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INVESTING
DECIDING TO INVEST
Before investing, make sure:
You are living within your means
 You are not paying finance charges or credit card
debt- charges and interest will be higher than any
earnings on investments
 You have adequate insurance protection
 You have emergency savings of 6-12 months of living
expenses.

continued
DECIDING TO INVEST
Investing is purchasing a financial product or
valuable item with the goal of increasing wealth
over time
 Investments offer greater returns than savings
 You risk losing some or all of your investment,
but gains usually exceed losses over time

continued
DECIDING TO INVEST

Reasons people invest:
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To increase wealth through
appreciation
To earn a steady income
To beat inflation
To take advantage of tax
benefits; capital gain is
income earned when the
selling price is greater than
purchase price
To preserve wealth in
unstable economic times
continued
DECIDING TO INVEST

Investment characteristics:
Degree of volatility
 Potential rate of return
 Level of risk
 Liquidity

 Risk
tolerance is the amount of
uncertainty you can handle
TYPES OF INVESTMENTS
Security—a type of investment issued by a
corporation, government, or other organization
 Securities include

stocks
 bonds
 mutual funds

TRUTH IN LENDING ACT

The Act that requires financial institutions to
provide information about costs and interestearning accounts in uniform terms

Provides Safeguards for the consumer so they
understand the terms of their loans/investments
STOCKS

Corporations sell stock to pay costs of start-up,
continuing operations, and expansion
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Stock is a share of ownership in a company
continued
STOCKS

Stockholders
have equity in a company
 share in profits after debts, taxes, and operating
expenses are paid
 aren’t responsible for company debt if company fails,
but can lose their investment
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continued
STOCKS

Stockholders make money in several ways:
Dividend income- The profit payout per quarter made
by the company to the shareholders
 Capital Gain- Profit from the sale of assets such
as stocks, bonds, or real estate
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The money made from successful sale of stocks due to
increased stock value
Stock splits
STOCK CLASSIFICATIONS

Common stock
Stockholders can vote in election of company
directors and other matters
 Increases in value more than preferred
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Preferred stock
Less risk; stockholders have first claim on assets if
company fails
 No voting privileges

continued
STOCK CLASSIFICATIONS
Blue-chip
 Income
 Growth
 Defensive
 Cyclical
 Penny
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STOCK TRADING
Stocks are bought and sold by stockbrokers in a
securities exchange or stock market
 Stockbrokers charge commissions on “buy” and
“sell” transactions

STOCK EXCHANGE
Place where most stocks are bought and
sold.
 Major exchanges:

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NASDAQ
New York Stock Exchange
Euronext
OVER-THE-COUNTER MARKETS
Stocks not listed on securities exchanges can be
bought and sold at over-the-counter (OTC)
markets
 An electronic network

allows dealers and brokers to conduct business
 lacks regulations of securities exchanges
 presents more risk for investors

INITIAL PUBLIC OFFERING

An initial public offering (IPO) is a company’s first
sale of stock to the public to
raise capital for expansion
 become publicly traded

Investment banks charge a commission to sell
securities to investors; rest of money goes to the
company
 Can be risky investments

This happened for Facebook in 2012 when they
became “publicly traded”
http://www.ask.com/wiki/Initial_public_offering_of_Facebook?o=2800&qsrc=999&ad=
doubleDown&an=apn&ap=ask.com
STOCK QUOTATIONS

