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CHAPTER 11 FUNDAMENTALS OF INVESTING Did you know In 1637 in the Netherlands a single tulip bulb was worth the cost of the best house in Amsterdam One hundred hundred shares of AT T purchased in 1983 at a cost of 6 140 is now worth about 74 562 representing a 17 7 percent annual return INVESTMENT DEFINED objectives Investment The commitment of funds capital to achievement of long term goals or Investments serve as a vital role in financial planning because they concern the management of wealth The are the key to long term financial success Purpose of investment Individuals invest to make money more specifically they invest to achieve financial goals increase current income gain wealth and financial security and have funds for homes children s college educations and retirement Importance of investing Investing has always been an important part of building wealth but in recent years it has become more critical because of rising prices inflation In many jobs salary raises are barely keeping pace with inflation To get ahead people need to invest PREPARATIONS FOR INVESTING Stable life Net Worth so you know how much you take in each month how much you spend and how much you have left to invest Regular Savings money set aside for emergencies No credit card debt credit cards should be paid off or under control Employer sponsored retirement plan These plans have tax advantages and most employers match at least part of your contribution FOUR STEPS IN INVESTING Setting goals Developing Investment Attitude One of the most important factors affecting goals is current income but as a student you are in a different situation It should be based on your anticipated income after you graduate 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 or will I have Assessing Risk and Return How long will it take to get the money How much risk can I take Am I willing to give up things I want now to live better in the future Given my circumstances what can I realistically expect In a poll of 2000 freshman 81 percent said owning a home is very important and 46 percent said individual retirement accounts IRAs and pensions are important Only 31 percent said stocks bonds mutual funds are important The first question refers to investment horizon How do you need to save or invest to get something you want Expected Returns Anticipated future returns Current Income Money received from investments Capital Gains refers to the income that results from an increase in the value of Capital Losses refers to the lost income that results from a decrease in the an investment value of an investment Return The total income from an investment based on current income plus capital gains or minus capital losses Total Return The best measure of a return The annual return on an investment including appreciation and dividends or interest It tells how well an investment is performed in a year Yield Return on a capital investment Most commonly the word yield is used to Current yield is the annual interest on a bond divided by market price It is the refer to bonds actual rate of return Investment Risk Uncertainty over an investment s actual return Selecting Investments Allocating Assets Eventually what investors seek is a comfortable workable level of assets Asset Allocation A target mix of stocks bonds and cash investments such as treasury bills CD s and money market funds Diverisfy Investors should Diversify their investments which means to put money into different forms of investing such as stocks bonds mutual funds real estate It is an investment strategy that is employed to balance risk by ensuring that not all your eggs are put into one basket Portfolio is created whereby the assets held by an investor are evaluated and INVESTMENT LADDER Tradeoffs between risk and return managed as a group Step 4 Speculation Options commodities junk bonds penny stocks collectibles metals gems futures contracts Step 3 Growth growth stocks growth mutual funds raw land real estate convertible bonds Step 2 Safety Income Preferred stocks corporate bonds gov and municipal bonds other than savings bonds utility stocks and some REITS Real estate Investment Trusts Step 1 Security Cash CD s Gov savings bonds insurance retirment plans U S treasury securities money market funds savings accounts The first step is the safest money is the most secure As you move up the ladder more risk may be encountered but also the possibility of a higher rate of return Managing Investments How much should be invested How long should investments be held Who should be involved in investment decisions and processing buy holds long term strategy involving keeping investments for many years There are 80 000 reps to choose from in the U S TYPES OF INVESTMENTS Savings The goal of savings is to accumulate funds in a risk free conservative manner based on interest Stocks Bonds Mutual Funds and money market instruments Stocks represent ownership in such corporationsas Intel Pepsi Cola and IBM Bonds Investments in which you lend money to some organization corporation or government for a period of time Dividends Distributions of money from a corporation or government to investors Mutual funds groups of stocks bonds or other securities managed by an investment Real estate Social security Company pensions Large holdings Your own business Anticipated inheritance Precious metals and collectables Annuities INVESTING STRATEGIES TERMS Risk and investment 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 Program in which employees can buy stock in the company they work for at a reduced price or with matching funds for employers COMMON STOCKS CHAPTER 12 STOCKS Issuers of Common stock Ex The Buckle Inc The Value of Common Stock Dollar appreciation of stock value Stocks do not have a specific cash flows however The value of a share can be seen as the present value of the dividends paid by the stock Stock splits Dividends Increases the number of shares in the public company The price is adjusted such that before and after market capitalization of the company remains the same and dilution does not occur Cash Company products PREFFERED STOCK


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FSU COA 4131 - CHAPTER 11 FUNDAMENTALS OF INVESTING

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