Investment Options

Part 1

Three reasons to invest

• Investing helps beat inflation• Investing increases wealth• Investing is fun and challenging

– Opportunity to take risk• Risk- the uncertainty of the outcome of

any given situation

– Gain knowledge

7 Wise practices of investing

1. Define your financial goals2. Go slowly

1. Knowledge is power2. If it sounds too good to be true it probably is

3. Follow through4. Keep good records

5. Seek good investment advice

6. Keep knowledge current

7. Know your limits

1. How much money can you afford to risk?

2. How much risk are you willing to take?

Risk/Reward

The greater the potential reward – The greater the risk that must be taken in

order to achieve it.

Reward

Risk

Risk Pyramid

Low risk/Low return

• Government Savings Bonds• Certificates of Deposit• Savings/Money Market Accounts

Risk Pyramid

Medium risk/Medium return

• Stock– Stock is a share of ownership in the assets

and earnings of a company– core of America’s economic system

• provide portfolio diversification• Diversification- spreading risk among many types of

investments

Why Companies Issue Stock

• To grow or expand• To pay for ongoing business activities• It is popular because:

– The company does not have to repay the money

– Paying dividends is optional

2 Basic Types of Stock

Common Stock

Vs.

Preferred Stock

Common Stock

• Common stock – shares or units of ownership in a public corporation– Most basic form of ownership– One vote per share owned to determine company’s

board of directors

Preferred Stock

• Preferred stock – type of stock that pays a fixed dividend– Dividends

• distribution of a portion of a company's earnings to shareholders

– Fixed value paid out before common stock

• IF company fails preferred gets paid before common

– Less risk than common stock = lower returns– No voting rights

How Well the Stock Market is Doing Overall

Part 2

3 Basic Indicators

• Dow Jones Industrial Average (“DOW”)– Lists the 30 leading industrial blue chip stocks

• Standard and Poor’s 500 Composite Index– Covers market activity for 500 stocks– More accurate than DOW because it evaluates a

greater variety of stock• National Association of Security Dealers

Automated Quotations (“NASDAQ”)– Monitors fast moving technology companies– Speculative stocks, show dramatic ups and downs

Ups and Downs

• bull market -market is doing well – optimistic about the economy and are purchasing

stocks

• bear market -market is doing poorly– investors are not purchasing stocks – selling stocks already owned

Purchasing Stock

Stock brokers

• Full-service brokers- most expensive– will call with advice – keep an eye on stock and call if changes need to be

made.

• Discount brokers- charge less– general advice– research options available– Buy and sell for you

• Online brokerage sites- Cheapest– No advice-you do research for yourself– Order takers

Three Stock Exchanges• New York Stock Exchange (NYSE)

– Oldest and largest, began in 1792– 2,800 companies– Strict requirements

• American Stock Exchange– Began in 1849– allowing younger, smaller companies to list

• National Association of Securities Dealers Automated Quotations– over the counter electronic market– 4,000 small companies– More volatile because companies are young and new

Stock Transactions• Customer- you• Broker- qualified and regulated professional who

buys and sells stocks• Trader- someone who buys and sells stock

shares • Specialist- Seller of specific stock. Shows best

bids and asked prices to the market during trading hours.

Traders

Broker

NEW

YORK

STOCK

EXCHANGESpecialist

Customer

The guaranteed way to make money in the stock market is simple:

Buy Low and Sell High

Medium Risk/Medium Return

• Mutual funds- shares bought in a large, professionally managed group of investments– Pools money of investors to buy large

amounts of stocks and bonds– Advantages

• Professional management• Diversification- spreading risk among many types

of investments

Bond- money loaned to government or corporation

• Study Guide- read pages 306-315 and

1.Explain the following types of bonds.

2.Explain where and how you can buy bonds.

3.What are the three ways to earn a return on a bond?

4.Why are bonds safer than other investments?

– Corporate• Debenture• Mortgage • Convertible

– Government• Municipal• Revenue• General

obligation

Risk Pyramid

High Risk/High Return

• Futures- buy and sell stock on a specific date in the future at a specific price– Betting the price will go up or down accordingly

• Penny Stocks- low priced stocks of small companies- risk of failure is high

• Collectibles- gain or lose value as public tastes change