#11
Investment
Planning
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The Objectives & Rewards
Of Investing
Investing
• usually long-term
• expect future value
and return to
increase over time
Speculating
• usually short-term
• future value and
return highly
uncertain
Adequate insurance coverage and
cash/savings are investment prerequisites
How Do I Get Started?
PAY YOURSELF FIRST!
• Regularly allocate a portion of earnings for
investing
• Take advantage of automatic investment
and dividend reinvestment programs
• Learn about investments and "play" trading
• Determine financial objectives
What Are Your
Investment Objectives?
• Current Income
– appropriate for
retired persons
• Retirement
– live comfortably
in "golden years"
• Major Expenditures
– college education,
down payment on
a home, or starting
a business
• Shelter from Taxes
– preserve more of
your earnings
Coming Up With the Capital
• How much money will it take?
• Do you have a lump sum to
invest now, or will you
systematically save toward your
goal?
Investment plan provides
direction to help attain goal
Different Ways to Invest
1. Common Stock
2. Bonds
3. Preferreds and
Convertibles
4. Mutual Funds and
Exchange Traded
Funds
5. Real Estate
Different Ways to Invest
1. Common Stock
• Represents a share of ownership in a
corporation
• Greater potential returns
with a higher level of risk
Different Ways to Invest
2. Bonds
• Represent debt – IOU’s of the issuer
• Provide interest income
• Bond values inversely related to
changes in interest rates
Different Ways to Invest
3. Preferred Stock
• Equity security that
behaves like debt
• Fixed dividend paid
before dividend to
common
stockholders
Convertible Bonds
• Special type of fixed
income security
• Allows conversion
into common stock
• Provides income and
possible price
appreciation
Different Ways to Invest
4. Mutual Funds
• Professionally
managed portfolio
by an investment
company
• Returns and
risk depend on
portfolio
Exchange
Traded Funds
• Track a basket
or index of
securities
Different Ways to Invest
5. Real Estate
• Invest directly or through shares in a REIT
• Difficult to estimate risk and return
• Investors must be aware of economic
cycles
Securities Markets
“Arenas” where financial instruments trade
• Capital Market - long-term securities
• maturities >1 year
• Money Market - low-risk, short-term
securities
• maturities l< 1 year
Securities Markets
Primary market
new issues available
for first time
• Investment bank
underwrites
• Issuing company
gets proceeds
• Prospectus
Secondary market
trading previously
issued securities
• Securities
exchanges
• NASDAQ
• OTC Market
Broker and Dealer Markets
Broker Market
• buyer and seller
come together,
direct trade takes
place between them
• Party A sells
securities directly
to Party B
Dealer Market
• buyer and seller
never meet
• buy/sell orders are
executed separately
through securities
dealers acting as
market makers
Broker and Dealer Markets
Dealer Markets
Bid Price
Ask Price
• price at which
investor can sell
a security
• price at which
investor can
buy a security
Foreign Securities Markets
• Organized securities
exchanges exist in
over 100 countries
• Found in major
industrialized nations
and in emerging
economies around
the globe
Manila
Tokyo
Regulating the Securities Markets
• Federal and state laws regulate
securities sales
• Provides for adequate and accurate
disclosure of financial information
• Securities and Exchange Commission
(SEC) administers federal securities
laws
Regulating the Securities Markets
• Securities Act of 1933 – ensure full disclosure
• Securities Exchange Act of 1934 – created SEC
• Investment Company Act of 1940 – protect mutual
fund shares
• Sarbanes-Oxley Act of 2002 – eliminate corporate
fraud
• Maloney Act of 1938 - created NASD
• Securities Investor Protection Act of 1970 - SIPC
Market Trends
Bull Market
Bear Market
• Rising securities
prices for extended
time period
• Falling securities
prices for extended
time period
– Investor optimism
– Favorable
economy
– Investor pessimism
– Economic downturn
Making Transactions in the
Securities Markets
• Stockbrokers buy and sell securities
for customers
• Full-service, discount, or online brokers
• Brokerage fees
• Investor protection
Types of Brokers
Brokerage Fees
Odd or Round Lots
• Odd Lot - fewer than 100 shares
– Odd-lot differential
• Round Lot - 100 shares
of stock or multiples
thereof
Investor Protection
Securities Investor Protection Corp. (SIPC)
• protects customers against financial failure of
brokerage firm
• insures accounts up to $500,000
• guarantees securities or cash held by broker
– does not guarantee dollar value of securities
Arbitration settles disputes between broker and
client
Executing Trades
• Investor establishes account with broker
• Trades can be executed by phone, at
brokerage firm, or online
Types of Orders
• Market order - trade now at best
available price
• Limit order - trade when a specified
price or better is reached
• Stop-loss order - sell if
stock drops to certain price
– use to limit losses
Becoming an Informed Investor
•
•
•
•
•
Annual Reports
Financial Press
Industry Data
Stock Quotes
Advisory Services
Annual Stockholder Reports
Here’s what to read….
• Highlights or selected financial data sections
• CEO’s letter
• Operations in management’s discussion and
analysis section
• Financial statements and notes
• Auditor’s report
Online Investing
• Online
services
• Educational
material
• Investment tools
– Investment planning
Research and
screening
– Portfolio tracking
Managing Your
Investment Holdings
• Build a diversified portfolio based on
goals and personal situation
• Allocate assets according to objectives
• Track investments, rebalance
portfolio as needed
Investor Objectives
Trade-off between
high current
income
capital
appreciation
Asset Allocation and Portfolio
Management
• Dividing a portfolio among different types
of securities
• Total return is influenced more by asset
allocation than by specific
security selections
Asset Allocation and Portfolio
Management
Keeping Track of Investments