COA4131Exam 3Chapters 11-1611. Fundamentals of Investing- Insurance is to protect your money and family- Investing is to create wealth and security – building up - 1637, the Netherlands, a single tulip bulb was worth the cost of the best house in Amsterdamo Why was a tulip bulb worth more than a house in Denmark – it was the only one around, it was rare which made it more valuable rarityand high demand drove up the priceInvestment: Commitment of funds to achievement of long-term goals (key to long term success)- Purpose in investmento Achieve financial goalso Increase current incomeo Gain wealtho Financial securityo Have funds for homes, children’s college education, and retirement- Importance of investing o Rising prices (inflation)o Many job salary’s are not keeping pace with inflationo People are living longer money has to last longero Social Security may not exist by the time it will be neededPreparations for investing- stable life- net worth- regular savings- no credit card debit- employer sponsored retirement plan)o ***(retirement plans are the biggest investment most people have)Four Steps in Investing-Steps in the Investing process: (each step explained below)Setting Goals/Developing an Investment AttitudeAssessing Risk and ReturnSelecting Instruments and Allocating AssetsManaging Investment1COA4131Exam 3Chapters 11-16- (1) Setting Goals/Developing Investment Attitudeo Goals should be flexible, realistic, specific, desirable, and evaluatedo 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 to get the money I need? 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?o Short-term goals, midterm goals, long-term goals - (2) Assessing Risk and Returno Figure out risk and return How long do you plan to invest? What amount of expected return are you aiming for? How do you feel about risk?o Investment horizon: how long do you need to save or invest to get something that you want?o Expected returns: anticipated future returns CD with an expected return of 6.5o Current income: money received from an investment Rent collected by the owner of an apartmento Capital gains: income that results from an increase in the value of an investmento Capital losses: lost income resulting from a decrease in an investment’s valueo Return: total income from an investment Based on current income plus capital gains or minus capital losses What is the expected return? You get a CD – you know how much you’ll gain at the end of theyearo Total return: annual return on an investment, including appreciation and dividends or interest Tells you how well the investment performed in a year Things that go on that you don’t think about What your real total iso Yield: return on a capital investment, typically bonds Amount you’re going to get from the bondo Current yield: annual interest on a bond, divided by market priceo Investment risk: uncertainty over an investment’s actual return Chance of loss or perhaps a significant loss Everyone handles risk differently2COA4131Exam 3Chapters 11-16 Greater uncertainty = greater risk, but could = higher returns Government savings bond is backed by the federal government, where as stock is risky because you can’t predict the future of a company- (3) Selecting Investments and allocating assetso Asset allocation – allocate your assets and put them in categorieso Diversity – always want to spread the risk into different categorieso Portfolio – build a portfolio, which is a mix of your investments – stocks, bonds, real estate, etc. As you get older – take less risk because you have less timeo Pg. 261 – questions about risk management- Investment Laddero PICTURE: Slide 9, Chapter 11 (pg. 262 in the text)o Step 1: (first step of the ladder) SECURITY Safest, money is most secure Cash, CDs, government savings bond, savings accounts, etc. Always want to secure your investmentso Step 2: SAFETY AND INCOME Preferred stocks, corporate bonds, etc.o Step 3: GROWTH Growth stocks, growth mutual funds, raw land, real estate, convertible bonds, etc. o Step 4: SPECULATION Options, commodities, junk bonds, penny stocks, collectibles, metals, gems, futures contracts, etc.o ****As you move up the ladder, more risk may be encountered, but also the possibility of a higher rate of returno Always want to start at the bottom of the ladder- (4) Managing Investmentso How much should I invest? Save a chunk of money, when you feel like you’re ready, investo How long should investments be held? Buying is easy, selling is difficult A decent amount of timeo Who should be involved investment decisions and processing buy andholds? 80,000 registered stockbrokers in the US Get other people involved in the conversation and find out everything you can The more information the better3COA4131Exam 3Chapters 11-16 But keep the absolute amount and when you want to invest private!-***Bonds are the safestTypes of Investing- Savingso Have to save money first before you can make any moveso Savings accounts interest- Stocks, Bonds, Mutual funds, Money Marketso Stocks – owning a pieces of the business Hopes that the corporation will grow – increase in stock worth Fastest form of investing Hold a stock for as long as you wanto Bond – lending money to the company or government Leading money for them to build a bridge, etc. Lender rather than owner You are a “Bondholder” You give them $1000, they tell you how long they’ll own it, they’ll pay you $40 a month for 30 years.. at what point are youbeginning to make money? Corporate bonds or government bonds4COA4131Exam 3Chapters 11-16 Pay you back plus interest Bonds can last from 1 month to 1 year (paid every 6 months) Dividends – distributions of money from a corporation or government to investors (interest)o Mutual Funds – group of stocks, bonds, or other securities managed by an investment company Offer diversification Low minimum to start Professional management (fees are charged for management)o Money Market – certificate of deposit Very secure Very liquid – can sell them quickly- Real estateo If you own rental property you
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