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CHAPTER 11: INVESTMENT PLANNING PowerPoint PPT Presentation


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CHAPTER 11: INVESTMENT PLANNING. The Objectives & Rewards Of Investing. Investing —usually considered a long-term activity. Future values and returns expected to increase through time. Speculating —usually considered a short-term activity. Future values and returns highly uncertain.

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CHAPTER 11: INVESTMENT PLANNING

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Chapter 11 investment planning

CHAPTER 11:INVESTMENT PLANNING


The objectives rewards of investing

The Objectives & Rewards Of Investing

  • Investing—usually considered a long-term activity. Future values and returns expected to increase through time.

  • Speculating—usually considered a short-term activity. Future values and returns highly uncertain.

  • Adequate insurance coverage and emergency funds should be in place before starting to invest.


How can you get started investing

How Can You Get Started Investing?

  • Accumulate money by regularly allocating a portion of your earnings for investing—PAY YOURSELF FIRST!

  • Take advantage of automatic investment and dividend reinvestment programs.

  • While saving, learn as much as possible about investments and "play" trade.


Coming up with the capital

Coming Up With the Capital

  • Determine your financial objective.

  • How much money will it take?

  • Do you have a lump sum to invest now, or will you systematically save toward your goal?

  • Your investment plan provides direction in helping you attain your goal!


What are your investment objectives

What Are Your Investment Objectives?

  • Supplement current income— appropriate for retired persons.

  • Save for major expenditures— such as college education, down payment on a home, or starting a business.


Chapter 11 investment planning

  • Save for retirement—to live comfortably in your "golden years."

  • Shelter income from taxes—to preserve more of your earnings.


Different ways to invest

Different Ways to Invest

1. Common Stock

2. Bonds

3. Preferreds and Convertibles

4. Mutual Funds

5. Real Estate

6. Commodities, Financial Futures, and Options


Chapter 11 investment planning

1. Common Stock

  • Represents a share of ownership in a company.

  • Greater potential returns, but at a higher level of risk.

    2. Bonds

  • Represent the debt of a company.

  • Provide current income.

  • Lower level of risk than stocks, but with lower expected returns as well.

  • Bond valuations inversely related to changes in prevailing interest rates.


Chapter 11 investment planning

3. Preferred Stock

  • An equity security that behaves like debt—provides current income and possible price appreciation.

  • However, company has no legal obligation to declare dividends.

    Convertible Bonds

  • Usually offer lower interest rates than regular bonds, but —

  • Can be converted into common stock.

  • Risk that common stock will not do well and investor simply gets lower return.


Chapter 11 investment planning

4. Mutual Funds

  • Collection of professionally managed securities offered by an investment company.

  • Returns and level of risk depend on characteristics of underlying portfolio.

    5. Real Estate

  • Can invest directly or through buying shares of a REIT.

  • Estimating risk and expected return can be difficult. Investors must be aware of economic cycles.


Chapter 11 investment planning

6. Commodities and Futures

  • Originally designed for agricultural producers to manage price risks; participants are now mostly speculators.

  • Traders enter contracts to buy or sell a certain physical or financial item at a future date.

    Options

  • Contract which conveys the right, but not the obligation, to buy (call) or sell (put) the underlying asset at a specific price on or before the expiration date.

  • Learn more at www.cme.com.


Securities markets

Securities Markets

  • Place (not always physical) where financial instruments are traded.

  • Capital market—where long-term securities (those with maturities greater than 1 year) are traded.

  • Money market—where low-risk, short-term securities (those with maturities less than 1 year) are traded.


Chapter 11 investment planning

  • Primary market—for new issues which are available for the very first time. The issuing company gets the proceeds.

  • Secondary market—for trading previously issued securities. Trading is done between investors; issuing company gets nothing.


Chapter 11 investment planning

  • Organized securities exchanges

  • Secondary markets for trading listed securities.

  • Physical marketplaces, such as the NYSE, AMEX, and regional exchanges.

  • Utilize brokers to facilitate trading between buyers and sellers.

  • Handle transactions of larger, well-known companies' securities.


Chapter 11 investment planning

  • Over-the-counter market

  • Secondary market where securities are traded via a telecommunications network.

  • Investors trade directly with securities dealers.

  • Larger, actively traded issues make up NASDAQ, while smaller, thinly traded issues are listed on "pink sheets."


Chapter 11 investment planning

  • Foreign securities markets

  • Organized securities exchanges exist in more than 100 countries worldwide.

  • Found in major industrialized nations such as Japan, Great Britain, Germany and Canada.

  • Also found in developing markets around the globe.


Chapter 11 investment planning

Regulating the Securities Markets

  • Federal and state laws regulate the sale of securities.

  • Purpose is to provide for adequate and accurate disclosure of financial information.

  • Securities and Exchange Commission (SEC) is the agency in charge of administering federal securities laws.


Chapter 11 investment planning

Market Trends:

  • Bull market—generally rising securities prices for an extended period of time.

    • Reflects investor optimism.

    • Associated with favorable economy.

  • Bear market—generally falling securities prices for an extended period of time.

    • Reflects investor pessimism.

    • Associated with economic downturn.


Making transactions in the securities markets

Making TransactionsIn the Securities Markets

  • Stockbrokers purchase and sell securities for investors.

  • Select from full-service, discount, or online broker, depending on your needs.

  • Consider brokerage fees when making securities transactions.


Chapter 11 investment planning

Investor Protection:

  • Securities Investor Protection Corp. protects customer accounts against financial failure of brokerage firm.

