Download Fundamentals of Investing Chapter Fifteen

Chapter 10:
Fundamentals of
Investing
Kapoor
 2004 McGraw-Hill Ryerson Ltd.
Dlabay
Hughes
Ahmad
Prepared by Cyndi Hornby, Fanshawe College
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Learning Objectives – Chapter 10
1. Explain why you should establish an
investment program.
2. Describe how safety, risk, income, growth
and liquidity affect your investment
decisions.
3. Identify the major types of investment
alternatives.
4. Recognize the role of the professional
financial planner and your role in a personal
investment program.
5. Use various sources of financial information
that can reduce risks and increase
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investment returns.
 2004 McGraw-Hill Ryerson Ltd.
Learning Objective # 1
Explain why you should establish
an investment program.
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Establishing Investment Goals
Financial goals should be specific and measurable
and tailored to your particular financial needs. Ask
yourself..
What will you use the money for?
How much will you need?
How will you obtain it?
How long will it take you to obtain the money?
How much risk are you willing to assume?
Are goals reasonable and are you willing to sacrifice
current consumption to invest?
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What will happen if you don’t reach your goals?
 2004 McGraw-Hill Ryerson Ltd.
Performing a Financial Checkup
Work and learn to save and to balance your
budget.
Reduce high interest debt first.
Obtain adequate insurance protection.
Start an emergency fund you can access quickly.
Three to nine months of living expenses.
Have access to other sources of cash for
emergencies.
Line of credit is a short-term loan approved
before the money is needed.
Cash advance on your credit card.
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Getting the Money Needed to
Start an Investing Program
Prioritize your investment goals. How badly do
you want to achieve them?
Pay yourself first.
Take advantage of employer-sponsored retirement
programs.
Participate in elective savings programs.
Payroll deduction or electronic transfer.
Make extra effort to save one - two months/year.
Take advantage of gifts, inheritances, and
windfalls.
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Value of Long-Term
Investing Programs
Many people don’t start investing because
they only have a small amount to invest
but....
Small amounts invested regularly
become large amounts over time.
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Learning Objective # 2
Describe how safety, risk,
income, growth and liquidity
affect your investment
decisions.
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 2004 McGraw-Hill Ryerson Ltd.
Factors Affect the
Choice of Investments
Safety and risk.
The potential return on any investment
should be directly related to the risk the
investor assumes.
Safety in an investment means minimal
risk of loss
Risk tolerance is the amount of
psychological pain you’re willing to
suffer for your investments
 2004 McGraw-Hill Ryerson Ltd.
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Safety and Risk
Safest investments include...
Savings accounts
Canada Savings bonds
Canadian Treasury Bills
Guaranteed Investment Certificates (GICs)
Higher potential income investments include…
Government and Corporate bonds.
Utility Stocks
Preferred and select Common stocks.
Mutual funds.
Real estate rental property.
 2004 McGraw-Hill Ryerson Ltd.
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Components of the Risk Factor
Inflation Risk
Return on investment will not keep up with
inflation
Interest Rate Risk
Changes in the interest rates in the economy
Business Failure Risk
Business will be less profitable then anticipated
Market Risk
Values fluctuate because of behaviour of
investors in marketplace
Global Investment Risk
Should be evaluated like domestic investments 10-11
 2004 McGraw-Hill Ryerson Ltd.
Investment Growth and Liquidity
Growth means investments will increase in
value
Common stock.
Growth stocks reinvest retained earnings.
Bonds, mutual funds and real estate.
Liquidity.
Ability to buy or sell an investment quickly
without substantially affecting the
investment’s value.
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Learning Objective # 3
Identify the major types of
investment alternatives.
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Investment Alternatives
Stock or equity financing.
Equity capital is provided by
stockholders, who buy shares
of a company’s stock.
Stockholders are owners and share in the
success of the company.
A corporation is not required to repay the
money obtained from the sale of stock.
They are under no legal obligation to pay
dividends to stockholders. They may instead
retain all or part of earnings.
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Investment Alternatives
(continued)
Corporate and government bonds.
A bond is a loan to a corporation, the
federal government, or a municipality.
Bondholders receive periodic interest
payments, and the principal they lent is
repaid at maturity (1-30 years).
Bondholders can keep the
bond until maturity or sell
it to another investor.
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Investment Alternatives(continued)
Mutual funds.
Investors’ money is pooled and invested by a
professional fund manager.
You buy shares in the fund.
Provides diversification to reduce risk .
Funds range from conservative
to extremely speculative.
Match your needs with
a fund’s objective.
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 2004 McGraw-Hill Ryerson Ltd.
Investment Alternatives
(continued)
Real Estate.
Buy property and sell it when it increases in value.
Location, location, location is important.
Before you buy property, consider…
Is the property priced competitively?
Why type of financing is available, if any?
How much are the taxes?
What is the condition of nearby buildings/houses?
Why are the present owners selling?
Could the property decrease in value?
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 2004 McGraw-Hill Ryerson Ltd.
Investment Alternatives
(continued)
Other investment alternatives.
A speculative investment is a high-risk
investment made in the cope of earning
a relatively large profit in a short time.
Typical speculative investments include:
• Antiques and collectibles.
• Options.
• Derivatives.
• Commodities.
• Coins and stamps.
• Precious metals and gemstones.
 2004 McGraw-Hill Ryerson Ltd.
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Factors that Affect Investment
Choices
Diversification
Spreading your assets among several
types of investments to lessen risk
A Personal Investment Plan
Establish goals and determine the amount
of money needed to obtain them
Evaluate risk and potential return on
different investments
After choosing your investments continue
to evaluate your program
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 2004 McGraw-Hill Ryerson Ltd.
Investment Pyramid
High risk
Commodities
Junk bonds
Options
High Quality
Stocks
Mutual funds
Utility
stocks
CDs
Rental
property
Government
Securities
Money
Market
Corporate
bonds
Savings
Accounts
Cash
Low
risk
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 2004 McGraw-Hill Ryerson Ltd.
Learning Objective # 4
Recognize the role of the
professional financial planner and
your role in a personal
investment program.
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 2004 McGraw-Hill Ryerson Ltd.
Factors that Reduce Investment Risk
The Role of the Financial Planner
Seek professional help from stockbrokers,
lawyers, accountants, bankers and insurance
agents or Chartered Financial Planners
Be aware of how they are paid and how this
influences the advice they give
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Your Role in the Investment
Process
Evaluate potential investments.
Monitor the value of your investments.
Keep accurate and current records.
Be aware of tax considerations, including
tax deferred and tax exempt investments.
Keep track of capital gains and losses,
interest income, rental income, and
dividends.
Check to see if you qualify for a capital gains
exemption
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 2004 McGraw-Hill Ryerson Ltd.
Learning Objective # 5
Use various sources of financial
information that can reduce risks
and increase investment return.
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 2004 McGraw-Hill Ryerson Ltd.
Sources of Investment Information
The internet and online computer services.
Use a search engine such as Yahoo Canada
or Alta Vista Canada to find information.
View sites such as www.canoe.ca/Money,
quicken.ca, and canadianfinance.com
Newspapers and news programs.
Business periodicals and government
publications.
Corporate Reports.
Statistical Averages.
Investor Services and newsletters.
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Desktop Information Services 
2004 McGraw-Hill Ryerson Ltd.