risky investments This happened for Facebook in 2012 when they became publicly tradeddoubleDown&an=apn&ap=ask.com S TOCK Q UOTATIONS Stock quotations appear in major newspapers and financial Web sites To find a particular stock, you need the ticker symbol, or company abbreviation Current yield and price/earnings (PE) ratio help investors determine health or weakness of a company continued S TOCK Q UOTATIONS B ONDS When you buy bonds, you lend money to the issuera corporation or government Issuer owes you the amount of the loan plus interest on the bonds face value continued B ONDS Information stated on bonds includes maturity date face value yield coupon rate market value current yield T YPES OF B ONDS Corporate bonds are issued when businesses need money to operate and expand Municipal bonds are issued by state, county, and city governments continued T YPES OF B ONDS U.S. Government bonds are issued by the U.S. Treasury Safest bonds you can buy Treasury bills (T-bills) Treasury notes and Treasury bonds U.S. savings bonds M UTUAL F UNDS Inexperienced investors often start with mutual funds made up of securities chosen by professional managers at investment firms Mutual funds are a collection of investments such as stocks and bonds. continued M UTUAL F UNDS Advantages: Professional management Diversification If one investment in the fund does poorly, it will be offset by the growth of another investment Liquidity Disadvantages: Management fees Lack of control Minimum investment required T YPES OF M UTUAL F UNDS Closed-end funds Offer a fixed number of shares Shares are traded like stocks on securities exchanges Shares are bought and sold through investment brokers, not through an investment company continued T YPES OF M UTUAL F UNDS Most mutual funds are open-end funds Unlimited number of shares Shares are sold and redeemed at their net asset value (NAV) Value per share is the NAV of the fund divided by number of shares outstanding continued T YPES OF M UTUAL F UNDS Load funds charge a commission on amount invested when shares are bought No-load funds dont charge fees when shares are bought, but may charge fees when shares are sold or redeemed continued T YPES OF M UTUAL F UNDS Income funds Balanced funds Growth funds Specialized funds Money market funds continued T YPES OF M UTUAL F UNDS T HE N EWEST I NVESTMENT T OOL - E XCHANGE T RADED F UNDS (ETF S ) Exchange Traded Funds (ETFs) Mutual Fund that trades like a stock Usually they track an index or a sector of the economy Upsides Instant liquidity- can be bought and sold throughout the day ETFs pay less in capital gains- tax efficiency Typically lower Expense Ratios Downsides Can make it tempting to time the market Bought and sold through brokerage firms- commission costs F ACTORS A FFECTING R ETURNS Laws of supply and demand determine the price of stocks and other investments continued F ACTORS A FFECTING R ETURNS Factors affecting returns include business cycle fluctuations interest rate fluctuations stock market fluctuations (bull market or bear market) product innovation government actions exchange-rate risk B ULL VS. B EAR Bull Markets Good Markets High Returns Prices Rising (Remember the Bull Stands HIGH when he charges) Bear Markets Poor Markets Low Returns Decline in Prices (Remember the Bear crouches LOW when he runs/charges) R EAL E STATE Buying real estate (land or buildings) is another way to invest for future profit Usually requires a down payment and a long- term loan Property usually increases in value over time H OME O WNERSHIP For many people, a home is a place to live the first experience in buying property Advantage- Owning a home can increase net worth and protect against inflation Downfall- Risky because it is NOT a liquid investment. In order to make money someone must BUY your home Also home values have been falling due to a bad economy (like the past few years) REIT S AND R EAL E STATE M UTUAL F UNDS Indirect investments in real estate include Real Estate Investment Trust (REIT) Real estate mutual funds They avoid the complications and financial commitment of owning individual properties V ALUABLE G OODS Collectiblesrare coins, books, stamps, art, antiques, sports memorabilia, vintage automobiles Precious metalsgold, silver, platinum Precious gemstones and jewelrydiamonds, emeralds, sapphires High Risk. Value changes based on market and demand. You can only sell something that someone else wants! continued V ALUABLE G OODS Advantages Value is not eroded by inflation Objects can bring pleasure and can be used or displayed Objects can increase in value continued V ALUABLE G OODS Disadvantages Less liquidity; can be difficult to sell quickly Requires knowledge to judge value Difficult to store and protect from damage and theft Prices are often volatile No guaranteed return on investment C HOOSING I NVESTMENTS Investment portfolioa collection of securities and other assets a person owns Diversification is a strategy of successful investors S OURCES OF I NFORMATION Professionals and financial experts can help Online resources: Investment-related Web sites Web sites of individual companies U.S. Securities and Exchange Commission (SEC) EDGAR database A NNUAL R EPORTS Are included in most corporate Web sites Show current and predicted market performance Report earnings per share (EPS) P ROSPECTUSES When an investor buys a security, the issuer must provide a prospectus- A legal document that gives a detailed description of a security. Additional copies are posted on company Web sites found on SECs EDGAR database mailed to prospective investors on request continued P ROSPECTUSES Contents include company officers businesss history and operations future plans financial risks performance summary fees and expenses management M ARKET Q UOTATIONS Stock, bond, and mutual fund quotations appear in the financial section of major newspapers and financial Internet sites Quotations, or listings, contain financial information including records of past and current performance I NVESTMENT S TRATEGIES Smart investing