Download Investing Options

Investment Options
Three reasons to invest
• Investing helps beat inflation
• Investing increases wealth
• Investing is fun and challenging
– Opportunity to take risk
• Risk- the uncertainty of the outcome of
any given situation
– Gain knowledge
7 Wise practices of investing
1. Define your financial goals
2. Go slowly
1. Knowledge is power
2. If it sounds too good to be true it probably is
3. Follow through
4. Keep good records
5. Seek good investment advice
6. Keep knowledge current
7. Know your limits
1. How much money can you afford to risk?
2. How much risk are you willing to take?
Risk/Reward
The greater the potential reward – The
greater the risk that must be taken in
order to achieve it.
Risk
Reward
Risk Pyramid
Low risk/Low return
• Government Savings Bonds
• Certificates of Deposit
• Savings/Money Market Accounts
Risk Pyramid
Medium risk/Medium return
• Stock
– Stock is a share of ownership in the assets
and earnings of a company
– core of America’s economic system
• provide portfolio diversification
• Diversification- spreading risk among many types of
investments
Why Companies Issue Stock
• To grow or expand
• To pay for ongoing business activities
• It is popular because:
– The company does not have to repay the
money
– Paying dividends is optional
2 Basic Types of
Stock
Common Stock
Vs.
Preferred Stock
Common Stock
• Common stock – shares or units of ownership in
a public corporation
– Most basic form of ownership
– One vote per share owned to determine company’s
board of directors
Preferred Stock
• Preferred stock – type of stock that pays a
fixed dividend
– Dividends
• distribution of a portion of a company's earnings to
shareholders
– Fixed value paid out before common stock
• IF company fails preferred gets paid before
common
– Less risk than common stock = lower returns
– No voting rights
How Well the Stock
Market is Doing Overall
Part 2
3 Basic Indicators
• Dow Jones Industrial Average (“DOW”)
– Lists the 30 leading industrial blue chip stocks
• Standard and Poor’s 500 Composite Index
– Covers market activity for 500 stocks
– More accurate than DOW because it evaluates a
greater variety of stock
• National Association of Security Dealers
Automated Quotations (“NASDAQ”)
– Monitors fast moving technology companies
– Speculative stocks, show dramatic ups and downs
Ups and Downs
• bull market -market is doing well
– optimistic about the economy and are purchasing
stocks
• bear market -market is doing poorly
– investors are not purchasing stocks
– selling stocks already owned
Purchasing Stock
Stock brokers
• Full-service brokers- most expensive
– will call with advice
– keep an eye on stock and call if changes need to be
made.
• Discount brokers- charge less
– general advice
– research options available
– Buy and sell for you
• Online brokerage sites- Cheapest
– No advice-you do research for yourself
– Order takers
Three Stock Exchanges
• New York Stock Exchange (NYSE)
– Oldest and largest, began in 1792
– 2,800 companies
– Strict requirements
• American Stock Exchange
– Began in 1849
– allowing younger, smaller companies to list
• National Association of Securities Dealers Automated
Quotations
– over the counter electronic market
– 4,000 small companies
– More volatile because companies are young and new
Stock Transactions
• Customer- you
• Broker- qualified and regulated professional who
buys and sells stocks
• Trader- someone who buys and sells stock
shares
• Specialist- Seller of specific stock. Shows best
bids and asked prices to the market during
trading hours.
Traders
NEW
YORK
STOCK
Specialist
EXCHANGE
Broker
Customer
The guaranteed way to make
money in the stock market is
simple:
Buy Low and Sell High
Medium Risk/Medium Return
• Mutual funds- shares bought in a large,
professionally managed group of
investments
– Pools money of investors to buy large
amounts of stocks and bonds
– Advantages
• Professional management
• Diversification- spreading risk among many types
of investments
Bond- money loaned to government
or corporation
– Corporate
• Study Guide- read pages
• Debenture
306-315 and
• Mortgage
1.Explain the following types
of bonds.
• Convertible
2.Explain where and how
– Government
you can buy bonds.
• Municipal
3.What are the three ways to
• Revenue
earn a return on a bond?
• General
4.Why are bonds safer than
obligation
other investments?
Risk Pyramid
High Risk/High Return
• Futures- buy and sell stock on a specific
date in the future at a specific price
– Betting the price will go up or down accordingly
• Penny Stocks- low priced stocks of small
companies- risk of failure is high
• Collectibles- gain or lose value as public
tastes change