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Investing
Advanced Business Math
Notes
(Notes Given and Discussed on Monday, April 02, 2007)
(no assignment given today)
Advanced Business Math
The Road to Investing Wave II
After completion of Checking…Savings…MM Savings….CDs
BONDS – debt obligations of corporations and governments
Two types of Bonds:
1. corporate bonds – when a corporation “borrows” money from an investor
2. gov’t bonds – when a government “borrows” money from an investor
Corporate Bonds
 Pay a fixed interest
 Pay every 6 months
 At maturity (10 years) they pay the principal
 Face Value – (par value) what the bond is worth at maturity
 Sold on the open market by brokers
 Interest reported on a 1099 is considered income and must be reported.
 No compounding
 When corporations need money to build, inventory, new products, whatever
Government Bonds
1. Federal
2. State
3. Local
Federal
EE Savings Bonds – a loan to the government like a Patriot Bond
 Common gifts
 You buy it ½ the face value (maturity value)
 Can mature in 10 years up to 30 years
 Must hold it for 1 year
 Stops earning interest after 30 years.
 Interest accumulates every 6 months
 Interest is exempt from state and local taxes, not federal
 Not taxed until you cash them
 Buy at a bank for paper version
 Buy on internet for paperless version
 Payroll deduction is a nice way to buy
 Good/safe investment
 Liquid
 College bonds are tax free
 If lost or stolen or destroyed, they can be replace without penalty
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Notes
EE Bonds
$25.00
$50.00
$75.00
$100.00
$200.00
$500.00
1000.00
5000.00
10,000
You cannot buy more than $30,000 face value each year.
Buy at a bank or through the Internet
Bonds
 State and Local
 Called “munies” or municipal bonds – used to help a city government build a
building, sewer, water, swimming pool
 Fixed
 Safe
Wednesday Notes
We’ve talked about Corporate Bonds and Gov’t Bonds
Treasury Securities- U
 U.S. Treasury bills (called t-bills) are available in denominations of
$10,000
 and then in increments of $5,000 more.
 A treasury bill matures in one year or less.
 Usually a three month, six month, or one year government obligation
Treasury notes
 Issued in unit of $1,000 or $5,000
 Mature in 2 years to 10 years
 Higher interest rates than Treasury bills
Treasury bonds
 $1,000 minimum
 mature from 10 to 30 years
 higher interest rates than t-bills or treasury notes
 interest is paid every 6 months
 taxed by the federal government, but not by state and local
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THAT SUMMS UP THE LOW INVESTMENT LOW RETURN
INVESTMENTS
Medium Risk Investments
Stocks –
 is a unit of ownership in a corporation.
 Owner is called a stockholder
 Owner receives a stock certificate
 A stockholder shares in a corporations profits which are paid to you as
dividends.
 You can earn money two ways.
o Dividends
o Increased value of stock which you can sell
 Variable interest
 Stocks in well established companies are relatively safe
 Stocks in less established companies are risky
 A diversified portfolio can make the whole thing medium risk
The Stock Market
 More than 34,000 public corporations
 We call this open trade
 Stockholders are called shareholders
 Dividends are the part of the corporation’s profits paid to
stockholders.
 Capital gain is a way to earn money. It means the stock is worth more
now than when you paid for it. The capital gain is only on paper. You
must sell it which means you need to find a buyer.
 Capital loss. When the stock is worth less than what you paid for it.
 You could lose all of your money, but no more than your initial
investment.
 DON’T GAMBLE/INVEST WHAT YOU CAN’T AFFORD TO
LOSE!
Types of Stock
 Common Stock
o Pays a variable dividend and gives voting rights
 Voting consists of issue additional stock, sell the
company, or change the board of directors
 Vote using a proxy…mail…written which allows
someone of authority to vote for you. Most sign the
proxy instead of attend the meetings.
o The board of directors decides the dividend each year
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 Preferred Stock
o Pays a fixed dividend and carries no voting rights.
o They make money regardless of how the company is doing
o Less risky than common stock
o If the company fails, you still get paid.
o However, the initial fixed amount is relatively low.
STOCK MARKET GAME BEGINS ON
THURSDAY April 5, 2007
1.
2.
3.
4.
5.
GO TO WWW.STOCKSQUEST.COM
SIGN UP WITH A USERNAME AND PASSWORD
JOIN A CONTEST
USE hancock08 for name and owls08 for password
BEGIN TRADING
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Notes
Investing
Advanced Business Math
Notes
Mutual Funds
Mutual Funds Characteristics
 A large, professionally managed group of investments.
 A Mutual Fund pools the money of many investors and buys
a large selection of securities.
