Types of Investments
Investments
• Investments Assets purchased
with the goal of
providing
additional income
to pay for longterm goals
– Buying a House
– Higher Education
– Retirement
Financial
Plan
Savings
Investments
Saving vs. Investing
Saving: Portion of current
income not spent on
consumption.
Emergencies
Investing: Purchase of
assets with the goal of
increasing future income.
Long-Term Goals
More Liquid
Less Liquid
Limited Risk
Higher Risk
Lower Returns (0-4%)
Higher Returns (8-12%)
Financial Security
Increase Net Worth
(Wealth)
Why are Saving and Investing
Important?
Help pay for a level of living and
reach a desired standard of living
Level of Living
Standard of Living
Money needed to pay
for the necessities and
comforts currently
enjoyed
Higher level of living
that a person wishes to
reach
Present
Future
Types of Investments
• Stocks
– “Blue Chip”
– Common vs Preferred
• Bonds
• Mutual Funds
• Real Estate
• Savings/Certificates of Deposit
• Collectibles
Stocks
• An investment that represents
ownership in a company or
corporation.
“Blue Chip” Stocks
• Nickname for a stock that is:
– Thought to be safe and has less ups and
downs
– Well known companies with a long
record of profit growth and dividend
payment
– Have a reputation for quality
management
• Examples: Coca-Cola, Gillette, ExxonMobile, General Electric
Common vs Preferred Stock
• Similarities
– Both represent ownership
– Both may receive dividend payments
• Differences
– Preferred stockholders are paid dividends first, on
a set schedule and higher than common
stockholders, but have no voting rights
– Common stockholders are paid dividends only if
the Board of Directors of the company decides to
pay and there is no set schedule or payment
amount
– Common stockholders vote on who will sit on the
Board of Directions and help form company policy
Stock Split
• When stocks go up in price this may indicate
a vote of confidence in the company and its
future
• If the price gets too high, it can be difficult
for new investors to buy blocks of stock
• Companies may then issue 2-for-1 stock
splits:
– The price of stock is split in half, but the number of
shares doubles
– Example: Stock closes at $50 at the end of day but
opens the next day at $25, if stockholder owned 100
shares before the split, she/he now owns 200 shares
of stock at the new price
Dividend Reinvestment
• When a company declares a dividend, it
takes profit that it has earned during the
year and pays the funds to investors
based on the number of shares they hold
• Some companies offer a “dividend
reinvestment” plan
– Money earned through the dividend payment is
used to purchase additional shares in the
company
How Well the Stock
Market is Doing
Overall
3 Basic Indicators
• Dow Jones Industrial Average (“DOW”)
– Lists the 30 leading industrial blue chip stocks
• Standard and Poor’s 500 Composite Index
– Covers market activity for 500 stocks
– More accurate than DOW because it evaluates
a greater variety of stock
• National Association of Security Dealers
Automated Quotations (“NASDAQ”)
– Monitors fast moving technology companies
– Speculative stocks, show dramatic ups and
downs
Ups and Downs
• The term bull market means the market
is doing well because investors are
optimistic about the economy and are
purchasing stocks
• The term bear market
means the market is doing
poorly and investors are
not purchasing stocks or
selling stocks already
owned
Purchasing Stock
Brokers
• A Broker is a person who is licensed
to buy and sell stocks, provide
investment advice, and collect a
commission on each purchase or sale
– Purchases stocks on an organized
exchange (stock market)
– Over ¾ of all stocks are bought and sold
on an organized exchange
Organized Exchanges
• Minimum requirements for a stock to
ensure only reputable companies are
used
• Each exchange has a limited number
of seats available which brokerage
firms purchase to give them the
legal right to buy and sell stocks on
the exchange
New York Stock Exchange
• New York Stock Exchange (NYSE)
– Oldest and largest, began in 1792
– 1,366 seats available
