Download Investing

Investing
(Or…how to build wealth since I
can’t hit a golf ball like Tiger)
I. Understanding Your
Objectives
• WHY are you investing? What future
needs are you planning for?
• Examples:
- college tuition
- retirement
- down payment for a house
Objectives (con’t.)
• WHAT is your time frame?
• WHEN do you need the money?
• HOW long do you have to reach your
goal
(all 3 essentially ask the same Q.)
Risk and Reward
• Understand the relationship between risk
and reward:
Higher returns = higher risk
• Assess your tolerance for risk
Many Kinds of Risk !
• The value of your investments is exposed
to a variety of risks:
– Inflation risk (is it possible to play it TOO
safe?)
– Interest rate risk
– Political risk
– Many, many more to consider
Know what you are investing in
• Do you understand HOW your money will
grow?
• Are you able to judge for yourself HOW
your investment is doing?
Investment Choices
• There are lots of things that you can invest
in….for instance:
Real Estate
Examples:
• Buy “raw land”
• Buy a “fixer-upper” home to rent
• Buy an apartment building
Precious Metals
• Gold
• Silver
• Platinum
Art or “Collectables”
• Buy a painting, photo, sculpture, etc.
• Collectables:
- trading cards
- autographs
- memorabilia
- others
Commodities
http://video.google.com/videoplay?docid=529647372100644969&ei=MxgS_WaGaDKqQKC9dG0CA&q=trading+places+-site%3Ayoutube.com&hl=en#docid=-2701937519505157898
• Generally, most are agricultural
products…you make money by correctly
deciding if the price by a certain future
date will be higher or lower than today’s
• Examples:
- orange juice
- coffee
-wheat
- pork bellies
The 2 most common
investments:
Stocks & Bonds
BONDS
• Are debts…like an I.O.U.
The issuer must repay the bond PLUS interest
• Gov’ts sell bonds to raise money for various
reasons: for example,
– to pay for the cost of war (WWII war bonds)
– to build schools, hospitals, libraries, courthouses,
and other public buildings
– to build roads, bridges, etc.
– in general, to pay for construction projects that
benefit the general public
Who issues bonds?
1. Gov’ts: federal, state, local
A.



B.


U.S. Gov’t
Treasury Bonds
Treasury Notes
Treasury Bills
States and local gov’t
“municipal bonds”
Tax advantages
2. Corporations

