Chapter 11
Investing for Your Future
Investing Fundamentals
Exploring Investment Options
Lesson 11.1
Investing Fundamentals
GOALS
Describe the stages of investing and the
relationship between risk and potential
return.
Explain effective investment strategies,
criteria for choosing an investment, and
steps for investing wisely.
Stages of Investing
Stage 1. Put-and-take account
First get a job
Use your money to pay bills and start an “emergency”
fund
Put two paychecks worth into savings to use
when car breaks down, medical bills, other
larger expenses.
Stage 2. Beginning investing
Start conservatively and low risk in your 20s
Maybe buy some mutual funds or stocks for
“fun”
Stages of Investing
Stage 3. Systematic investing
Set aside a specific amount of money to invest
each month
Should really start in your 20s and continue into your
30s
Set up an IRA (Individual Retirement Account),
contribute to employer-sponsored 401(k)’s and
403(b)’s
Roth IRA
Invest post-tax dollars
Earnings grow tax free
When you start drawing money at retirement, you are not
taxed
GET A ROTH IRA AND CONTRIBUTE THE MAXIMUM
ALLOWED EACH YEAR!
Stages of Investing
Stage 4. Strategic investing
In your 40s and 50s you need to more actively
manage your investments
Move some riskier investments to more conservative
as you get closer to retirement
Portfolio – your collection of investments
Always want to diversify (or mix up) what you are
investing in – reduces risk
Stage 5. Speculative investing
Final stage – make or break
You have either made or lost a lot of money
Don’t make a risky investment to try to make
up for previous losses!
Reasons for Investing
Investing helps beat inflation.
Investing increases wealth.
Investing is fun and challenging.
Risk and Return
Diversification
Don’t invest in only one company or one
sector of economy (banking, transportation,
retail, etc.)
Types of risk
Interest-rate risk
Occurs during times of high inflation
Inflation makes your fixed-rate investments worth
less
Fixed-rate bond at 3% and inflation rate is 6% not so good
Fixed-rate bond at 6% and inflation rate is 3% better
Risk and Return
Types of risk (continued)
Political risk
Governmental policies can affect business decisions
Increased taxes on businesses or environmental
restrictions can make some investments less attractive
Market risk
Sudden world events affect entire market
The Great Depression, September 11th
Company or industry risk
Certain businesses or industries are affected by
national trends
Adkins diet was good for the cattle industry – the price of
beef increased!
Criteria for Choosing
an Investment
Safety
Little chance of losing initial investment
Low risk bonds, savings accounts, CDs
High liquidity
Accessing your money quickly
Savings account, money market fund, CDs
Low liquidity means that it takes a little
longer to cash out of your investment
Real estate, stocks, mutual funds, collectibles
Criteria for Choosing
an Investment
High dividends or interest
Dividends are distributed to shareholders based
on company profits
If dividend is $0.25 per share and you own 100
shares, you would receive a dividend of $25.00
Look at previous financial records (annual
report) to see dividend history
Growth in value that exceeds the inflation
rate
Inflation has increased 58% since 1982
Criteria for Choosing
an Investment
Reasonable purchase price
Stock might be undervalued
Good buying opportunity if you think that it will
increase in price
Remember there’s no guarantee!
Tax benefits
You will have to pay taxes on investment earnings
– unless you invest in tax-exempt mutual funds
or bonds
Tax-exempt bonds have a lower interest rate, which is
offset by the tax benefits
Usually only high-net worth individuals purchase tax-exempt
investments
Wise Investment
Practices
Define your financial goals.
Saving for first home, retirement, college
Go slowly.
Research investments – don’t buy on impulse
Follow through.
Start saving now - take advantage of the
benefits of compound interest!
Best bet is to have money taken directly from
checking account each month
Wise Investment
Practices
Keep good records.
Hold on to monthly/quarterly statements
For tax purposes you will need to have
record of the purchase price of investments
This is called the cost basis
Seek good investment advice.
If need be, hire a certified financial planner
Listen to Money Talk on the radio
http://www.bobbrinker.com/
Wise Investment
Practices
Keep investment knowledge current.
Again, listen to Money Talk
Good investments now, may not be good
investments in the future
Watch world events and pay attention to
economic changes
Know your limits.
Know your risk tolerance and what you can
afford
Be weary of “get rich quick” investments that
sound too good to be true
Lesson 11.2
Exploring
Investment Options
GOALS
List and describe sources of
financial information useful for
making investment decisions.
List and define basic investment
options, rated by risk.
Sources of Financial
Information
Newspapers have financial pages that
keep track of the financial market
Papers that are specific for the financial
market
Wall Street Journal, Barron’s, The Bond Buyer
Investor’s services provide extensive
data to clients
Moody’s Investors Services and Standard
& Poors
Sources of Financial
Information
Financial Magazines
Fortune, Business Week
Full-service broker
Provide clients with investment advice based on
their specific needs/risk tolerance
Raymond James, Merrill Lynch, Smith Barney
Discount brokers
Buy and sell securities for customers at a
reduced cost
Little or no advice
Ameritrade, TD Waterhouse
Sources of Financial
Information
Financial Advisor
Trained professional investment planners
Look at your goals, age, net worth,
occupation, etc to determine what
investments you should make
Annual Reports
Summary of a company’s financial results
Securities and Exchange Commission
(SEC) requires all corporations to provide
to stockholders each year
Sources of Financial
Information
Trade yourself online (E-trade)
You do your own research
Costs about $5 a trade, but you are
limited to only 10 trades a year
More than 10 trades and its more expensive
Costs to buy and sell (trade) depend
on several factors
Commission, flat rate or per trade cost
Investment Options
Low risk: low-to-medium return
Medium risk: medium return
High risk: high return
Low Risk:
Low-to-Medium Return
Corporate and municipal bonds
U.S. government savings bonds
Treasury securities
Treasury bills – mature in one year or less
Also referred to as t-bills
Treasury notes – mature in 2 to 10 years
Treasury bonds – mature from 10 to 30
years
Medium Risk:
Medium Return
Mutual funds
Annuities
Contract sold by an insurance company that
provides the investor with a series of regular
payments
These have ENOURMOUS fees!
Self-managed retirement accounts
The risk of the IRA depends on the particular
investments
Real estate
High Risk:
High Return
Stocks
Owner is called the stockholder
When the company makes a profit this is paid to
stockholders in the form of dividends
Futures
Buy and sell commodities or stocks for a date in the future
You can also buy just commodities
When you sell you are betting the price will go down, when
you buy you are betting the price will go up
http://www.bloomberg.com/markets/commodities/cfutures
.html
Options
Puts and calls
The right (not obligation) to buy or sell a commodity or
stock for a specific price for a set amount of time
High Risk:
High Return
Penny stocks
Extremely low priced stocks of small
companies with or without a proven track
record
Usually costs less than a dollar
Many fail and become worthless
Collectibles
You need to make sure that there is a
buyer for what you are collecting
Annual Reports
Published by “public” companies for
shareholders to view
Legally required and shows all financial records
Important parts to look at
Income statement
Are sales (revenue) increasing?
Do they have low operating expenses?
Building, payroll, maintenance, etc.
Do they have a lot of interest expense/income?
What’s their net income (revenue – expenses)?
One of most important items for a stockholder!
Stock
Common Stock
Own share of company and have a voting right
Only receive dividends if company makes profit
Preferred Stock
Own share of company but have no voting rights
Pay dividend monthly or yearly regardless of the
profitability of company
Shares Outstanding
Number of shares available for trading
Companies can change this amount
Effects supply and demand which in turns affects the
price of the stock