Investment Unit

1. Investment Unit

2. DO NOW Calculate the capital gains/losses for the stocks

3. Stocks, Bonds, Mutual Funds Stocks: ownership in a company Bonds: a loan to a government or corporation Mutual Fund: group of professionally managed combined funds that invest in a variety of stocks and/or bonds

4. Bonds • What is a bond? • A written promise to repay a loan with interest on a specific date. • Three Main Types of Bonds • Corporate • Federal • Municipal • Generally considered a safe place to invest • If you don’t get paid you can take legal action • Get paid before stockholders if business fails

5. Bonds • Ranked based on risk • Sold in a variety of venues: • Banks • Brokerage firms • Open market • May hold to maturity date or sell on the open market before the maturity date • Discount Bonds • Sold for less than face value (par value) • Gather interest until they mature and reach face value • Zero coupon bond – sold at discount and makes no coupon payments, then is worth the face value at maturity

6. Bonds Form of lending to a company or the government (city, state, or federal) Definition Bonds are less risky than stocks but usually do not have the potential to earn as high of a return Annual interest is paid to investor Return Once the maturity date is reached, the principal is repaid to the bondholder

7. Government Bonds • Debt issues by the US Government • Considered very safe • Debt of stable, developed countries are all considered safe • Bills (technically not true bonds b/c of maturity length) • less than 1 year maturity • Notes • 1 to 10 year maturity • Bonds • More than 10 year maturity • Less risk = less yield • Interest not subject to taxes • Reduced or no taxes if meet specific criteria

8. Municipal Bonds • Debt issued by a municipality (city/town) • Also called “munis” • Sold to finance local projects (ie building a new school) • Less risky than corporate, more risky than Government • Most cities/towns don’t go bankrupt • Lower yields • Gains may be tax free (no income tax from fed, state, local)

9. Corporate Bonds • Debt issued by a corporation • Ranked based on how risky • Riskiest are called “Junk Bonds” • Junk bonds usually won’t get any money if the business fails because there will be nothing left • Change to make more money because higher interest rates • Convertible • Holder can convert the bond into stock • Callable • Company can redeem the bond before maturity date • Would call in bond if interest rates fall • Could re-issue debt and pay less in interest • Similar to re-financing a home loan

10. How Bonds Work • Gains • Hold to maturity = make money from the interest • Sell before maturity: • “used bonds” • Sell/buy on secondary market • Supply and demand (like stocks) • Interest rates and value of the bond are inversely related • What does that mean: • Interest rates go up (why buy your used bond) • Interest rates go down (your bond pays higher rates than “new” bonds)

11. Identify on the Bond Coupon Rate Maturity Date Face Value

12. How to Reduce Risks • DIVERSIFICATION • Investing in a large variety of corporations so that if one does poorly others may succeed. • Can diversify many different investments (article)

13. Pg. 658 Number 1-4, 8

14. Mutual Funds • Make sure to research the fees charged by a mutual fund Reduces investment risk Saves investors time Fees may be high when a company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks, bonds, or both

15. MUTUAL FUNDS • No Load Funds • No special fees for buying and selling • Sometimes fees if sell in the short term (5 yrs or so) • Load Funds • Fees at purchase (front load) • Fees at sale (back end load) • Generally try to avoid these extra fees

16. Types of Stocks Common Stock Preferred Stock • Primary type • All corporations sell these • Many companies only issue these • Get voting rights per share you own • Not offered by all • Limited or no voting rights • Amount paid in dividends is known • Paid before common stock holders if bankruptcy occurs. • Safer that common stock, but less chance for growth

17. What changes the price of a stock? • SUPPLY AND DEMAND (it’s economic principles!) • When a business does well: • Many want to buy into the business • Few want to sell their ownership • SO… the price rises until supply = demand • When a business does poorly: • Few want to buy into the business • Many want to sell their ownership • SO… the price falls until supply = demand

18. Stock Classifications • Blue Chip Stocks • Strongest, most respected companies • Attracts conservative investors • Leaders in industry • Stable earnings & consistent dividends • Income Stocks • Higher than average dividends • Often gas and electric companies • Cyclical Stocks • Market values reflect the state of the economy • Want to buy when inexpensive right before the economy improves

19. Stock Classifications Continued • Growth Stocks • Potential earnings higher than average predicted for the country • Generally no dividends • Look for signs company is engaged in activities that produce high earnings and sales revenue (new facilities, research etc.) • Defensive Stocks • Stable during declining economy • Many blue chip stocks

20. Risk versus Reward • The more established a stock is: • the less risky • thus less chance for a high reward • The less established a stock is: • the more risky • thus greater chance for a large reward • Stocks are often classified into different categories (we will look at 5)

21. BONDS, FUNDS, STOCKS

22. Financial Risk Pyramid The risk level for specific investment tools may vary Speculative Investment Tools Futures Commercial Paper Increasing potential for higher returns Increasing risk Options Collectibles Stocks Real Estate Investment Tools Index Funds Mutual Funds Bonds Money Market Deposit Account Savings Tools Savings Bonds Certificate of Deposit Checking Account Savings Account

23. SAVINGS Go over review

24. Real Estate • Any residential or commercial property or land as well as the rights accompanying that land • A family home is usually not considered an investment asset • Can be risky and more time consuming but has potential for large returns • Value of improvements on existing real estate and value of homes are not the same everywhere.