– 2,800 companies
– Average stock price is $33.00
– Strict requirements
American Stock Exchange
• American Stock Exchange
– Began in 1849
– 2nd largest exchange
– It’s requirements are not as strict as
NYSE allowing younger, smaller
companies to list
– Average stock price is $24.00
Regional Stock Exchanges
• Regional Stock Exchanges
– Stocks are traded to investors living in a
specific geographical area
• Including Boston, Cincinnati, Philadelphia,
Spokane
NASDAQ
• National Association of Securities
Dealers Automated Quotations
– Stocks are traded in an over the counter
electronic market
– 4,000 small companies
• Company requirements are not as strict
– More volatile because companies are
young and new
– Average stock price is $11.00
Bonds
• A security representing a loan of money
from a lender to a borrower for a set time
period, which pays a fixed rate of interest
• Corporations issue bonds to raise money for
expansion or other company operations
• Local governments issue Municipal bonds to
raise money to build roads, bridges and
other construction projects
– If you bought a Microsoft bond, you would be
lending money to Microsoft to expand the
company or for new research and development
U.S. Savings Bonds
• A federally issued debt instrument that
you can purchase directly from the
Treasury or banks
• Savings bonds are conservative
instrument on which you can earn interest
for up to 30 years
– EE bonds cost 50% of face value
– Interest earned on EE bonds are exempt from
state and local taxes
Treasury Bills
• Nicknamed “T-Bill”
– Short-term debt obligation backed by the U.S.
government with a maturity of less than one year
– Common maturities of:
• 1 month (Four weeks)
• 3 months (13 weeks)
• 6 months (26 weeks)
– Sold in denominations of $1,000 up to a maximum
purchase of $5 million
• Considered to be a secure, low-risk
investment
Mutual Funds
• An investment that pools money
from several investors to buy a
wide range of different
investment instrument, providing
diversification
Retirement
• Individual Retirement Accounts
– Traditional:
• Can deposit up to $5500 per year pre-tax
dollars if under age of 50
• Can lower your taxable income thus lowering
the amount taxes payable to government
• Doesn’t require that you pay taxes on your
gains until start withdrawals after 59 ½ years
• Can be penalized for early withdrawals
• Mandatory withdrawals at 70 ½ years and no
further contributions
Retirement
– Roth IRA
• Can deposit up to $5500 per year after
taxes
• Will not lower taxable income
• Can withdraw funds at any time without
taxes or penalty if Roth is held at least 5
years or 59 ½ years
• Can use up to $10,000 to purchase first
home for yourself or family member or pay
for higher-education costs for yourself or
family member
• No mandatory withdrawals and can continue
depositing after the age of 70 ½ years
Retirement
• 401(k)
– Employer sponsored retirement plan offered to
employees of public or private for-profit
companies
– Money is deducted from paycheck before taxes
which lowers taxable income
– Maximum contribution of $17,500 if under the
age of 50
– Employers may or may not contribute additional
funds
– Penalty for early withdrawal
– Taxes paid at the time of withdrawal
Retirement
• 403(b)
– Employer sponsored retirement savings
plan offered to employees of tax-exempt
or non-profit organizations
– Money is deducted from paycheck before
taxes which lowers taxable income but
must pay Social Security and Medicare
– Money taxed when withdrawn
– Penalty for early withdrawal
Real Estate
• An investor buys pieces of
property, such as land or a
building, in hopes of generating a
profit
• Investor may buy apartments for
rental income:
– Careful: Profits may be lower than
expected if units go un-rented!
Savings/Certificates of
Deposits
• A deposit that earns a fixed
interest rate for a specified length
of time.
– The longer the time period the
greater the rate of return.
– There is a substantial penalty for
early withdrawal.
Collectibles
• Unique items that are relatively
rare or highly valued.
