INVESTMENT
Investment – current commitment of resources for a period
of time in the expectation of receiving future resources
greater than that of the investment. An investment is simply
any asset into which funds can be placed with the expectation
that it will generate positive income and/ or increase its value,
and a collection of different investments is called a portfolio.
Investing – purchase of assets with the goal of increasing
future income.
 Focuses on wealth accumulation.
 Appropriate for long-term goals.
Savings is for short-term goals of emergencies. Investing is for
long-term goals.
Rate of Return
 The higher the return, the higher the risk
 Return is money that you earn from your investment
 The Rate of Return is the total return on an investment
expressed as a percentage of the amount of money
invested.
Risk
 The uncertainty regarding the outcome of a situation
or event.
Investment Risk
 The possibility that an investment will fail to pay the
expected return or fail to pay a return at all.
Inflation
 The rise in the general level of prices.
Inflation Risk
 the danger that money won’t be worth as much in the
future as it is today.
 Inflation risk should not be a concept of savings.
Investment Philosophy
 Each individual has a tolerance level for the amount of
risk they are willing to take on.
 An individual’s general approach to investment risk.
 Generally divided into three categories: conservative,
moderate and aggressive.
Types of Investment Tools
1. Stocks (Equities) – a share of ownership in a company.
Stockholder or shareholder = owner of stocks
Return on Stocks
a. Dividends – the share of profits distributed on cash to
stockholders.
b. Market Price – the current price that a buyer is willing
to pay for stock.
 If stocks are sold for a market price higher than
what was paid. Stockholder will receive a return.
 If stock is sold for a market price lower than what
was paid, stockholder will lose money.
Stock Markets – stocks are bought and sold on stock markets
by people called brokers.
2. Bonds (Loans)
 Bonds are loans
 A company or government will borrow money from
investors by issuing bonds.
 The company or government pays annual interest to
the investor until the maturity date is reached.
- The maturity date is the specified time in the
future when the principal is repaid to the
bondholder.
 Bonds issued by a company are called Corporate
Bonds.
 Bond issued by a government are called Treasury
Bonds (Federal Government), Municipal Bonds
STOCKS vs. BONDS
 Bonds are debt.
 Debt means the bondholder has lent money to the
company that the company will repay with interest.
 Companies must repay debt before they pay
anything to stockholders
 Bonds are less risky than stocks.
PORTFOLIO DIVERSIFICATION
Portifolio Diversification - reduces risk by
spearding investment money among
different investment tools
Financial Pyramid
Creates a collection of investments that
will increase return while reducing risk
Specu
Increasing potential for
higher returns
Increasing Risk
lation
Wealth
Accumulation Investment
Financial Security - Saving
Tools
The main goal of diversification is to
reduce risk.
3. Mutual Fund
 Mutual Fund – invests money in a diversified
portfolio of stocks and bonds
Reduces
investment risk
by helping
people diversify
their portfolio
Saves investors
time
Fees can be high
How do mutual funds work?
 Individuals buy shares
 The money is used to purchase stocks, bonds, and
other investment
 Profits returned to shareholders monthly, quarterly,
or semi-annually in the form of dividends.
Pool their
money
with
2. Fund
1.
Investors
Manager
Passed
back to
Invest in
4.
Returns
3.
Securities
Generate
s
Market Indexes
 A market index is the value of a group of stocks or
other investments.
 Market indexes are intended to represent an entire
stock market and thus track the market’s changes
over time.
4. Index Fund
 A mutual fund that was designed to reduce fees by
investing in the stocks and bonds that make up an
index.
 Offers high diversification with low fees
5. Real Estate
 Includes any residential or commercial property or
land as well as the rights accompanying that land.
 A family home is not considered an investment
asset.
 Can be risky and more consuming but has potential
for large returns.
6. Speculative Investments
 Have the potential for significant fluctuations in
return over a short period of time. Example: future
options, commercial paper, collectibles
 Recommended for people with an aggressive
investment philosophy and a high level of financial
security.
Buying and Selling Investments
 Investors must utilize a brokerage firm that acts as
buying and selling agent for the investor (except for
when buying real estate and certain speculative
investments).
 The traditional broker, or full-service broker, in
addition to executing clients’ transactions, offers
investors a full array of brokerage services:
providing investment advice and information,
holding securities in street name, offering online
brokerage services, and extending margin loans.
Investors who wish merely to make transactions and
are not interested in taking advantage of other
services should consider either a premium or basic
discount broker. Premium discount brokers focus
primarily on making transactions for customers.
They charge low commissions and provide limited
free research information and investment advice.
 Basic discount brokers, also called online brokers or
electronic brokers, are typically deep-discount
brokers through whom investors can execute trades
electronically online via a commercial service, on
the Internet, or by phone.
Investing Versus Speculating
 Investment – an asset that generates a return
 Income return – usually in the form of dividends
interest payments
 Speculation – an asset whose value depends solely
on supply and demand.
 Derivative securities- value derived from value other
assets
 Option – right of owner to buy or sell an asset
FORMULA:
(𝐸𝑛𝑑𝑖𝑛𝑔 𝑉𝑎𝑙𝑢𝑒 − 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑉𝑎𝑙𝑢𝑒)
+𝐼𝑛𝑐𝑜𝑚𝑒 𝑅𝑒𝑡𝑢𝑟𝑛
𝑹𝑶𝑹 =
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑉𝑎𝑙𝑢𝑒
Profit = Initial Price – (Ending Price – Income
Return) – Total commissions paid
𝑹𝒆𝒂𝒍 𝑹𝑶𝑹 =
1 + 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑅𝑎𝑡𝑒
−1
1 + 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑹𝑶𝑹 =
(𝐸𝑉 − 𝐵𝑉) + 𝐼𝑅 1
𝑥
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑉𝑎𝑙𝑢𝑒 𝑁