Download What are Stocks?

Investment
®
Jeopardy
Joan Koonce, Ph.D., AFC®
Extension Financial Planning
Specialist
Bonds
Mutual
Funds
Emergencies,
Education
& Retirement
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Terminology
& Concepts
Stocks
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Terminology & Concepts - 100
This represents the total value (in
percentage terms) of what you earn
on your investments.
What is rate of return?
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Terminology & Concepts - 200
Dividends, interest and rent are
examples of this.
What is investment income?
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Terminology & Concepts - 300
Doing this to your investment
portfolio will reduce risk, but it will
also reduce return.
What is diversifying?
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Terminology & Concepts - 400
This is what you are doing when you
invest an equal amount of money at
regular intervals.
What is dollar-cost averaging?
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Terminology & Concepts - 500
This is your inability to convert
your investments to cash without
a capital loss.
What is liquidity risk?
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Stocks - 100
This is what shares of stock represent
to the buyer.
What is ownership?
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Stocks - 200
This is what you receive when you sell
shares of stock for more than or less
than you paid for them.
What are capital gains and capital losses?
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Stocks - 300
Stocks issued by well-known
companies with sound financial
histories are called this.
What are blue-chip stocks?
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Stocks - 400
These stocks are issued by companies
whose earnings tend to move inversely to
the broader economy and may actually
increase during economic downturns.
What are defensive stocks?
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Stocks - 500
For a fee, these two plans allow
shareholders to purchase stock
directly from the company.
What are Dividend Reinvestment Plans
(DRIPs) and Direct Stock Purchase Plans
(DSPP) or Direct Investment Plans (DIPs)?
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Bonds - 100
You are doing this when you
invest in bonds.
What is loaning money?
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Bonds - 200
The amount returned to the
bondholder at maturity is called this.
What is face value or par value?
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Bonds - 300
This is what bonds issued by the state
and local government are called.
What are municipal bonds or muni’s?
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Bonds - 400
This does not have to be paid on
interest earned on treasury bills,
notes and bonds.
What is state income tax?
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Bonds - 500
Bond rating companies rate bonds
based on this risk.
What is default risk?
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Mutual Funds - 100
A mutual fund is this type of company.
What is an investment company?
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Mutual Funds - 200
These are sales commissions charged
to the investor of a mutual fund.
What are loads?
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Mutual Funds - 300
These funds invest in short-term
securities such as treasury bills and
certificates of deposit.
What are money market mutual funds?
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Mutual Funds - 400
The primary objective of these funds
is preservation of capital invested.
What are balanced mutual funds?
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Mutual Funds - 500
The name of the fees mutual fund
investors are charged for fund
management and fund advertising and
marketing.
What are management fees and 12b-1
fees?
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Investing for Emergencies, Education
& Retirement - 100
Because liquidity is important for this
type account, money market accounts
and short-term certificates of deposit
are good choices.
What is an emergency account?
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Investing for Emergencies, Education
& Retirement - 200
Contributions to this retirement
account are not tax deductible, but
earnings are tax-free.
What is a Roth IRA?
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Investing for Emergencies, Education
& Retirement - 300
If you have this type of employersponsored retirement plan, your benefit
payment is based on the account balance
at retirement. 401(k), 403(b) and 457
plans are examples of this type plan.
What is a defined-contribution plan?
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Investing for Emergencies, Education
& Retirement - 400
With this type of employer-sponsored retirement
plan, the benefit payment that you receive at
retirement is specified based on the plan’s
formula. The Teacher’s Retirement System
(TRS) and Employee Retirement System of
Georgia (ERSGA) are examples of this type plan.
What is a defined-benefit plan?
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Investing for Emergencies, Education
& Retirement - 500
These education plans have tax-deferred
growth and distributions from these plans
are excludible from gross income if used
to pay certain educational expenses.
What are qualified tuition plans or 529
plans?
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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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