Corporate Bonds
Why do Govt’s & Corps. Sell
Bonds?
•
Financing (paying for) large projects:
1. Gov’t needs to pay for…?
2. Corporations need to pay for…?
Bonds have 3 “parts”
• Principal – the amount borrowed
• Interest – the amount paid by the borrower
for using the money
• Maturity – the date by which the borrower
must pay off the loan
Who invests in bonds?
• People who want to generate an “income
stream”
(Investors collect the interest and then get their principal
back when the bond matures)
• Those looking for lower-risk investments
• Popular with senior citizens…why?
Stocks
• A common method for companies to raise large
sums of cash is to sell stock in the company…if
you own a share of stock, you own a piece of the
company
When a company sells stock for the 1st time:
“Initial Public Offering” (an “IPO”)
• Selling stock means giving up a degree of
ownership
How do I make money in
stocks?
• Capital Appreciation: buy low….sell high
• Dividends : cash payment to shareholders
by the company from its profits
dividends are not automatic…the Board
of Directors decides IF and HOW
MUCH the dividend will be
Where do shares of stock “trade”?
(where are they bought / sold?)
• The New York Stock Exchange (NYSE)
- generally, well-established companies
• The American Stock Exchange
• Nat’l Assoc. of Securities Dealers
Automated Quote System…or just
NASDAQ
Stock symbols
• EVERY stock has its own unique symbol
• Those traded on the NYSE have 1 to 3
letters: for example
- F = Ford Motor Co.
- HD = Home Depot
- IBM = Int’l Business Machines
Symbols (cont.)
• Stocks traded on NASDAQ have 4 letters:
• DELL = Dell Computer
• SIRI = Sirius Satellite Radio
• INTC = Intel Corp.
Reading a stock quote
http://finance.yahoo.com/marketupdat
e/overview
Stock Indexes
• What are they?
Quick way to measure how “the market” is
doing:
The Dow-Jones Industrial
Average
• AKA: ‘the Dow”
• Group of 30 stocks representing the major sectors
of the US economy
* Ford and GM
* Microsoft
* General Electric
* Coca Cola
* 25 others
• The Dow is an average of the 30 stocks
prices
• In theory, if the average goes up, “the
Market” in general has moved higher
• Weakness of the DJIA: not a very large
sample (can just 30 stocks really reflect
accurately what the overall market is
doing?)
The Standard & Poor’s 500 Index
• S+P 500 for short
• Same concept as the Dow, but uses 500
companies
• S + P 500 is generally the preferred index
to assess the overall market
Other Indexes
•
•
•
•
The Russell 2000
The Wilshire 5000
The NASDAQ 100
Dozens of other “specialty” indexes
(e.g. transportation index
utilities index
energy index)
(don’t need to write the following)
• So…the 1st thing to do when checking your
stocks is to get a sense of the overall
performance of the market
Do this by checking the Dow
and the S&P 500
http://finance.yahoo.com/
Why do stock prices go up or
down?
•
Basically….supply and demand! We want to
own shares in companies that are increasing
profits. Above all else: stock prices are
tied to a company’s
future earnings
If investors believe that earnings will grow, demand
for shares of stock in that company grows &
it’s price will rise (opposite if investors think
earnings will decline)
Be Advised!
•
Despite any developments surrounding a
company,
1. A company’s stock price is subject to
many currents in the economy
• Political events
• Events of the overall economy
• Events in that company’s industry
Accounting 101
Revenues (“income from sales”)
- Expenses
“Gross Income”
- Taxes____
“Net Income” (aka “net earnings”)
Net Earnings is a dollar amount
• Company A: net earnings = $2,000,000
• Company B: net earnings = $1,000,000
• Company A would be the better
investment, right? Not so fast…
• Company A has issued 4,000,000 shares
• Company B has issued 1,000,000 shares
• We need to do one simple math operation:
Net Earnings
# Shares
Comparison
• Company A:
$2,000,000
4,000,000 shares
= $0.50 / share…50¢ per share
in net earnings
• Company B:
$1,000,000
1,000,000 shares
= $1.00 / share…$1.00 per share in
net earnings
Now, connect the dots…
•
Recall that above all else: a stock’s value tends to
mirror its earnings… If earnings go up, a stock’s
price should go up
As investors, then, we look for:
1. Earnings growth year to year
•
•
Improving or deteriorating?
How do your company’s earnings
compare to its competition?
What could change a company’s
earnings?
1. An event or news specific to that
company:
• A new and exciting product
• A new contract
• A change of management
• Cost-cutting measures (like closing
unprofitable stores or divisions)
What could change a company’s
earnings (continued)
• The industry the company is in could be
changing (are there solar companies out
there that could be the next Microsoft?)
• Maybe the company & the industry are
fine but the entire economy is struggling?
Types of Stock
• “Growth” stocks: grows in value faster
than the overall market
• “Blue Chip” stocks: stock in companies
that are well-established…often household
names…leaders in their industry
• “Income” stocks: those that pay high
dividends
• “Cyclical” stocks: move with the business
cycle…tend to rise when the economy is
strong….fall when the economy struggles
• “Defensive” stocks: tend to hold value in
poor economic cycles, but do not rise as
fast in up cycles
• “Speculative” stocks: high risk stocks that
offer the promise of spectacular
returns…usually doesn’t happen!
“Stock-picking” isn’t always easy
• You might have the right industry…but the
wrong company
• Negative unforeseen events may occur
AFTER you own it
• A “solution”? Spread your risk over many
stocks…
Mutual Funds
• Pools investors’ monies
• Professionally managed
• Buys 100’s…1,000’s of different stocks
and or bonds
• DIVERSIFIES your investment $
• Hundreds of “families of funds” to choose
from