 Two major advantages: professional management and
diversification
 Small investors could not otherwise invest in the stock
market
 Range from risky speculative category to low risk category,
 But most specialize in broad medium range for risk and
return
 Fastest growing segment of the American financial services
 To get started many funds require $500 to $3000 to get
started, then you can make small contributions like $50 a
month
 Easy to sell..call broker or sell on-line
 Liquid
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Types of Mutual Funds
 Growth Fund
 Income Fund
 Growth and Income Fund
 Money Market Fund
 Global Fund
 Index Fund
Net Asset Value – Unlike stocks, mutual funds are not determined
by what people are willing to pay for them. They are determined
by net asset value (NAV). The NAV is the total value of a fund’s
investment portfolio minus its liabilities, divided by the number of
outstanding shares of the fund:
NAV = Value of Portfolio – Liabilities / Number of Shares
For Example: Suppose the value of all stocks in a fun’s portfolio is
currently $100,000. The fund has $90,000 in liabilities and has
sold 500 shares of its funds to investors. The price for one of its
shares, or its net asset value, would be $20 at this time:
$100,000 – $90,000/500 = $20
Prospectus – detailed information about the funds which is a legal
document that offers securities or mutual funds shares for sale.
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What do they cost you?
Load – a sales fee.
A front-end load is a sales charge paid when you buy an
investment
A back-end load is a sales charge paid when you sell an
investment
Range from 2% to 8%
No-load fund – no charge for the sales fee if you buy directly
through the investment company.
 Telephone
 Mail
 Email
 Website
They make money by:
Charging a fee for their services of 1 to 1/5%
Where to find:
Forbes
Fortune
Money
www.morningstar.com
Vanguard
Fidelity
Dreyfus
http://finance.yahoo.com
www.mfea.com
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Investing
Advanced Business Math
Notes
Best way to buy your mutual funds is through an IRA
Traditional Individual Retirement Account
Set aside money for retirement
IRAs-tax sheltered
$4000 per year
Delay paying tax on the earning until they begin w/d at 59 ½
Penalty for early withdrawl 10%
Then taxable too
Have to take a contribution at 73 ½
If your work has a pension plan for you, you may not be able to
invest the maximum or any to an IRA
You can deduct your contribution each year from your taxable
income.
Pay no taxes now
When you retire, you will be in a lower tax bracket and pay less
taxes anyway.
Roth IRA
Your money is taxed same as it ever was
However, the money is not taxed at retirement
Can contribute up to $4000 but not more unless you are over 50
Do not have to be 59 ½
You may w/draw before 59 ½ without penalty if you’ve held
it for 5 years and it qualifies for education or first time home
buyers.
Do not have to w/d at 73 ½
You never have to w/draw it, especially if you have quite a
bit of money coming in and it would increase your tax base.
It could be “willed” to your children w/out fees.
Senator William Roth – Delaware – (D) in 1998
Created it because of “fear” of Social Security disappearing
Part of the Tax Payer Relief Act of 1997
You can contribute to a Roth IRA even if your job already
contributes to a retirement plan for you
If you are over 50 you can contribute $5000 this year to “catch up”
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Notes
Joel Flaten
May 30, 2007
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Works for Prairie Community Services for 17 years
70 Group Homes
Degrees in Sociology and Psychology
Masters in School Psychology
On the Hancock School Board
Founded the Hancock Foundation
What Detroit Lakes Alumni said to this question:
“What do you wish you would have had more of in school?
1. How to save money and use credit cards—more
financial literacy
2. career planning and placement
Facts:
 70% of Americans live paycheck to paycheck
 1.5 million annual bankruptcy’s in 2001 and getting worse
 more people will file bankruptcy than will graduate from
college
 leading to foreclosures on homes
 3.3 trillion dollars in personal American debt
 Finances if the number one reason for Divorce
i. 50 percent of marriages fail
ii. 80 percent of those failed marriages are
because of money
 78 million Americans have no savings
 $ is highest reason for depression
 90% of people buy things they cannot afford
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Personal Savings Rate of American’s
 7% in the 1970s
 8% in the 1980s
 9% in the 1990s
 -2% in the 2000s
Americans who have:
 food, clothes, house/apt., transportation are in the top 15% of
the worlds richest people. 5.1 million people are worse off
that that.
Americans who have:
 money saved
 hobby with equipment
 variety of clothes
 2 cars
 live in own home are in the top 5% of the worlds richest
category. 5.7 billion people are worse that you.
Store Credit Cards
 No payment or interest for 1 year, etc.
 The Catch is that 80% of people do not pay before the due
date.
FICO-Fair Isaac Credit Organization
 300 to 850 Score
 above 650 is good
 below 600 is bad
 it is a record of every loan type of activity you have ever had
 shows late payments
 outstanding loans
 everything!
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How do you get a good score?
1. Make your payments on time
2. Have low balances compared to how much you are allowed
to spend
3. Do not exceed 30% of you income for all debt
4. Have a long credit history
5. Limit new credit and many inquiries
Dave Ramsey 7 Steps of Success
1. Have $1000 in Savings
2. Be debt free except for house and that should be under a 15
year mortgage and be no more than 25% of your net income
or 35% of your gross income.
3. Should have 3-6 months emergency money
4. 10 – 15% of your income going to a retirement account every
month.
5. Avoid lots of credit inquiries
6. ?
7. ?
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