COA4131 Final ExamChapter 11: Fundamentals of Investing- Investment definedo Investment = commitment of funds to achievement of long-term goals Purpose of investment – individuals invest to make money Importance of investing - Competing with rising prices (inflation)- Job salary raises are not enough- People are living longer- Threat of no longer having Social Security- Turn towards self-directed retirement plans- Preparations for investingo Stable lifeo Net wortho Regular savingso No credit card debto Employer sponsored retirement plan (tax advantages)- Four steps in investingo Setting goals/Developing Investment Attitude Questions to help in setting goals- What do I really want? How much money will it take to get there? How much money do I have? How long will it take? How much risk can I take? Am I being realistic?o Assessing risk and return Investment horizon - How long you need to save or invest to get something you want Expected returns - Anticipated future returns Current income- Money received from an investment Capital gains- Income that results from an increase in the value of an investment Capital losses- Lost income resulting from a decrease in an investment’s value Return- Total income from an investment Total return- Annual return on an investment, including appreciation and dividends or interestKatie McCrink Yield- Return on a capital investment, typically bonds Current yield- Annual interest on a bond, divided by market price; the actual rate of return Investment risk- Uncertainty over an investment’s actual returno Selecting instruments and allocating assets Asset allocation- Target mix of different types of investments (stocks, bonds, cash investments) Diversity- Putting money into different types of investments Portfolio - Combined holdings to increase diversification and to reduce risk- Active portfolio management involves buying and selling The investment ladder- Speculation – junk bonds, gems, metals, penny stocks Growth – growth mutual funds and stocks, raw land, real estateo Safety and income – preferred stocks, corporate bonds, government and municipal bonds - Security – cash, CDs, savings bonds, insurance (safest step, moneyis most secure)o Managing investments How much should be invested? How long should investments be held?- Buy and hold = a long-term strategy involving keeping investments for many years- A low return mutual fund should be sold and replaced Who should be involved in investment decisions and processing buy and holds? - The higher the risk, the higher the return- Money markets and short term bonds < intermediate term bonds < long-term bonds < high yield bonds < large cap US stocks < mid-small cap US stocks < international stocks < emerging markets- Types of investmentso Savings Accumulating funds in a risk-free conservative manner based on interestKatie McCrinko Stocks, bonds, mutual funds, money markets Stocks = ownership in a corporation represented by shares Bonds = investments involving lending money to organizations Dividends = distribution of money from a corporation or government to investors Mutual funds = groups of stocks, bonds, or other securities managed by aninvestment company Money markets = lending money to an organization such as a bank (CDs) or the government; offers security and liquidityo Real estate Rental propertyo Social securityo Company pensions Fixed pensions mean less buying powero Large holdings Executives and family owners of companies with a lot of money tired up in stock in that company Ex. WalMart, Bill Gates of Microsoft, Michael Eisner of Disneyo Your own businesso Anticipated inheritanceo Precious metals and collectibles Precious metals move against inflation Certain collectibles will provide high returns, many will noto Annuities Periodic payments from life insurance companies until deatho Transaction costs involved in investing Transaction costs = charges for buying and selling securities Comparison shop- Investing strategies and termso Risk and investment The risk of losing money by being too aggressive vs. the risk of losing buying power by being too conservative o Tradeoffs between risk and return Realized return = actual return on investments If you minimize your risk, you lower the expected returno Tax shelters Tax sheltered = no taxes are charged on profits until a later date- Trying to legally avoid tax liabilitieso Dollar cost averaging = systematic investing of equal sums of money at regular intervals regardless of price fluctuations in an investment Katie McCrink Dividend investment plans (DRIPs) = automatic reinvestment of shareholder dividends to buy additional stock Direct investment plans = investors buy stock directly from a corporation Employee stock ownership plans or stock options = program in which employees can buy stock in the company they work for at a reduced price or with matching funds from employerso Investment formulas and experts Universal investment formula does not exist; there is much trial and erroro Rebalancing and life cycle investing Rebalancing = adjusting asset allocation; resetting targets for what percentages you want held in stocks, bonds, cash, etc. The younger you are, the more risk you can take Small cap stocks = companies with market capitalization of $500 million or less- For less well-established companies, but fast growingo Starting to invest Signing up through payroll deduction of stocks, bonds, mutual funds, aftergetting a careero Deciding to sell Sell when you reach your goal or need the money Cut losses quickly Decide if what you own is a good investment todayo Time to invest Investing takes time- Other aspects of investingo Global investing Investing in foreign countries Downsides include lack of knowledge about the currencies’, companies, and potential volatility o Women and investing Concern – studies indicated that college women know less about investingand plan to invest less than men students even when the women have higher GPA’s and when majors are considered o Investment clubs = groups that form partnerships to invest in stocks and to learn about investing Invest the money as a group- Advice for beginnerso Know your risk levelo Investigate before you investo Hope for the bestKatie McCrinko Stay the courseo Invest – get in the marketo Diversityo
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