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Stock quotations appear in major newspapers and
financial Web sites
To find a particular stock, you need the ticker symbol,
or company abbreviation
Current yield and price/earnings (PE) ratio help
investors determine health or weakness of a company
continued
STOCK QUOTATIONS
BONDS
When you buy bonds, you lend money to the
issuer—a corporation or government
 Issuer owes you the amount of the loan plus
interest on the bond’s face value
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BONDS
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Information stated on
bonds includes
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maturity date
face value
yield
coupon rate
market value
current yield
TYPES OF BONDS
Corporate bonds are issued when businesses
need money to operate and expand
 Municipal bonds are issued by state, county, and
city governments
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continued
TYPES OF BONDS
U.S. Government bonds are issued by the U.S.
Treasury
 Safest bonds you can buy
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Treasury bills (T-bills)
 Treasury notes and Treasury bonds
 U.S. savings bonds
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MUTUAL FUNDS
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Inexperienced investors often start with mutual
funds made up of securities chosen by
professional managers at investment firms
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Mutual funds are a collection of investments such as
stocks and bonds.
continued
MUTUAL FUNDS
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Advantages:
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Professional management
Diversification
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If one investment in the fund does poorly, it will be offset by
the growth of another investment
Liquidity
Disadvantages:
Management fees
 Lack of control
 Minimum investment required
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TYPES OF MUTUAL FUNDS
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Closed-end funds
Offer a fixed number of shares
 Shares are traded like stocks on securities exchanges
 Shares are bought and sold through investment
brokers, not through an investment company
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continued
TYPES OF MUTUAL FUNDS
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Most mutual funds are open-end funds
Unlimited number of shares
 Shares are sold and redeemed at their net asset value
(NAV)
 Value per share is the NAV of the fund divided by
number of shares outstanding
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continued
TYPES OF MUTUAL FUNDS
Load funds charge a commission on amount invested
when shares are bought
 No-load funds don’t charge fees when shares are
bought, but may charge fees when shares are sold or
redeemed
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continued
TYPES OF MUTUAL FUNDS
Income funds
 Balanced funds
 Growth funds
 Specialized funds
 Money market funds
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continued
TYPES OF MUTUAL FUNDS
THE NEWEST INVESTMENT TOOLEXCHANGE TRADED FUNDS (ETFS)
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Exchange Traded Funds (ETFs)
Mutual Fund that trades like a stock
 Usually they track an index or a sector of the economy
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Upsides
Instant liquidity- can be bought and sold throughout the
day
 ETFs pay less in capital gains- tax efficiency
 Typically lower Expense Ratios
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Downsides
Can make it tempting to “time the market”
 Bought and sold through brokerage firms- commission
costs
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FACTORS AFFECTING RETURNS
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Laws of supply and
demand determine the
price of stocks and
other investments
continued
FACTORS AFFECTING RETURNS
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Factors affecting returns include
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business cycle fluctuations
interest rate fluctuations
stock market fluctuations (bull market or bear
market)
product innovation
government actions
exchange-rate risk
BULL VS. BEAR
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Bull Markets
Good Markets
 High Returns
 Prices Rising
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(Remember the Bull Stands HIGH when he charges)
Bear Markets
Poor Markets
 Low Returns
 Decline in Prices
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(Remember the Bear crouches LOW when he runs/charges)
REAL ESTATE
Buying real estate (land or buildings) is another
way to invest for future profit
 Usually requires a down payment and a longterm loan
 Property usually increases in value over time
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HOME OWNERSHIP
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For many people, a home is
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a place to live
the first experience in
buying property
Advantage- Owning a home can increase net
worth and protect against inflation
Downfall- Risky because it is NOT a liquid
investment. In order to make money someone
must BUY your home
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Also home values have been falling due to a bad
economy (like the past few years)
REITS AND REAL ESTATE MUTUAL FUNDS
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Indirect investments in real estate include
Real Estate Investment Trust (REIT)
 Real estate mutual funds
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They avoid the complications and financial
commitment of owning individual properties
VALUABLE GOODS
Collectibles—rare coins, books, stamps, art,
antiques, sports memorabilia, vintage
automobiles
 Precious metals—gold, silver, platinum
 Precious gemstones and jewelry—diamonds,
emeralds, sapphires
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High Risk. Value changes based on market and
demand. You can only sell something that
someone else wants!
continued
VALUABLE GOODS
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Advantages
Value is not eroded by
inflation
 Objects can bring pleasure
and can be used or displayed
 Objects can increase in value
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continued
VALUABLE GOODS
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Disadvantages
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Less liquidity; can be difficult to sell quickly
Requires knowledge to judge value
Difficult to store and protect from damage and theft
Prices are often volatile
No guaranteed return on investment
CHOOSING INVESTMENTS
Investment portfolio—a collection of securities
and other assets a person owns
 Diversification is a strategy of successful
investors
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SOURCES OF INFORMATION
Professionals and financial experts can help
 Online resources:
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Investment-related Web sites
 Web sites of individual companies
 U.S. Securities and Exchange Commission (SEC)
EDGAR database

ANNUAL REPORTS
Are included in most
corporate Web sites
 Show current and predicted
market performance
 Report earnings per share
(EPS)
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PROSPECTUSES
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When an investor buys a security, the issuer
must provide a prospectus- A legal document that
gives a detailed description of a security.
Additional copies are
posted on company Web sites
 found on SEC’s EDGAR database
 mailed to prospective investors on request
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PROSPECTUSES
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Contents include
company officers
 business’s history and operations
 future plans
 financial risks
 performance summary
 fees and expenses
 management
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MARKET QUOTATIONS
Stock, bond, and mutual fund quotations appear
in the financial section of major newspapers and
financial Internet sites
 Quotations, or listings, contain financial
information including records of past and current
performance
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INVESTMENT STRATEGIES
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Smart investing
requires balancing
risks against returns
BUY AND HOLD
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Strategy of buying securities and holding them
for long-term gains as opposed to frequent
trading
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Buy and Hold allows you to take advantage of
dividends
Investors who sell stocks when they drop in value
lose money; investors who hold onto stocks
during market fluctuations usually gain in the
long run
DOLLAR-COST AVERAGING
With dollar-cost averaging, you invest without
regard to the price of the investment at the time
you buy it
 You end up buying more shares when the price is
low and fewer when it is high
 You can set up automatic payments with as little
as $25 monthly
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BUYING SECURITIES