  • SIPC insures accounts up to $500,000 (brokerage firms often purchase even greater amounts of coverage).

  • Guarantees securities or cash held by broker will be replaced (does not guarantee dollar value of securities!).


Executing trades

Executing Trades:

  • Investor must first establish account with broker.

  • Trades can be executed by phone, at the brokerage firm, or online.

  • Odd lots (less than 100 shares) may incur extra fee. Round lots (multiples of 100) do not.

  • Market orders generally take less than a minute!


Chapter 11 investment planning

Investor places

the order with

the broker.


Chapter 11 investment planning

Investor places

the order with

the broker.

Broker transmits

order to the

market via tele-

communications

equipment.


Chapter 11 investment planning

Investor places

the order with

the broker.

Broker transmits

order to the

market via tele-

communications

equipment.

Order is

filled at the

market by

other buyers

and sellers.


Chapter 11 investment planning

Investor places

the order with

the broker.

Broker transmits

order to the

market via tele-

communications

equipment.

Order is

filled at the

market by

other buyers

and sellers.

Execution of

the order is

confirmed

to the broker.


Chapter 11 investment planning

Investor places

the order with

the broker.

Broker transmits

order to the

market via tele-

communications

equipment.

Broker confirms order fulfillment. Investor has 3 days to settle account.

Order is

filled at the

market by

other buyers

and sellers.

Execution of

the order is

confirmed

to the broker.


Types of orders

Types of Orders:

  • Market order—trade now at best available price.

  • Limit order—trade when a specified price or better is reached; investor is seeking opportunity.

  • Stop-loss order—sell if price drops to certain price; investor is seeking to limit losses.


Margin trading

Margin Trading:

  • Allows investor to purchase securities on credit by borrowing part of purchase price from broker.

Increases gains when returns are positive.

Increases losses when returns are negative.


Example of margin trade with profit see exhibit 11 3 in text

Example of Margin Trade with Profit:(See Exhibit 11.3 in text)

Transaction w/out w/margin

  • Initial investment (100 shares @ $50)

    Amount invested$5,000$2,500

    Amount borrowed$ 0$2,500

    Total purchase$5,000$5,000

  • Price INCREASES(100 shares @ $70)

    Gross proceeds$7,000$7,000

    Less interest (9%)$ 0$ 225

    Net proceeds$7,000$6,775

    Net profit$2,000$1,775


Example of margin trade with loss

Example of Margin Trade with Loss:

Transaction w/out w/margin

  • Initial investment (100 shares @ $50)

    Amount invested$5,000$2,500

    Amount borrowed$ 0$2,500

    Total purchase$5,000$5,000

  • Price DECREASES(100 shares @ $30)

    Gross proceeds$3,000$3,000

    Less interest (9%)$ 0$ 225

    Net proceeds$3,000$2,775

    Net loss ($2,000)($2,225)


Margin trade returns

Margin Trade Returns:

Return = Profit (loss)  Amount Invested

w/outw/margin

  • Price Increase$2,000$1,775$5,000$2,500

    Return 40% 71%

  • Price Decrease ($2,000) ($2,225)$5,000$2,500

    Return (40%) (89%)


Short selling

Short Selling:

  • Allows investor to sell securities borrowed from the broker or broker's accounts.

  • Before period is over, investor must replace the borrowed securities.

Investor profits if security’s price has declined.

Investor loses if security’s price has increased.


Chapter 11 investment planning

Example of Short Sale:

(See p. 459 in text)

  • Investor wishes to short 100 shares of ABW now selling at $52.50/share.

  • Broker sells borrowed shares for investor:

    100 x $52.50 = $5,250 proceeds


Chapter 11 investment planning

Scenario A:

Price of security drops to $40/share & investor repurchases:

  • Costs 100 x $40 = $4000 to replace shares.

  • Investor receives:

    $5250 – $4000 = $1250 profit!!


Chapter 11 investment planning

Scenario B:

Price of security rises to $60/share & investor repurchases:

  • Costs 100 x $60 = $6000 to replace shares.

  • Investor receives:

    $5250 – $6000 = ($750) loss!!


Chapter 11 investment planning

To profit from short selling:

Not only must the price of the security fall, but it must do so within the given time period.

Double jeopardy!


Becoming an informed investor

Becoming an Informed Investor

  • Types of Information to Follow:

    • Economic developments and current events

    • Alternative investment vehicles

    • Current interest rates and price quotations

    • Personal investment strategies


Available investment information

Annual Reports

Financial Press

(WSJ and financial magazines)

Brokerage Reports

Advisory Services

Investment Advisors

On-Line Sources

Available Investment Information :


Online investing

Online services

Educational material

Investment tools

Investment planning

Research and screening

Portfolio tracking

Day trading

Online Investing


Using the internet wisely

Using the Internet Wisely:

  • Do your own research.

  • Realize that frequent trades mean higher transaction costs.

  • Don’t believe everything you read.

  • Avoid online scams!


Questions to ask

Questions to Ask:

  • Is the stock registered?

  • Who is making the sales pitch?

  • Is it too good to be true?

Refer to SEC Web site:

www.sec.gov

(Search on “investment scams.”)


Managing your investment holdings

Managing Your Investment Holdings

  • Build a diversified portfolio of securities based upon your goals and personal situation.

  • Allocate your assets according to your objectives.

  • Track your investments and rebalance your portfolio as your needs change.


Chapter 11 investment planning

THE END!


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