requires balancing risks against returns B UY AND H OLD Strategy of buying securities and holding them for long-term gains as opposed to frequent trading Buy and Hold allows you to take advantage of dividends Investors who sell stocks when they drop in value lose money; investors who hold onto stocks during market fluctuations usually gain in the long run D OLLAR -C OST A VERAGING With dollar-cost averaging, you invest without regard to the price of the investment at the time you buy it You end up buying more shares when the price is low and fewer when it is high You can set up automatic payments with as little as $25 monthly B UYING S ECURITIES You can use a brokerage or securities firm to buy and sell securities continued B UYING S ECURITIES Open an account with a brokerage or securities firm These firms charge a fee for their services Brokerage firms keep records of investors transactions and periodically send out statements B ROKERAGE F IRMS Full-service brokerage firms maintain research departments provide investment advice, portfolio management, and other services are good for both experienced and beginning investors Discount Brokerage Firms execute orders to buy and sell securities charge lower commissions than full-service are good for some experienced investors continued I NVESTING FOR R ETIREMENT Retirement planning is key element of financial security Some retirees need income for up to 30 years Starting a retirement investment plan early is the most effective way to provide enough money on which to live after retiring Social security should not be your sole source of retirement income continued E MPLOYER -S PONSORED R ETIREMENT P LANS Employee Retirement Income Security Act (ERISA) set standards for pension and retirement plans to guarantee that workers receive entitled benefits Vesting requirements are an important part of this act 401 K An employer-sponsored retirement plan Funded with employees before-tax salary contributions; portion often matched by employer contributions of cash, stock, profit sharing, or deferred-compensation continued 401 K Advantages: Most plans offer different investment options, including stocks, bonds, or mutual funds Employers match contributions Tax-deferred growth of savings Automatic payroll deductions Disadvantage: Investors may lack knowledge, which can cause them to make poor choices continued P ERSONAL R ETIREMENT P LANS You can start a personal retirement plan at most financial institutions Usually consists of investments in stocks, bonds, and mutual funds IRA S Individual Retirement Account (IRA) is a personal retirement account with tax benefits Traditional: contributions and earnings are not taxed until funds are withdrawn at retirement Roth: contributions are taxed, but withdrawals are usually not S ELF -E MPLOYED P LANS Simplified Employee Pension (SEP) plan or Keogh plan Tax-deductible contributions Contributions limited to percentage of earned income Earnings grow tax deferred until money withdrawn at retirement C ENTRAL I DEAS OF THE C HAPTER Investments create wealth that meets long-term financial goals. Investing offers the opportunity to earn relatively high returns but it is not without risk. E STATE P LANNING T ERMS Use the following terms in a paragraph relating to the case study on p. 306 Estate Executor Will Trustee Living will Trust Probate court Beneficiary G LOSSARY OF K EY T ERMS annuity. A contract with an insurance company that provides income for a set period of time or for life. appreciation. An increase in the value of an investment. bear market. Term for the market when investors feel insecure and stock prices fall. Back G LOSSARY OF K EY T ERMS bond. A certificate of debt issued by a corporation or government that entitles the bondholder to a set rate of interest on the face value of the bond until it matures. bull market. Term for the market when investors are confident in the economy and stock prices are rising. capital gain. Income earned from selling an asset for more than the purchase price. Back G LOSSARY OF K EY T ERMS common stock. Stock that pays dividends declared by the company and gives stockholders certain voting rights. diversification. Spreading risk by putting money in a variety of investments. dividend. A portion of a company s earnings paid to stockholders. Back G LOSSARY OF K EY T ERMS dollar-cost averaging. An strategy of investing a fixed dollar amount at regular intervals. estate. The possessions, such as property, savings, investments, and insurance benefits, a person leaves when he or she dies. executor. A person appointed to carry out the terms outlined in a will. Back G LOSSARY OF K EY T ERMS investment portfolio. The collection of securities and other assets a person owns. living will. A statement of instructions for specific medical treatment if a person becomes unable to make medical decisions. Also called a healthcare directive. money market fund. A type of mutual fund that deals only in high interest, short- term investments such as U.S. Treasury Bills, certificates of deposit, and commercial paper. Back G LOSSARY OF K EY T ERMS mutual fund. An investment created by pooling the money of many people and investing it in a collection of several securities. net asset value. A mutual fund s assets minus its liabilities. Also called current market value. Back G LOSSARY OF K EY T ERMS preferred stock. Stock that pays regular dividends at a set rate. Preferred stockholders have priority in receiving dividends and assets, but do not have voting privileges. probate court. The government institution that processes a deceased individual s will and estate. prospectus. A legal document that gives a detailed description of a security. Back G LOSSARY OF K EY T ERMS securities exchange. A formal market where securities are bought and sold by stockbrokers. stock. A share in ownership of a corporation. stockbroker. An agent who buys and sells securities for clients. trust. A legal agreement where assets and property are managed by a trustee on behalf of the beneficiaries. Back