INVESTING IN STOCKS BONDS Business Department Mr Hathaway
INVESTING IN STOCKS & BONDS Business Department Mr. Hathaway
Investing u The use of savings to earn a financial return. u Objective: earn money with money
Stages of Investing u Emergency Account – Short-term savings (3 -6 month’s pay) u Begin Investing – Conservative, low risk u Systematic Investing – Retirement, college; long-range u Strategic Investing – Self-management; maximize return u Speculation – Take changes; quick profit; high risk
Rule of 72 u Quick method to evaluate rate of return u Double your money u Number of years: – Divide 72 by the rate of return – Earning 10% – Answer: 72 divided by 10=7. 2 years u Rate of return: – Divide 72 by the number of years – Need $5, 000; double in 6 years – Answer: 72 divided by 6=12%
Why Invest? u Helps beat inflation – Inflation = general rise in prices u Increases wealth u Fun and challenging
Risk – chance that an investment’s value will decrease. u Short-term investments are generally less risky u Interest-rate risk – Rates don’t keep up with inflation u Political risk – Increased taxes & controls u Market risk – Business declines – Interest rate fluctuations u Company or industry risk
Sources of Financial Info u Newspapers u Investor Services & Newsletters u Financial Magazines – The Wall Street Journal – Barron’s – Moody’s Investor Service (www. moodys. com) – Standard and Poor’s Reports (www. standardandpoors. com) – Business Week (www. businessweek. com) – Forbes (www. forbes. com) – Money (www. money. cnn. com) Brokers u Financial Advisors (CFP’s) u Annual Reports u Online Investor Education u
Low Risk/Low Return u Corporate & Municipal Bonds – Debt obligations of corporations of local governments u US Government Bonds – Lending money to US govt – Series EE – discount bond u Treasury Securities (T-Bills) – $10, 000 + increments of $5, 000 – Treasury notes & Treasury bonds
Medium Risk/Medium Return u Stock – Unit of ownership in a corporation u Mutual Funds – Shares in a large, professionally managed group of investments u Annuities – Contract sold by insurance co. – Provides regular payments (retirement) u Real Estate – Houses and land
High Risk/High Return u Futures – Specified price on a specified date in the future u Options – Right, not obligation, to buy or sell a commodity or stock for specified price, specified period u Penny stocks – Low-priced stocks of small companies w/no track record u Collectibles – Coins, art, memorabilia
Stock Common: Variable dividend u Voting rights u Proxy: transfer voting authority to someone else u Preferred: Fixed dividend u No voting rights u Less risky u Lower return u
Terms: u Income stocks – consistent history of paying high dividends. – Receive current income – Retirees u Growth stocks – corporations that reinvest profits in business to promote growth. – Little or no dividends – Future capital gains – Long-term investments
Bulls and Bears Bull Market: Prolonged period of rising stock prices u Investor optimism u Confidence in economy u Bear Market: Prolonged period of falling stock prices u Investor pessimism u Prices may fall 20% u Short & savage u
Strategies (Short-Term) u Buy on Margin – Borrow money from broker (Margin Account) – Minimum of $2, 000 deposit – Leverage = using borrowed money to buy securities – Betting that stock will increase u Short selling – Selling stock borrowed from broker – Must be replaced later – Betting that stock price will drop (buy back at lower price)
Strategies (Long-Term) u Buy and Hold – Overall trend of non-speculative stocks is up – Over years, ride out down times u Dollar-Cost Averaging – Systematic purchase of equal dollar amount of same stock at regular intervals – Price averages out
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