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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 Katie McCrink• 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 interest 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) DiversityKatie McCrink• 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, money is 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 an investment 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 investingKatie McCrink 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  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 takeKatie McCrink 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, after getting 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 investing and 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 investKatie


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FSU COA 4131 - Final Exam

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Notes

Notes

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Notes

Notes

25 pages

Notes

Notes

29 pages

CH 11

CH 11

31 pages

Chapter 6

Chapter 6

20 pages

Test 1

Test 1

2 pages

Test 1

Test 1

2 pages

Exam 3

Exam 3

59 pages

Exam 3

Exam 3

40 pages

Test 2

Test 2

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Test 3

Test 3

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Exam 2

Exam 2

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