Download Exploring Investment Options

Investing for your Future
Review
Personal Finance
Chapter 11
11.1 Check Your Understanding
P. 264 #1
• You should have an emergency fund so that
should a need arise, you won’t dip into
permanent, long-term investments to pay for
temporary short-term needs.
11.1 Check Your Understanding
P. 264 #2
• Investors seek investments for the long term
that will grow faster than the prices of goods
and services, or the rate of inflation
11.1 Check Your Understanding
P. 264 #3
• Diversification is the spreading of risk among
many types of investments. Diversification
reduces overall risk because not all of your
choices will perform poorly at the same time.
11.2 Check Your Understanding
P. 272 #1
• Sources of inflation • Annual reports and
information include: • Financial statements
• Newspapers
• Online investor
• Investor services and education
newsletters
• Financial magazines
• Brokers
• Financial advisers
11.2 Check Your Understanding
P. 272 #2
• Beginning investors, who are inexperienced in
terms of their knowledge and experience,
should consider fairly safe investments.
11.2 Check Your Understanding
P. 272 #3
• Stocks generally carry more risk than choices
with fixed interest because a stockholder’s
earnings can go up or down, depending on the
company’s fortunes.
Review Facts and Ideas
P. 276 #1
List the stages investors usually go through as
their excess income increases over time.
The stages are:
– Put-and-take account
– Beginning investing
– Systematic investing
– Strategic investing
– Speculative investing
Review Facts and Ideas
P. 276 #2
Explain the difference between temporary and
permanent investments.
• Temporary investments are set aside for shortterm needs. Permanent investments represent
money set aside “permanently,” for
retirement or some other long-term need,
rather than for a short time.
Review Facts and Ideas
P. 276 #3
List three reasons for investing
• People invest their money to
– Provide supplemental income
– Make profits
– Provide a hedge against inflation
– Minimize tax burdens now and in the future
– Provide income for the future
Review Facts and Ideas
P. 276 #4
What can you use the Rule of 72 to estimate?
• The Rule of 72 is used to estimate the number
of years or,
• The rate of return required to double your
money.
Review Facts and Ideas
P. 276 #5
How does risk relate to potential return?
• The greater the risk you are willing to take, the
greater the potential returns.
Review Facts and Ideas
P. 276 #6
How does inflation affect an investment’s
return?
• Inflation reduces your investment’s true rate
of return.
• For example, if make 6% on your investment,
but inflation increases by 4% in the same time
period, you’ve gained only 2% of true value.
Review Facts and Ideas
P. 276 #7
Identify criteria can you use to evaluate an
investment.
• Safety
• High liquidity
• High dividends or invest
• Growth in value that exceeds the inflation rate
• Reasonable (low) purchase price or cost
• Tax benefits
Review Facts and Ideas
P. 276 #8
What are seven wise investment practices?
1. Define your financial goals
2. Go slowly
3. Follow through
4. Keep good records
5. Seek good investment advice
6. Keep your investment knowledge current
7. Know your limits
Review Facts and Ideas
P. 276 #9
Name at least six main sources of financial
information
1. Newspapers
2. Investor services and newsletters
3. Financial magazines
4. Brokers
5. Financial advisers
6. Annual reports and financial statements
7. Online investor education
Review Facts and Ideas
P. 276 #10
What advantages and disadvantages of investing
through a discount broker rather than a fullservice broker?
Discount broker
Pro - Reduced commission
Con - Buyer must be well informed (do own research)
Full-Service broker
Pro – Well known, will provide research
Con – Costly commission
Review Facts and Ideas
P. 276 #11
Where can you find investment information
online?
In addition to websites of print publications and
brokers, the Internet offers many educational
sites for new investors.
Review Facts and Ideas
P. 276 #12
Distinguish between t-bills, Treasury notes, and
Treasury bonds.
• Treasury bills (t-bills) are short-term (one year
or less) debts of the US government.
– They are sold at a discount, in denominations of
$10,000 and increments of $5,000 thereafter.
• Treasury notes are issued in $1,000 or $5,000
denominations and mature between two and
ten years.
Review Facts and Ideas
P. 276 #12
Distinguish between t-bills, Treasury notes, and
Treasury bonds.
• Treasury bonds mature in 10 to 30 years, are
issued in $1,000 denominations, and pay the
highest interest rates.
Review Facts and Ideas
P. 276 #13
Explain the difference between stocks and
bonds.
• Stocks represent equity or ownership interests
in a company. Stocks have no guaranteed rate
of return. Stocks have more risk and more
potential earnings.
• Bonds represent debt or the loaning of money
to a company. Bonds have a specified rate of
return.
Review Facts and Ideas
P. 276 #14
What are some advantages of investing in
mutual funds?
• Two major advantages of mutual funds for an
investor:
– Professional management
– Diversification
Review Facts and Ideas
P. 276 #15
Why are futures and options risky investments?
• With futures and options, the investor is
betting that price of the commodity or stock
will rise over time.