Download Investment Terminology and Concepts

Investments
Joan Koonce, Ph.D., AFC®
Extension Financial Planning
Specialist
Investment Terminology and
Concepts
• What is Investing?
– Investing is putting your money into an
asset that generates a rate of return.
– Some examples of investments are
stocks, bonds, mutual funds, and real
estate.
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Investment Terminology and
Concepts
• Investment Income
– Income that you receive from the
investment while you have it
• from bonds you receive interest
• from stocks you receive dividends
• from real estate you receive rent
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Investment Terminology and
Concepts
• Capital Gain or Loss
– Profit or loss received when you sell an
investment that has increased or
decreased in value
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Investment Terminology and
Concepts
• Rate of Return
– Total return (investment income and
capital gains) generated from an
investment stated in percentage terms
• Investment Risk
– Uncertainty that an investment will not
perform as expected
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Investment Terminology and
Concepts
• Types of Risk
– Interest rate risk
– Inflation (purchasing power) risk
– Financial (default) risk
– Liquidity risk
– Business risk
– Market risk
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Investment Terminology and
Concepts
• Risk Capacity
– The amount of risk you can afford to
accept
• Risk Tolerance
– The amount of risk you feel comfortable
accepting
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Investment Terminology and
Concepts
• What is your “risk” personality?
– http://www.rce.rutgers.edu:8080/money
/riskquiz/default.asp
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Investment Terminology and
Concepts
• Diversification
– Investing in several different types of
securities in an effort to reduce overall
risk in your investment portfolio
• Dollar-Cost Averaging
– Investing an equal amount of money
regularly regardless of the investment’s
price
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Investment Terminology and
Concepts
• Asset Allocation
– Allocating proportions of your investment
portfolio to different categories of assets
• Leverage
– Using borrowed money to make an investment
• Time Horizon
– The period of time before you will need the
money you invested
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Investment Terminology and
Concepts
• Types of Investments
– Ownership investments (Equity)
• Stock
• Real estate
– Lending investments (Debt)
• Bonds
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What are Stocks?
• Stocks are shares of ownership in a
company.
• Stock represents a claim on the
company's assets and earnings.
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What Does Stock Ownership Mean?
• Voting Rights
• Owning shares in Home Depot does
not mean you can go help yourself to
free home improvement or other
building materials!
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Buying Stocks
• Brokers
• DRIPs & DSPPs or DIPs
– Dividend Reinvestment Plans (DRIPs) and
– Direct Stock Purchase Plans (DSPPs) or Direct
Investment Plans (DIPs) are plans with which
individual companies for a minimal cost, allow
shareholders to purchase stock directly from
the company.
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Why Consider Stocks?
• Stocks can provide investors with
dividends and capital gains.
• Over time, common stocks
outperform all other investments.
• Stocks are somewhat liquid.
• Growth of your investment is
determined by more than just interest
rates.
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General Classifications of Stock
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Blue-Chip Stocks
Growth Stocks
Income Stocks
Speculative Stocks
Cyclical Stocks
Defensive Stocks
Large-Cap, Mid-Cap, Small-Cap and
Micro-Cap Stocks
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What are Bonds?
• Similar to an I.O.U. When you purchase a
bond, you are making a loan to a
corporation, local, state or federal
government, federal government agency
or other entity known as the issuer.
• The issuer promises to pay you a specified
rate of interest during the life of the bond
and to repay the principal when it
“matures,” or comes due.
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Why Consider Bonds?
• Bonds produce steady current income.
• Bonds can be a safe investment if
held to maturity.
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Basic Bond Terminology and Features
• Face Value: the amount you loan
(principal) and is returned to you at
maturity
• Coupon Rate: the annual interest
rate that is paid over the life of the
bond
• Maturity date: the date the investor
receives the principal back
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Types of Bonds
• Corporate Bonds
• Municipal Bonds
• Treasury Bills, Notes, Bonds and
Treasury Inflation-Protected Securities
(TIPS)
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Bond Ratings
• Generally ratings run from AAA or aaa for
the safest to D for the extremely risky.
• Ratings categorize bonds by default risk.
• Rating Companies
– Standard & Poor’s
– Moody’s
• http://www.moodys.com/
– Fitch
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What are Mutual Funds?
• An investment company that pools
money from investors to buy stocks,
bonds, and other investments.
Investors own shares of the fund
proportionate to the amount of their
investment.
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Why Invest in Mutual Funds?
• Benefits the Small Investor
– Mutual funds allow people with a limited
amount of money the opportunity to
invest and purchase enough investments
to have a fully diversified investment
portfolio.
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Advantages of Mutual Fund Investing
• Diversification
• Professional Management
• Minimal Transaction Costs
• Liquidity
• Flexibility
• Service
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Disadvantages of Mutual Fund
Investing
• Lower Than Market Performance
• Costs
– Loads
– Management fees
– 12b-1 fees
• Capital Gains Distributions
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Types and Objectives of Mutual Funds
• Money Market Mutual Funds
• Stock Mutual Funds
– Aggressive growth funds
– Small company growth funds
– Growth funds
– Growth and income funds
– Sector funds
– Index funds
– International funds
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Types and Objectives of Mutual Funds
• Balanced Mutual Funds
• Asset Allocation Funds
• Life-Cycle Funds
• Bond Funds
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Investing for Emergencies
• Savings Accounts
• Money Market Accounts
• Money Market Mutual Funds
• Short-term Certificates of Deposit
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Investing for Education
• Qualified Tuition Plans (QTPs or 529 Plans)
– Prepaid Tuition Plans
– Savings Plans
• Coverdell Education Savings Account (ESA)
• Series EE Savings Bonds
• Traditional IRA
• Roth IRA
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Investing for Retirement
• Employer-Sponsored Plans
– Defined-Contribution Plans
– Defined-Benefit Plans
• Personal Savings Plans
– Traditional IRAs
– Roth IRAs
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Investing for Retirement
• Self-Employed Plans
– Keogh plan
– Simplified Employee Pension Plan (SEP)
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