Download CHAPTER 11: INVESTING IN STOCKS AND BONDS

CHAPTER 11:
INVESTMENT PLANNING
Copyright  2002 by Harcourt, Inc. All rights reserved.
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11-2
How Can You Get Started
Investing?
 Accumulate money by regularly
allocating a portion of your earnings for
investing.
 Take advantage of automatic investment
and dividend reinvestment programs.
 While saving, learn as much as possible
about investments and "play" trade.
Copyright  2002 by Harcourt, Inc. All rights reserved.
11-3
What are Your
Investment Objectives?
Supplement current income—
appropriate for retired persons.
Save for major expenditures—
such as college education,
down payment on a home, or
starting a business.
Copyright  2002 by Harcourt, Inc. All rights reserved.
11-4
Save for retirement—to live
comfortably in your "golden
years."
Shelter income from taxes—to
preserve more of your earnings.
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11-5
Different Ways to Invest
Common Stock
Bonds
Preferreds and Convertibles
Mutual Funds
Real Estate
Commodities, Financial Futures,
and Options
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11-6
Securities Markets
 Place (not always physical) where
financial instruments are traded.
 Capital market—where long-term
securities (those with maturities
greater than 1 year) are traded.
 Money market—where low-risk, shortterm securities (those with maturities
less than 1 year) are traded.
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11-7
 Primary market—for new issues which
are available for the very first time.
The issuing company gets the
proceeds.
 Secondary market—for trading
previously issued securities. Trading
is done between investors; issuing
company gets nothing.
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Organized Securities Exchanges
11-8
– Secondary markets for trading listed
securities.
– Physical marketplaces such as the
NYSE, AMEX, and regional
exchanges.
– Utilize brokers to facilitate trading
between buyers and sellers.
– Handle transactions of larger, wellknown companies' securities.
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Over-the-counter Market
11-9
– Secondary market where securities
are traded via a telecommunications
network.
– Investors trade directly with
securities dealers.
– Larger, actively traded issues make
up NASDAQ, while smaller, thinly
traded issues are listed on "pink
sheets."
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Foreign securities markets
11-10
– Organized securities exchanges
exist in more than 100 countries
worldwide.
– Found in major industrialized
nations such as Japan, Great Britain,
Germany and Canada.
– Also found in developing markets
around the globe.
Copyright  2002 by Harcourt, Inc. All rights reserved.
11-11
Regulating the Securities Markets:
 Federal and state laws regulate the sale
of securities.
 Purpose is to provide for adequate and
accurate disclosure of financial
information.
 Securities and Exchange Commission
(SEC) is the agency in charge of
administering federal securities laws.
Copyright  2002 by Harcourt, Inc. All rights reserved.
11-12
Market Trends:
 Bull market—generally rising securities
prices for an extended period of time.
– Reflects investor optimism.
– Associated with favorable economy.
 Bear market—generally falling securities
prices for an extended period of time.
– Reflects investor pessimism.
– Associated with economic downturn.
Copyright  2002 by Harcourt, Inc. All rights reserved.
11-13
Making Transactions
In the Securities Markets
 Stockbrokers purchase and sell
securities for investors.
 Select from full-service, discount, or
online broker, depending on your
needs.
 Consider brokerage fees when
making securities transactions.
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Investor Protection:
11-14
 Securities Investor Protection Corp.
protects customer accounts against
financial failure of brokerage firm.
 SIPC insures accounts up to $500,000
(brokerage firms often purchase even
greater amounts of coverage).
 Guarantees securities or cash held by
broker will be replaced (does not
guarantee dollar value of securities!).
Copyright  2002 by Harcourt, Inc. All rights reserved.
11-15
Executing Trades:
Market orders generally take less
than 2 minutes!
Investor must first establish
account with broker.
Trades can be executed by phone,
at the brokerage firm, or online
with a PC.
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Investor places
the order with
the broker
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11-16
Investor places
the order with
the broker
Broker transmits
order to the
market via telecommunications
equipment.
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11-17
Investor places
the order with
the broker
Broker transmits
order to the
market via telecommunications
equipment.
Order is
filled at the
market by
other buyers
and sellers.
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Clip Art  2001 Microsoft Corporation. All rights reserved.
11-18
Investor places
the order with
the broker
Broker transmits
order to the
market via telecommunications
equipment.
Execution of
the order is
confirmed
to the broker.
Order is
filled at the
market by
other buyers
and sellers.
Copyright  2002 by Harcourt, Inc. All rights reserved.
Clip Art  2001 Microsoft Corporation. All rights reserved.
