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INVESTING IN INVESTING IN STOCKS & BONDSSTOCKS & BONDS
Business DepartmentBusiness Department
Mrs. PollisonMrs. Pollison
InvestingInvesting
The use of savings to earn a financial The use of savings to earn a financial return.return.
Objective: earn money with moneyObjective: earn money with money
Stages of InvestingStages of Investing
Emergency AccountEmergency Account– Short-term savings (3-6 month’s pay)Short-term savings (3-6 month’s pay)
Begin InvestingBegin Investing– Conservative, low riskConservative, low risk
Systematic InvestingSystematic Investing– Retirement, college; long-rangeRetirement, college; long-range
Strategic InvestingStrategic Investing– Self-management; maximize returnSelf-management; maximize return
SpeculationSpeculation– Take changes; quick profit; high riskTake changes; quick profit; high risk
Rule of 72Rule of 72 Quick method to evaluate rate of Quick method to evaluate rate of
returnreturn Double your moneyDouble your money Number of years:Number of years:
– Divide 72 by the rate of returnDivide 72 by the rate of return– Earning 10%Earning 10%– Answer: 72 divided by 10=7.2 yearsAnswer: 72 divided by 10=7.2 years
Rate of return:Rate of return:– Divide 72 by the number of yearsDivide 72 by the number of years– Need $5,000; double in 6 yearsNeed $5,000; double in 6 years– Answer: 72 divided by 6=12%Answer: 72 divided by 6=12%
Why Invest?Why Invest?
Helps beat inflationHelps beat inflation– Inflation = general rise in pricesInflation = general rise in prices
Increases wealthIncreases wealth Fun and challengingFun and challenging
Risk – Risk – chance that an investment’s chance that an investment’s value will decrease.value will decrease.
Short-termShort-term investments are generally investments are generally less riskyless risky
Interest-rateInterest-rate risk risk– Rates don’t keep up with inflationRates don’t keep up with inflation
PoliticalPolitical risk risk– Increased taxes & controlsIncreased taxes & controls
MarketMarket risk risk– Business declinesBusiness declines– Interest rate fluctuationsInterest rate fluctuations
Company or industryCompany or industry risk risk
Sources of Financial InfoSources of Financial Info NewspapersNewspapers
– The Wall Street JournalThe Wall Street Journal– Barron’sBarron’s
Investor Services & NewslettersInvestor Services & Newsletters– Moody’s Investor Service (Moody’s Investor Service (www.moodys.comwww.moodys.com))– Standard and Poor’s Reports (Standard and Poor’s Reports (
www.standardandpoors.comwww.standardandpoors.com)) Financial MagazinesFinancial Magazines
– Business Week (Business Week (www.businessweek.comwww.businessweek.com))– Forbes (Forbes (www.forbes.comwww.forbes.com))– Money (Money (www.money.cnn.comwww.money.cnn.com))
BrokersBrokers Financial Advisors (CFP’s)Financial Advisors (CFP’s) Annual ReportsAnnual Reports Online Investor EducationOnline Investor Education
Low Risk/Low ReturnLow Risk/Low Return
Corporate & Municipal BondsCorporate & Municipal Bonds– Debt obligations of corporations of local Debt obligations of corporations of local
governmentsgovernments US Government BondsUS Government Bonds
– Lending money to US govtLending money to US govt– Series EE – discount bondSeries EE – discount bond
Treasury SecuritiesTreasury Securities (T-Bills) (T-Bills)– $10,000 + increments of $5,000$10,000 + increments of $5,000– Treasury notes & Treasury bondsTreasury notes & Treasury bonds
Medium Risk/Medium ReturnMedium Risk/Medium Return StockStock
– Unit of ownership in a corporationUnit of ownership in a corporation Mutual FundsMutual Funds
– Shares in a large, professionally Shares in a large, professionally managed group of investmentsmanaged group of investments
AnnuitiesAnnuities– Contract sold by insurance co.Contract sold by insurance co.– Provides regular payments (retirement)Provides regular payments (retirement)
Real EstateReal Estate– Houses and landHouses and land
High Risk/High ReturnHigh Risk/High Return FuturesFutures
– Specified price on a specified date in the futureSpecified price on a specified date in the future OptionsOptions
– Right, not obligation, to buy or sell a Right, not obligation, to buy or sell a commodity or stock for specified price, commodity or stock for specified price, specified periodspecified period
Penny stocksPenny stocks– Low-priced stocks of small companies w/no Low-priced stocks of small companies w/no
track recordtrack record CollectiblesCollectibles
– Coins, art, memorabiliaCoins, art, memorabilia
StockStock
Common:Common: Variable dividendVariable dividend Voting rightsVoting rights Proxy: transfer Proxy: transfer
voting authority to voting authority to someone elsesomeone else
Preferred:Preferred: Fixed dividendFixed dividend No voting rightsNo voting rights Less riskyLess risky Lower returnLower return
Terms:Terms:
Income stocksIncome stocks – consistent history of – consistent history of paying high dividends.paying high dividends.– Receive current incomeReceive current income– RetireesRetirees
Growth stocksGrowth stocks – corporations that – corporations that reinvest profits in business to reinvest profits in business to promote growth. promote growth. – Little or no dividendsLittle or no dividends– Future capital gainsFuture capital gains– Long-term investmentsLong-term investments
Bulls and BearsBulls and Bears
Bull Market:Bull Market: Prolonged period of Prolonged period of
rising stock pricesrising stock prices Investor optimismInvestor optimism Confidence in Confidence in
economyeconomy
Bear Market:Bear Market: Prolonged period of Prolonged period of
falling stock pricesfalling stock prices Investor pessimismInvestor pessimism Prices may fall 20%Prices may fall 20% Short & savageShort & savage
Strategies (Short-Term)Strategies (Short-Term)
Buy on MarginBuy on Margin– Borrow money from broker (Margin Account)Borrow money from broker (Margin Account)– Minimum of $2,000 depositMinimum of $2,000 deposit– Leverage = using borrowed money to buy Leverage = using borrowed money to buy
securitiessecurities– Betting that stock will increaseBetting that stock will increase
Short sellingShort selling– Selling stock borrowed from brokerSelling stock borrowed from broker– Must be replaced laterMust be replaced later– Betting that stock price will drop (buy back at Betting that stock price will drop (buy back at
lower price)lower price)
Strategies (Long-Term)Strategies (Long-Term)
Buy and HoldBuy and Hold– Overall trend of non-speculative stocks Overall trend of non-speculative stocks
is upis up– Over years, ride out down timesOver years, ride out down times
Dollar-Cost AveragingDollar-Cost Averaging– Systematic purchase of equal dollar Systematic purchase of equal dollar
amount of same stock at regular amount of same stock at regular intervalsintervals
– Price averages outPrice averages out