25. How to make $ in Real Estate • Appreciation (becomes worth more): • Land • Commercial Property • Residential Property • Income • Land • Commercial Property • Residential Property • QUESTION: What makes real estate worth more $?

26. Speculative Investments Futures Futures market: Contract to deliver futures contract will state the price that will be paid and the date of delivery Options contract which gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified strike price on or before a specified date Commercial Paper short-term (9 mo or less) unsecured promissory notes issued by companies. Collectibles An item that is worth far more than it appears because of its rarity and/or demand

28. Real Estate • Pro • Con

29. Taxation Profits earned on investments are _________ income Taxes are often ______ on unearned income Taxes are due on most investment returns in the year the unearned income is ____________

30. Tax-Sheltered Investments Government tries to encourage certain types of investments by making them tax-_________ Tax-sheltered investments- eliminate, _____, _____, or adjust the current year tax liability Tax-sheltered investments are usually not tax-free! • ______________ • Child/dependent care • Education expenses • Health care expenses

31. When are taxes for tax-sheltered investments usually paid? OR What is the benefit of a tax-sheltered investment if taxes still have to be paid? There are often limits to the amount that can be invested

32. RETIREMENT: TAX SHELTERED INVESTMENTS

33. How You Buy Stocks • Primary Market • Stocks offered for the first time • Secondary Market • Stock Exchanges (NYSE, ASE) • NASDAQ • OTC (over the counter) markets

34. Buying and Selling Investments Offer investment advice and one-on-one attention from a broker Offer no advice to investors but charge 40-60% less Complete investment transactions Only complete investment transactions Brokerage firm acts as a buying and selling agent for an investor (except for real estate and certain speculative investments)

35. Types of Stock Purchases • Market Order • Buy/sell at ________ price • 4-6 weeks you get a stock certificate • Most are “left in the street name” = brokerage firm ________ onto it so its easier to ______ later. • Limit Order • Buy/sell as a _________ price • May not go through • Filled in order ___________ so if price is rising yours may not get __________. • Stop Order • Limit order to _____ stock at the next available opportunity once price = _________ point

36. Long-Term Techniques • Use these for retirement investing, college savings etc. • Techniques: • Buy and Hold • Keep for many _______ • Hope for _______, capital ______, and stock _______. • Direct Investment and Dividend Reinvestment • Buy directly from the corp. • Dividends go directly back to buy _______ shares • Advantage = Don’t pay ___________

37. Short-Term Techniques = Risky • Buying on Margin • Basically buying on _________ • Fed requires 50% collateral deposit • Selling Short • _________ stock that has been __________ from a brokerage firm and must be _______ later • When you short sell you want the price to go ____________.

38. How Does Short Sell Work • Steps: • Borrow Stock from a broker • Sell borrowed stock (make revenue) – “Short sell” • Wait and buy stock at a lower price • Use this stock to replaced the borrowed shares from your broker - “Cover” • So What Happens…

39. Gains from Short Sales • Borrow 100 shares • Sell these 100 @ $10/share • Price falls to $5/share • You buy 100 shares @ $5/share to cover

40. Losses from Short Sales Borrow 100 shares Sell these 100 @ $10/share Price rises to $15/share You buy 100 shares @ $15/share to cover

41. Short Term Risks • Buying on Margin: • Short Sales: • call the shares in and you have to _______ at the _________ price • stocks _________ (now you have to replace _______as many) • you must ________ dividends etc. that would have been ______ out

42. Health of the Stock Market • Stock Indices • Measure the value of the stock ______ using the weighted mean of _________ stocks • Tell you the “________” of the overall ________ • Examples: • _____________ • Who is on the Dow Jones • _____ large industrial stocks • _______500 • 500 large stocks

43. ACTIVITY • Find data on the Dow Jones • Who is listed on the Dow Jones • Trends over the last 15 years (5 year intervals) • What would you expect to happen to your stock portfolio in: • 2000 – What would you expect from your portfolio • 2005 – How would your portfolio change? • 2010 • 2015