FSU COA 4131 - Chapter 11: Fundamentals of investing

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Chapter 11: fundamentals of investing1. Investment: commitment of funds to achievement of long-term goals.2. Purpose of investment: a. Individuals invest to make money b. Achieve financial goals, increase income, gain wealth and financial security, have funds for homes, children’s college, and retirement3. Importance of investing due to:a. Rising of prices (inflation)b. People are living longer and their money has to last longerc. Worries that social security will not exist in the futured. Self-directed retirement plans and how retirement funds are invested4. Preparations for investing:a. Stable life: live in a place you will stay for a while, secure job, etc.b. Net worth estimate: what you won, what you owe.c. Regular savings and money set aside for emergenciesd. No credit card debte. Employer sponsored retirement plan: tax advantages and most employers match at least part of your contribution5. Four steps in investing:a. Setting goals /developing investment attitudei. Goals should be flexible, realistic, specific, desirable, and evaluatedii. Develop investment attitude by asking companies about expansionand develop interest in topic.b. Assessing risk and returni. Investment horizon: how long do you need to save money or invest to get something that you want?ii. Expected returns: anticipated future returnsiii. Current income: money received from an investmentiv. Capital gains: income that results from an increase in the value ofan investment (taxed)v. Capital loses: lost income resulting from a decrease in an investment’s value (deducted from tax, tax benefit)vi. Return: total income from an investmentvii. Total return: annual return on an investment, including appreciation and dividends or interestviii. Yield: return on a capital investment, typically bonds. ix. Current yield: annual interest on a bond, divided by market price. (current worth)x. Investment risk: uncertainty over an investment’s actual return1. The greater the uncertainty, the higher the riskc. Selecting investments and allocating assetsi. Asset allocation: target mix of different types of investments (what do I want)ii. Diversify: putting money into different types of investments1. Key to success 2. Don’t put all into one3. Mix different categoriesiii. Portfolio: combined holding to increase diversification and to reduce risk1. Group of investmentsiv. Investment ladder: as you move up the ladder, more risk is encountered1. Security: cash, CDs, gov. savings bonds, insurance, etc.2. Safety and income: preferred stocks, corporate bonds, etc.3. Growth: raw land, real estate, convertible bonds, etc.4. Speculation: collectibles, metals, gems, future contractsd. Managing investmentsi. How much should be invested?ii. How long should investments be held?1. Buy and hold is a long-term strategy involving keeping investment for many years. iii. Who should be involved in investment decisions and processing buy and holds?1. Stockbrokers6. Types of investment:a. Savings: accumulate funds in a risk-free, conservative manner based on interest over time. b. Stocks: ownership in a corporation represented by shares.c. Bonds: investments involving lending money to organizationsd. Dividends: distribution of money from a corporation or government to investorse. Mutual funds: groups of stocks, bonds, or other securities managed by an investment companyf. Money market: lend money to an organization such as bank or government and they offer security and liquidity in exchangeg. Real estate: as general rule, real estate increases in value and you will make a profit, but these are no guarantees.i. Rental property serves as a source of income and a hedge against inflationii. Ownership of land or won and live in a house, is also a hedge against inflation-Conservative -moderate -aggressiveh. Social security: those in retirement or close to it will receive monthly checks. Have built-in inflation protectioni. Company pensions: provide monthly check at retirement. Pension money that does not go for immediate living expenses should be investedj. Large holdings: less common. Executives and family owners of companies have a lot of money tied up n a stock in the company. k. Your own business: risky. If successful it can be a great investmentl. Anticipated inheritances: things can go wrong. Will can change or final health expenses and taxes can take away money that was left in an estatem. Precious metals and collectibles: serve as a hedge against inflation. Some are overestimated. Know your subject and buy from reputable dealers.n. Annuities: contracts brought from life insurance companies in which thecompany promises the insured a series of periodic payments. If the company is secure, an annuity pays as long as a person liveso. Transaction costs: charges for buying and selling securities7. Investing strategies and terms:a. Risk and investment:i. Two types of risk: 1. Losing money by being too aggressive2. Losing buying power by being too conservativeb. Tradeoffs between risk and returni. Realized return: actual returns of investmentc. Tax shelters: no taxes are charged on profits until a later dated. Dollar cost averaging: systematic investing of equal sums of money at regular intervals regardless of price fluctuations in an investmenti. Dividend reinvestment plans (DRIPs): automatic reinvestment of shareholder dividends to buy additional stockii. Direct investment plans: investors buy stick directly from a corporationiii. Employee stock ownership programs: programs in which employees can buy stick in the company they work for at a reduced price or with matching funds from employers.8. Investing strategies and terms:a. There is no perfect formula 9. Rebalancing and life cycle investing: a. Rebalancing: adjusting asset allocation.b. Starting to Investi. Remove $50 a month for investmentii. Youth is an advantagec. Deciding to Selli. Sell when you reach your goal or need money ii. Cut losses quickly iii. Decide if what you won is a good investment todayiv. Buy and hold, but not strangleholdd. Time to Investi. If salary is barely keeping up with inflation, your investments should be beating inflationii. If investments aren’t beating inflation, rebalance portfolio10.Other aspects of investinga. Global investing: Coca- Cola, Colgate, Palmolive, and Ford derive a large percentage of their revenue from abroadb. Women and investing: i. Women need to take into consideration divorce rate and death


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