– Art work
– Baseball trading cards
– Coins
– Automobiles
– Antiques
– Gems
– Comic books
– Rare books
– Stamps
Risk vs. Return
• On average, stocks have a high rate of
return
– The increase or decrease in the original
purchase price of an investment
• Higher rate of return = greater risk
– Uncertainty about the outcome of an
investment
• Stocks provide portfolio diversification
– Money invested in a variety of investment tools
Short-term Investment
Strategies
• Buying on margin is where an
investor borrows part of the
money needed to invest in a stock
from a brokerage firm
– There is a 50% margin requirement.
– If you want to purchase $2,000
worth of stock you can borrow up to
$1,000 to make the purchase
Short-term Investment
Strategies
• Short selling is where an investor
sells shares of stock that they don’t
own with the intent to buy them
back later at a lower price.
– Let’s use rollerblades as an example.
• Your friend buys new rollerblades for $80.
• You borrow them and sell them for $80.
• The price at the stores has been lowered to
$45.
• You buy a new pair for $45 and give them to
your friend.
• You made $35!!!
Long-term Investment
Strategies
• Diversification is spreading your
assets among different types of
investments to reduce risk.
– Don’t put all your eggs in one basket.
Long-term Investment
Strategies
• Dollar Cost Averaging is buying
an equal amount of the same stock
at equal intervals.
– Invest $100 in e-bay every month.
The price you pay for the stock
averages out over time.
Dollar Cost Averaging
One-Time Investment
Amount
Invested
Shares
Share
Price ($) Purchased
$1,000.00
$20.00
50.00
$1,000.00
$20.00
50.00
Dollar-Cost Averaging
Amount
Invested
$100.00
$100.00
$100.00
$100.00
$100.00
$100.00
$100.00
$100.00
$100.00
$100.00
$1,000.00
Shares
Share
Price ($) Purchased
$20.00
$19.50
$19.25
$19.75
$19.20
$18.90
$18.00
$18.60
$19.78
$20.90
$19.39*
5.00
5.13
5.19
5.06
5.21
5.29
5.56
5.38
5.06
4.78
51.66
* Average Share Price
Long-term Investment
Strategies
• Buy and hold technique is where
an investor buys stock and holds
on to it for a number of years.
– During that time you are paid
dividends and the price of the stock
may go up.
How Can Government
Regulations Protect
Investors?
• Regulatory Pyramid
– A network of safeguards that
surrounds the securities industry from individual brokerages all the
way up to the U.S. Congress
– Companies/corporations must
register with SEC (Securities and
Exchange Commission) before it
can issue stock or bonds
Regulatory Pyramid
www.nyse.com
Sources of Investment
Information
• Prospectus
– A formal written offer to sell securities
that sets forth a plan for a proposed
business enterprise. A prospectus should
contain the facts that an investor needs to
make an informed decision.
• IPO (Initial Public Offering)
– First time a company publicly sells shares
of its stock on the open market.
– Also known as “going public.”
Sources of Investment
Information
• Annual Report
– A document detailing the business
activity of a company over the
previous year, and containing an
income statement, cash flow
statement, and balance sheet.
Sources of Investment
Information
• Financial publications
– Wall Street Journal
– Fortune
– Kiplingers Personal Finance
• Online information
– http://finance.yahoo.com
– http://moneycentral.msn.com
How Do You Buy and Sell
Investments?
• Full-service broker
– Commissions are typically bases on a
percentage of your purchase price
• Discount broker
– Between $10 and $10 for a trade of
1,000 shares or less (About 1/3 price of
broker)
• Online broker
– $9 to $15 a trade
• Investment advisors
Capital Gain/Loss
• Capital Gain is the profit that results
from the sale of stocks, bonds or real
estate, where the sale price is more
than the original purchase price
• Capital Loss is the loss that results
from the sale of stocks, bonds or real
estate, where the sale price is less
than the original purchase price
Sale Price – Purchase Price = Capital Gain or Capital Loss
WATCH OUT!
• If companies plan to merge stock
prices may be unpredictable
• If a company causes a disaster such
as an oil spill, the stock price may
decrease