11-19
Investor places
the order with
the broker
Broker confirms order
fulfillment. Investor has
3 days to settle account.
Execution of
the order is
confirmed
to the broker.
Broker transmits
order to the
market via telecommunications
equipment.
Order is
filled at the
market by
other buyers
and sellers.
Copyright  2002 by Harcourt, Inc. All rights reserved.
Clip Art  2001 Microsoft Corporation. All rights reserved.
11-20
11-21
Types of Orders:
Market order—trade now at best
available price.
Limit order—trade when a
specified price or better is reached;
investor is seeking opportunity.
Stop-loss order—sell if price drops
to certain price; investor is seeking
to limit losses.
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11-22
Margin Trading:
Allows investor to purchase
securities on credit by borrowing
part of purchase price from broker.
Increases gains when
returns are positive.
Increases losses when
returns are negative.
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Example of Margin Trade with Profit:
11-23
Transaction
w/out w/margin
 Initial investment (100 shares @ $50)
Amount invested
$5,000
$2,500
Amount borrowed
$
0
$2,500
Total purchase
$5,000
$5,000
 Price INCREASES (100 shares @ $70)
Gross proceeds
$7,000
$7,000
Less interest (9%)
$
0
$ 225
Net proceeds
$7,000
$6,775
Net profit
$2,000
$1,775
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Example of Margin Trade with Loss:
11-24
Transaction
w/out w/margin
 Initial investment (100 shares @ $50)
Amount invested
$5,000
$2,500
Amount borrowed
$
0
$2,500
Total purchase
$5,000
$5,000
 Price DECREASES (100 shares @ $30)
Gross proceeds
$3,000
$3,000
Less interest (9%)
$
0
$ 225
Net proceeds
$3,000
$2,775
Net loss
($2,000) ($2,225)
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Margin Trade Returns:
11-25
Return = Profit (loss)  Amount Invested
 Price Increase
Return
 Price Decrease
Return
w/out
$2,000
$5,000
40%
w/margin
$1,775
$2,500
71%
($2,000) ($2,225)
$5,000 $2,500
(40%)
(89%)
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Short Selling:
11-26
 Allows investor to sell securities
borrowed from the broker or broker's
accounts.
 Before period is over, investor must
buy securities to replace those
borrowed.
Investor profits if security’s
price has declined.
Investor loses if security’s
price has increased.
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11-27
Example of Short Sale:
Investor wishes to short 100
shares of ABW now selling at
$52.50/share.
Broker sells borrowed shares for
investor:
100 x $52.50 = $5,250 proceeds
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11-28
Scenario A:
Price of security drops to $40/share
& investor repurchases:
Costs 100 x $40 = $4000 to replace
shares.
Investor receives:
$5250 – $4000 = $1250 profit!!
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11-29
Scenario B:
Price of security rises to $60/share &
investor repurchases:
Costs 100 x $60 = $6000 to replace
shares.
Investor receives:
$5250 – $6000 = ($750) loss!!
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11-30
To profit from short selling—
not only must the price of the
security fall, but it must do so
within the given time period.
Double jeopardy!
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11-31
Becoming an
Informed Investor
Types of Information to Follow:
– Economic developments and
current events
– Alternative investment vehicles
– Current interest rates and price
quotations
– Personal investment strategies
Copyright  2002 by Harcourt, Inc. All rights reserved.
11-32
Available Investment Information :
 Annual Reports
 Financial Press
(WSJ and
financial
magazines)
 Brokerage
Reports
 Advisory
Services
 Investment
Advisors
 On-Line
Sources
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11-33
Online Investing
 Online services
 Educational
material
 Investment
tools
 Investment
planning
 Research and
screening
 Portfolio
tracking
 Day trading
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11-34
Using the Internet Wisely:
Do your own research.
Realize that frequent trades
mean higher transaction costs.
Don’t believe everything you
read.
Avoid online scams.
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11-35
Questions to Ask:
Is the stock registered?
Who is making the sales pitch?
Is it too good to be true?
Refer to SEC Web site:
www.sec.gov/consumer/offertip.htm
Copyright  2002 by Harcourt, Inc. All rights reserved.
11-36
Managing Your
Investment Holdings
 Build a diversified portfolio of
securities based upon your goals and
personal situation.
 Allocate your assets according to
your objectives.
 Track your investments and
rebalance your portfolio as your
needs change.
Copyright  2002 by Harcourt, Inc. All rights reserved.
THE END!
Copyright  2002 by Harcourt, Inc. All rights reserved.