#11
Investment
Planning
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Learning Goals
Discuss the role investing plays in financial planning process and identify
investment objectives
Distinguish between primary and secondary markets and between
broker and dealer markets
Explain buying and selling securities and recognize types of orders
Appreciate how information can lead to better skills and returns
Understand the impact of computer and internet on investments
Describe an investment portfolio, develop/manage a securities portfolio
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
How Do I Get Started?
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
PAY YOURSELF FIRST!
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Different Ways to Invest
1. Common Stock
2. Bonds
3. Preferreds and
Convertibles
4. Mutual Funds and
Exchange Traded
Funds
5. Real Estate
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Different Ways to Invest
1. Common Stock
Represents a share of
ownership in a corporation
Greater potential returns
with a higher level of risk
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
Hybrid Securities
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Securities Markets
“Arenas” where financial instruments trade
Capital Market - long-term securities
with maturities >1 year
Money Market - low-risk, short-term
securities with maturities l< 1 year
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Broker and Dealer Markets
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Dealer Markets
Bid Price
price at which
investor can sell a
security
Ask Price
price at which
investor can buy a
security
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Foreign Securities Markets
Organized securities
exchanges exist in over
100 countries
Found in industrialized
nations and emerging
economies around
the globe
Manila
Tokyo
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
Dodd-Frank Wall Street Reform and Consumer
protection Act of 2010
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Making Transactions in the
Securities Markets
Stockbrokers buy and sell securities
for customers
Full-service, discount, or online
brokers
Brokerage fees
Investor protection
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Historical Performance of US Stock
Markets Measured by NYSE Returns
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Types of Brokers
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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
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Executing Trades
Investor establishes
account with broker
Trades can be executed
by phone, at brokerage
firm, or online
Market orders often take less than two minutes!
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Becoming an Informed Investor
Annual Reports
Financial Press
Industry Data
Stock Quotes
Advisory Services
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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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Online Investing
Online services
Educational material
Investment tools
Investment planning
Investment Research
and screening
Portfolio tracking
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Investor Objectives
Trade-off between
high current
income
capital
appreciation
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.