Investing

Objectives

• Identify reason to invest

• Define inflation and explain how it relates to investing

• Identify factors that will increase or decrease stock prices

• Examine how bonds are rated

Standard(s)• 4.3 Evaluate methods of

investing.

• a. Stocks and bonds

• b. Mutual funds

• c. Real estate

• d. Annuities

• e. Business

Why Invest?

• Investing - the use of long term savings to earn a financial return

• a proven powerful way to strengthen your financial position over time

• helps accumulate faster than just putting excess money in a RSA

• When you purchase stocks/bonds you are helping businesses grow and offer new products/services

Why Invest?

• The stock market has generally produced much higher long-term returns than more liquid investments

• tends to have major ups and downs

• Consider riskier investments to be long-term investments

• Understand that a risk of these longer-term investments is the total loss of the investment

Inflation

• Investing helps beat inflation

• inflation is a rise in the general price level

• reduces purchasing power over time

• as prices rise from year to year, it takes more money to purchase the same number of goods and services

Inflation

• Investors seek investments that will grow faster than inflation

• There are investments that offer hope of outpacing inflation over time, such as stocks, bonds, and mutual funds

Check Your Financial IQ

• Why is it a good idea to invest in something like stocks or bonds?

Investing in Stocks

• As you know, stocks represent a share or piece of ownership in a company

• Companies, such as Apple, have issued millions of shares

• Stock ownership also carries voting rights

Stock Exchanges• Initial public offering (IPO) is when a

company chooses to “go public” and has the first sale of stock

• The IPO occurs in what is called the primary market

• Companies issue and sell stock as a way to raise money for business operations, expansion, and other needs.

• The initial sale is when employees get to purchase

• Later, the shares may be bought and sold by many different investors

Stock Exchanges• These stock sales occur in the so-called

secondary market, which includes the organized stock exchanges such as the New York Stock Exchange (NYSE) or the National Association of Security Dealers Automated Quotation system (NASDAQ).

• These are the transactions we are more familiar with

• These are the ones reported on TV and in newspapers such as the Wall Street Journal

• Publicly traded is when a company starts trading on one of these exchanges

Stock Exchanges

• People who buy and sell stock go through what’s called a stock broker such as:

• Merril Lynch

• Internet Accounts like E*TRADE

Partner Assignment• This should not take longer than 5 minutes to

complete

• You and your shoulder partner (the one sitting to the left or right of you) will research 5 of the 20 companies you have been following for the stock prices

• Please include the company name, current price, and the volume (how many shares of stock distributed)

• Once you are done, return to your notes and wait to move on.

The Behavior of Investors

• You already know that the stock market can go up and down frequently

• “Bull Market” is the term commonly used for markets that are treading upward

• “Bear Market” is the term commonly used for markets that are trending down

• Bull and Bear are examples of common jargon that investors use

The Behavior of Investors

• If you own stock, you are called a share holder

• You also receive dividends, which is a portion of the company’s profits

• could be in cash or additional stock

• this is another way share holders make money in the stock market

Math for Personal Finance

• Jennifer bought 900 shares of stock for $45 a share in a company’s IPO.

• Not counting commissions, what was her dollar return if she sold the stock two weeks later for $56 a share?

Math for Personal Finance

• Solution:

• 900 x $45 = $40,500 that Jennifer paid for the stock.

• She sold the stock for $56 x 900 = $50,400.

• Her return is the difference ($50,400 - $40,500 = $9,900)

The Behavior of Investors

• Stock investors must be prepared to evaluate their holdings regularly

• They may opt to sell poor performing stocks in hopes of finding a better investment

• Investors are generally wise to own a number of different stocks

• As risky as stocks can be, it is even riskier to depend on a single stock

Checking Your Financial IQ

• Why do companies sell shares of stock to investors?

• companies can raise money to use to expand businesses, product lines, etc.

Investing in Bonds

• Recall that a bond is like an IOU from a company, you have lent them money when you purchased the bond

• Companies, nonprofit organizations, and government agencies issue bonds as a way of taking a loan

• Investors buy the bonds and in return, the investor earns interest

How Bonds Work• Maturity date the date when the

bond expires (matures)

• Face value is the bond’s maturity value that is printed on the front of the bond

• Coupon rate is the bond’s interest rate

• this is paid to the bond holder until the bond expires

How Bonds Work

• Most bonds carry some risk

• If the bond issuer has financial problems, you may not get the interest you are due or your money back

Math for Personal Finance

• Kenneth held a bond for five years that had an 8.5 percent coupon rate and a $1,000 face value.

• How much did Kenneth receive in interest from the bond?

Math for Personal Finance

• Solution: $1,000 x .085 = $85 per year x 5 years = $425

Types of Bonds

• Investors can choose from several types of bonds

• Treasury Bonds

• Municipal Bonds

• Federal Agency Bonds

• Corporate Bonds

Treasury Bonds

• Treasury bonds are issued by the US Treasury to finance the debt of the United States government

• no default risk

• interest earned is subject to federal tax

• exempt from state and local income taxes

Federal Agency Bonds

• Federal agency bonds are the types of bonds that encourage home ownership

• Federal agencies such as the Federal Housing Administration (FHA) and the Government National Mortgage Association (Ginnie Mae) may issue bonds in order to fund projects

Municipal Bonds

• Municipal bonds are bonds issued by state and local governments to finance large public projects such as water and sewer systems

• do not pay taxes on interest payments

• have a slight default risk

Corporate Bonds

• Corporate bonds are bonds issued by large firms

• all degrees of risk depending on the strength of the company

• companies with a solid financial situation will have a lower risk

• Junk bonds are bonds from companies with the highest risk

The top 4 Ratings are reasonably safe

Buying and Selling Bonds

• Investors can buy and sell bonds much like they do stocks

• must use a broker to arrange transactions

Check Your Financial IQ

• What is supposed to happen at the end of a bond’s maturity date?

• the bond holder is supposed to get his or her initial investment back from the bond issuer

Other Ways of Investing• Mutual Funds

• best with limited money

• easy to diversify

• managed by experienced people

• Real Estate

• owning rental property

• Annuities

• An annuity is a contract that provides the investor with a series of regular payments, usually after retirement.

• Owning Your Own Business

• a large number of millionaires are small business owners

• with this, be very careful because many small ventures fail

• Futures are contracts to buy and sell commodities (products that are mined or grown) or stocks for a specified price on a specified date in the future.

In Review• Liquid investments are important, but it is

important to aim for a return that will beat inflation

• Stock is partial ownership in a company and a good way to seek a profit

• Bonds are promissory notes from an issuer to an investor

• The bond issuer pays interest and has to pay back the face value at the maturity date

• Mutual funds provide diversification and professional management for a low initial investment

Your Assignment• access finance.yahoo.com and search through all

10 of your stocks

• for each stock on the left hand side of the screen, you will find a menu

• scroll down to OWNERSHIP and click on Major Holders

• Please list the TOP Major Direct Holder, TOP Institutional Holder, and the TOP Mutual Fund Holder along with the number of shares each person/institution holds