BASIC INVESTING CONCEPTS Stages of Investing Type of
BASIC INVESTING CONCEPTS
Stages of Investing Type of Investment Strategy Considerations Put and Take account Short-term savings Safety Security Liquidity Short-term needs Initial Investing Conservative, lowrisk securities Higher rates of return Reasonable than savings purchase price Systematic Investing Retirement funding Long-range planning Growth Future financial security Strategic Investing Portfolio expansion Maximization of return in the medium term (5 -10 years) Diversifying Planning Hedging against risk High profits Uncertain future income Short-term profit potential Speculative Investing High-risk options
Stages of Investing � In Stage 4: Strategic Investing you carefully manage investment alternatives to maximize growth of your portfolio �Collection of investments
Risk and Return � Investing risk- chance that an investment’s value will decrease �The greater the risk the greater the potential return
Diversification � Spreading of risk among many types of investments �Stocks, bonds, real estate �Low risk stocks to balance high risk � Minimizes risk
Types of Risk � Interest-Rate risk- chance that inflation will rise faster than the return on your investments �Inflation makes your fixed-rate investments worth less because they are “locked in” at lower rates � Political risk- actions the government might take that would reduce the value of your investment
Types of Risk � Market risk- caused by the business cycle– periods of economic growth or decline � Nonmarket risk- unrelated to market trends; unpredictable and uncontrollable �Terrorism threats, people change their behavior and want to protect themselves
Types of Risk � Company risk- associated with owning one company’s stock, if the company fails you lose investment � Industry risk- affects groups of businesses �If you invest in the candy industry, a nationwide trend toward dieting or avoidance of sugar would negatively affect the value
Criteria for Choosing an Investment � Degree of safety � Degree of liquidity � Expected dividends or interest � Expected growth in value � Reasonable purchase price and fees � Tax benefits
Wise Investment Practices � Define your financial goals � Go slowly �Temporary investments � Follow through �Permanent investments � Keep good records � Seek good investment advice � Keep investment knowledge current � Know your limits
MAKING INVESTMENT CHOICES
Sources of Financial Information � Newspapers �Financial pages of your local newspaper �Wall Street Journal � � Investor Services and Newsletters Financial Magazines �Business Week, Forbes, Money, Fortune, Kiplinger’s Personal Finance, The Economist � � Brokers Financial Advisers Annual Reports Online Investor Education
Broker vs Financial Advisers � Full service- provide clients with analysis and opinions based on their judgments � Merrill Lynch, Fidelity Investments, American Express � Discount- buy and sell securities at a reduced commission � For people who are well informed and know what they want to buy and sell ○ E*Trade, Charles Schwab Certified Financial Planner (CFP) � Trained to give investment advice based on your goals, age, lifestyle, and other factors. �
Investment Choices � Low Risk/Low Return � Medium Risk/Medium Return � High Risk/High Return
Investment Choices Low Risk/ Low Return Medium Risk/ Medium Return High Risk/ High Return Bonds Stocks Futures U. S. Government Savings Bonds Mutual Funds Options Annuities Penny Stocks Real Estate Collectibles Treasury Securities
Low Risk/ Low Return � Good for first investments � Safe � Low return � Include in diversified portfolio
Low Risk/ Low Return � Bonds � Debt obligations of corporations (corporate bonds) or state or local governments (municipal bonds) � IOU � Earn interest � Repay amount borrowed at maturity � U. S. Government Savings Bonds � Series EE- discount bond, purchased for less than the maturity value (half) � Series I- sold at face value and earn interest for up to 30 years, designed for investors wanting to protect against inflation
Low Risk/ Low Return � Treasury Securities � U. S. Treasury Bills- short term � U. S. Treasury Notesmatures in 2, 5, or 10 years � U. S. Treasury Bondsinterest paid every 6 months and matures in 30 years
Medium Risk/ Medium Return � Once you have additional money to invest � Increase return � Investing with companies that manage the investment
Medium Risk/ Medium Return � Stocks � Unit of ownership in a corporation � Stock certificate is evidence of ownership � Stockholders share in corporation’s profits called dividends � Riskier than savings bonds, earnings go up or down depending on company’s profits � Investing in wellestablished companies are safe � Less-stable company= risky investment
Medium Risk/ Medium Return � Mutual Funds � � Pooling of money from many investors to buy a large selection of securities � Professionally managed � Allows for portfolio diversification Annuities � Contract that provides the investor with a series of regular payments, after retirement � Opposite of life insurance � Real Estate � Large, non-liquid investment of cash � Houses and land
High Risk/ High Return Futures- contracts to buy and sell commodities or stocks for a specified price on a specified date in the future � Options- right, not obligation, to buy or sell a commodity or stock for a specified price within a specified period of time � Penny stocks- are low -priced stocks of small companies that no track record � Collectibles- coins, art, memorabilia, ceramics, or other items popular at the time �
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