Chapter 9

1. Chapter 9 Investing for your Future

2. Investment Essentials Personal investing is defined as using personal savings over time for financial return (interest) Investing savings is a proven way to improve your financial position over time

3. Reasons for Investing Investing is vital for present & future needs Retirement income – Social Security problems & quality of life at retirement Profit (increasing wealth) – investments grow faster over time than savings & will help supplement earned income Beat the effects of inflation – returns greater than the inflation rate help maintain a quality standard of living Minimize tax burdens – some investments offer tax relief Emergencies / Fun & Challenging?

4. Stages of Investing Wise investing begins with having a good budgeting strategy Goals and strategies will vary based on personal preferences, lifestyles, age, income level, etc.

5. Steps for Investing Savings account “put and take account” Short-term needs / emergency fund / unexpected needs 3-6 months net pay Beginning Investments Conservative (low risk) - Diversification Tax advantages Systematic Investments Long-range financial security / retirement (401K) / growth Strategic Investments Maximum return / medium-term / diversify portfolio Speculative Investment High risk = high potential return or loss Short-term profit potential Uncertain future income – stocks (new companies)

6. Risk & Return The higher risk you are willing to take, the higher your potential returns or losses Individual investors have their own level of risk tolerance (risk takers vs. risk averse) Risks are minimized through diversification (not putting all of your eggs in one basket) – choose a variety of investments

7. Risk Types Short-term & Long-term Risk Long-term is riskier Interest Rate Risk (Inflation risk) Locked-in at rate below inflation Political Risk Government actions impacting business conditions Market Risk National or world events – Federal Reserve changing interest rates – sudden business declines Company Risk / Industry Risk Events impacting a company or industry

8. Investment Strategies It is important to develop some investment strategy regardless of whether you have a large or small amount of money to invest Long-term investments will usually grow over time

9. Criteria for Choosing Investments Good investments have some or all of these features Safety – minimal risk of loss Liquidity – easily withdraw all or part of your money at any time without penalty or inconvenience High Dividends or Interest - higher rate of return than savings Growth exceeds the rate of inflation Reasonable purchase price – inexpensive to buy Tax Benefits – some may be “Tax-exempt” or “Tax-deferred”

10. Exploring Investment OptionsSources of Investment Information Information regarding investment options are plentiful Newspapers Financial Magazines & Websites Investor Services & Newsletters Full-Service Brokers Discount Brokers Financial Advisors Annual Reports

11. Exploring Investment OptionsNewspapers Financial pages contain information regarding financial markets (NYSE / NASDQ / AMEX) Provide investment information to help analyze Wall Street Journal / Baron’s Dow Jones Industrial Average / S&P 500

12. Exploring Investment OptionsFinancial Magazines & Websites Most interpret financial data and provide opinions and recommendations Money, Fortune, Business Week, etc

13. Exploring Investment OptionsInvestor Services & Newsletters Provide extensive financial data to clients Moody’s Investor Services, Standard & Poor’s Reports, and Value Line

14. Exploring Investment OptionsFull-Service Brokers Brokers provide analysis & opinions based on their judgments & their firm’s recommendations Can not count on advice all the time

15. Exploring Investment OptionsDiscount Brokers Will complete your transactions at a reduced rate but will not provide any investment advice (Charles Schwab / Ameritrade / E*Trade)

16. Exploring Investment OptionsFinancial Advisors Trained professionals who give intelligent investment advice (CERTIFIED FINANCIAL PLANNERS)

17. Exploring Investment OptionsAnnual Reports Specific company provided by the company designed to provide financial information to help investors analyze a firm as a possible investment alternative All public companies must provide financial information to the Securities Exchange Commission (SEC) to publish Stockholders also will receive this information

18. Investment Options Low Risk / Low-to-Medium Return Corporate & Municipal Bonds Debt obligations of corporations or government Pays fixed interest at intervals (6 months) Bondholder receives interest on the bond when it MATURES U.S. Government Savings Bonds Purchased through local banks - lend money to the U.S. Government – originally known as “WAR BONDS” to help finance WWII Treasury Securities T-Bills – Available in denominations of $10,000 – then increments of $5000 (3 month, 6 month, or 1 year) T-Notes – Issued for $1000 or $5000 – maturity for 2-10 years – will pay a higher interest rate than T-Bills T-Bonds –Minimum units of $1000 – maturity of 10-30 years – slightly high interest rate than T-Notes

