Chapter 2: Saving and Investing
Investing: Risking money to make money
Stocks
 Stock: ownership in a company (Corporation)
 Shares (I have shares of stock in Ford)
 Stockholder: Owner of Stock
 Corporation issues certificates showing ownership
 Why do companies sell stock?
 Obtain funds for expansion; more profit
 IOP = Initial Price Offering
 How does Stockholder make money:
 Dividends: the money return a stockholder receives
 Usually paid out biannually or quarterly
 Sell Stock when its price rises
Types of Stocks
1. Common Stock
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Represents basic ownership in a corporation
Allows share holder to vote in affairs and for board of directors.
Earn money by rising value in the stock
Highest risk and highest reward opportunities
2. Preferred Stock
No voting rights
Receive a share of profits from common stockholders
(dividend)
- If company goes bankrupt shareholders get a part of assets.
Types of Stock
3.
4.
5.
Blue-Chip Stocks
- stocks of the biggest companies in the country (microsoft)
- Well established – safest to invest in.
Growth Stocks
- Companies with profits increasing quickly.
- Tend to put money into growing company not into dividends.
Income Stocks
- Stable companies that pay higher than average dividends
- Tend to be large established companies (utility companies)
Types of Stocks
Cyclical Stocks
- Stocks that move up and down with the business cycle.
- These tend to be companies that sell discretionary goods.
- examples- automobiles, toys, boats
7. Defensive Stocks
- Stocks unaffected by changes in business cycle.
- Examples: food, medicine
8. Penny Stocks
- Low-priced, highly speculative stocks, very risky
- companies with erratic history of earnings and losses
6.
Bonds
 Bond: Certificate Issued in Exchange for Borrowed money
 No ownership
 Pays a yearly interest rate for a specific period of time
 At maturity, bond is paid back in full
 Can be issued by Government or Company
Types of Bonds
 Municipal (Muni’s) Sold by Local Government
 Benefit: Tax Exempt & Very Safe
 On both Income Taxes and Interest taxes
 Good for the Wealthy
 Savings Bonds: Issued By the United States of America
 Way the government borrows money
 50-10,000 Dollars
 Benefit: Guaranteed by US Government
 Treasury Bills: Issue by the US treasury Department
 Maturity: 3 mos.-1 yr.
 Minimum Investment: 10,000
 Treasury Notes:
 Maturity Dates: 2-10 years
 Treasury Bonds:
 Maturity: 10 yrs or greater
Stocks and Bonds Market
 NYSE: New York Stock Exchange
 AMEX: American Stock Exchange
 Two Major Stock Exchanging Entities in the US
 A corporation selling stock must prove:
 It is in good financial condition
 It takes part in legal business
 Broker: person who acts as a go-between between stock
buyers and sellers
Over the Counter Market
 NASDAQ
 Not traded in a specific place
 You see in the paper:
 Use a broker
 E-Trade
 Bonds and stocks are sold OTC
Dow Jones Industrial Average
 Stock market indicator
 Shows movement in the stock market by average
 Uses 30 stable companies and a complex formula.
 Companies come from many different industries
Capital Gains and Losses
 Capital Gains: Money made in the Market
 Ex: Spend $20 on one share sell for $30, Ten dollar capital gains
 You are taxed on your capital gains
 Capital Loss: The Opposite
Mutual Funds
 Investment Company pools money from many
individuals to invest
 Benefit: Small investors get a piece of a big
investment
 Risk of Loosing money is decreased (professionals
make the decisions)
 Diversification: Investment in many areas
 Losses in one company are made up by gains in
another!
Regulation of the Market
 Security and Exchange Commission
 Requires Companies to provide accurate business information
to buyers
 Inside Information: Information on the market that no
one else has
 Illegal to possess and profit from
Special Savings Plans and Goals
A. Retirement Plans
1.
1.
Pension Plans: retirement income
- Social Security: Gov’t plan for the retired
- How does it work?
Individual Pension Plans (private plans)
2.
a. Keogh Plan: self-employed people can set up their own retirement
plans.
b. Individual Retirement Account (IRA):
c. 401 K: employee/private employer both contribute to plan
d. 403 B: government employee contributes
Benefit of these retirement plans
1. Tax deferred
Special Savings Plans and Goals
 B. Real Estate as an Investment
 Value has historically increased
 Undeveloped land is a higher risk
 Usually takes time to turn into profit
 Usually takes a higher investment
Special Savings Plans and Goals
C. How Much to invest
1. How much are your fixed expenses?
2. What are your reasons for saving?
3. How much interest will you earn?
4. How much income will you earn in the future?
5. How much of a risk should I take?
- diversify your portfolio
- individual values play a part