You can use a
brokerage or securities
firm to buy and sell
securities
continued
BUYING SECURITIES
Open an account with a brokerage or securities
firm
 These firms charge a fee for their services
 Brokerage firms keep records of investors’
transactions and periodically send out
statements
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BROKERAGE FIRMS
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Full-service brokerage firms
maintain research departments
 provide investment advice, portfolio management,
and other services
 are good for both experienced and beginning
investors
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Discount Brokerage Firms
execute orders to buy and sell securities
 charge lower commissions than full-service
 are good for some experienced investors
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INVESTING FOR RETIREMENT
Retirement planning is key element of financial
security
 Some retirees need income for up to 30 years
 Starting a retirement investment plan early is
the most effective way to provide enough money
on which to live after retiring
 Social security should not be your sole source of
retirement income
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continued
EMPLOYER-SPONSORED RETIREMENT
PLANS
Employee Retirement Income Security Act
(ERISA) set standards for pension and
retirement plans to guarantee that workers
receive entitled benefits
 Vesting requirements are an important part of
this act
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401K
An employer-sponsored retirement plan
 Funded with employees’ before-tax salary
contributions; portion often matched by employer
contributions of cash, stock, profit sharing, or
deferred-compensation
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continued
401K
Advantages:
 Most plans offer different investment options,
including stocks, bonds, or mutual funds
 Employers match contributions
 Tax-deferred growth of savings
 Automatic payroll deductions
 Disadvantage:
 Investors may lack knowledge, which can
cause them to make poor choices
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continued
PERSONAL RETIREMENT PLANS
You can start a personal retirement plan at most
financial institutions
 Usually consists of investments in stocks, bonds,
and mutual funds
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IRAS
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Individual Retirement Account (IRA) is a
personal retirement account with tax benefits
Traditional: contributions and earnings are not taxed
until funds are withdrawn at retirement
 Roth: contributions are taxed, but withdrawals are
usually not
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SELF-EMPLOYED PLANS
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Simplified Employee Pension (SEP) plan or
Keogh plan
Tax-deductible contributions
 Contributions limited to percentage of earned income
 Earnings grow tax deferred until money withdrawn
at retirement
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CENTRAL IDEAS OF THE CHAPTER
 Investments
create wealth that meets
long-term financial goals.
 Investing offers the opportunity to earn
relatively high returns but it is not
without risk.
ESTATE PLANNING TERMS

Use the following terms in a paragraph relating
to the case study on p. 306
 Estate
 Executor
 Will
 Trustee
 Living will
 Trust
 Probate court
 Beneficiary
GLOSSARY OF KEY TERMS
 annuity.
A contract with an insurance
company that provides income for a set
period of time or for life.
 appreciation. An increase in the value of
an investment.
 bear market. Term for the market when
investors feel insecure and stock prices
fall.
Back
GLOSSARY OF KEY TERMS
 bond.
A certificate of debt issued by a
corporation or government that entitles
the bondholder to a set rate of interest on
the face value of the bond until it
matures.
 bull market. Term for the market when
investors are confident in the economy
and stock prices are rising.
 capital gain. Income earned from selling
an asset for more than the purchase price.
Back
GLOSSARY OF KEY TERMS
 common
stock. Stock that pays
dividends declared by the company and
gives stockholders certain voting rights.
 diversification. Spreading risk by
putting money in a variety of investments.
 dividend. A portion of a company’s
earnings paid to stockholders.
Back
GLOSSARY OF KEY TERMS
 dollar-cost
averaging. An strategy of
investing a fixed dollar amount at regular
intervals.
 estate. The possessions, such as property,
savings, investments, and insurance
benefits, a person leaves when he or she
dies.
 executor. A person appointed to carry
out the terms outlined in a will.
Back
GLOSSARY OF KEY TERMS
 investment
Back
portfolio. The collection of
securities and other assets a person owns.
 living will. A statement of instructions for
specific medical treatment if a person
becomes unable to make medical decisions.
Also called a healthcare directive.
 money market fund. A type of mutual
fund that deals only in high interest, shortterm investments such as U.S. Treasury
Bills, certificates of deposit, and commercial
paper.
GLOSSARY OF KEY TERMS
 mutual
fund. An investment created by
pooling the money of many people and
investing it in a collection of several
securities.
 net asset value. A mutual fund’s assets
minus its liabilities. Also called current
market value.
Back
GLOSSARY OF KEY TERMS
 preferred
stock. Stock that pays regular
dividends at a set rate. Preferred
stockholders have priority in receiving
dividends and assets, but do not have
voting privileges.
 probate court. The government
institution that processes a deceased
individual’s will and estate.
 prospectus. A legal document that gives
a detailed description of a security.
Back
GLOSSARY OF KEY TERMS
 securities
exchange. A formal market
where securities are bought and sold by
stockbrokers.
 stock. A share in ownership of a
corporation.
 stockbroker. An agent who buys and
sells securities for clients.
 trust. A legal agreement where assets
and property are managed by a trustee on
behalf of the beneficiaries.
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