19. Investment Options Medium Risk / Medium Return Mutual Funds Pool of money from multiple investors managed by a professional investment specialist Multiple company’s stock fund insures diversification Annuities A contract sold by an insurance company - a series of regular payments (monthly) after retirement Supplements retirement income (opp. Life insurance) Retirement Plans 401k / 403B – Employee sponsored IRA – Tax deductible savings plan Keogh Plan – Similar to a IRA for self-employed Real Estate Large non-liquid investment – has been an extremely solid investment over time & has historically beat inflation Real Estate Investment Trusts (REITs) allow you to invest in real estate without owning it – riskier than owning

20. Investment Options High Risk / High Return Stocks Stock represents ownership in a “PUBLIC CORP” Stock Certificate is proof of ownership for the stockholder Futures Contracts to buy and sell commodities or stocks for a certain price on a specific future date – betting on increased price Options The right but not the obligation to buy or sell commodities or stock for specified price within a specified time period Risky & confusing – experienced investors (speculators) Penny Stocks Low-priced stocks – new (small) companies Usually sell for under $1 – very risky Collectables

21. Wise Investment Strategies Maximize returns & avoid mistakes leading to financial damage • Set clear financial goals • Specific & measurable • Avoid acting on impulse (go slowly) • Start investing early • Time in the market vs. Timing the market • Keep accurate records • Seek sound investment advice • Trained professional (TRUST) • Keep Investment knowledge current • Current events & economic changes • Know your limits • Understand your risk tolerance & what you can afford

22. Homework Vocabulary pg.323 (1-18) – Due Wed. Try These pg. 301 (1-9) – Due Wed.

23. Investing

24. Essential Questions How can you be certain that your portfolio is DIVERSIFIED? How are my investments protected? Where are the best places to find investment information?

25. Investing in Corporations - Bonds Rather than sharing ownership you are lending money to a corporation with a fixed rate of return at maturity Bonds are less risky - less potential return HIGH YIELD BONDS have more risk and more potential return BOND RATING SERVICES

26. Investing in Corporations - Stocks • Individuals who buy stock are owners of a corporation (STOCKHOLDERS) • Companies sell stock to investors to raise $$$$ to grow

27. Stock Exchanges & Index New York Stock Exchange (NYSE) American Stock Exchange (AMEX) National Association of Securities Dealers Automated Quotations (NASDAQ) The Dow-Jones Index (THE DOW) Standard & Poor 500 (S & P 500)

28. Types of Stock Common Stock – voting rights on major company issues but more risk Preferred Stock – guaranteed dividends if company is paying them (less risky – no voting) Blue Chip Stocks – companies that have a long history of solid performance Growth Stocks – companies with less history – generally have more risk & more potential gain or loss

29. How do I make (or lose) Money Investing in Stocks? Capital Gain / Loss: I buy at $20 per share & sell at $30 per share I buy at $20 per share & sell at $10 per share Dividends: I receive a portion of company profits

30. Dollar Cost Averaging Investment strategy where you purchase additional shares of stock when the price decreases SEE EXAMPLE

31. Mutual Funds A simple way to insure diversification Money is “pooled” with other investors & put into a fund Managed by investment professionals who study investment options for the fund Delays capital gains taxes

32. Mutual Funds – Costs • Annual maintenance fees (.2 or 3%+) • Load – is a sales fee paid for investing in a mutual fund. • Front-end load when you buy shares • Back-end load when you sell them • No-Load Funds – no sales fee since there is no sales person involved

33. Mutual Funds – Objectives • All mutual funds have stated objectives revolving around RISK & RETURN • You should select a fund consistent with your risk tolerance & goals • RISK / RETURN PYRAMID • Top = Growth Funds • Bottom = Income Stocks (pay regular dividend)

34. Mutual Funds – Other Objectives Global Funds - buy stock in businesses located in many nations Index Funds - invest in all the stocks that an index is based on Social Responsibility Funds - businesses that have good records in giving back to the community Environmental Funds - businesses that have good records in protecting the environment

35. Protect yourself Invest through large, well-established brokerage firms Ask for information about any company that contacts you Copy of investment offers in writing Do not have to invest NOW Salespeople that say they know something others do not is dishonest Demands for immediate payment are often a sign the deal is not honest.

36. Investment Regulation Securities and Exchange Commissions (SEC) – A federal government agency responsible for enforcing the laws concerning the trading of stocks and bonds. Insider trading – is trading stocks based on information that is not available to the general public

37. Homework Page 305 1-5 Page 315 1-8