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FSU COA 4131 - Exam 3 Notes

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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 AttitudeAssessing Risk and ReturnSelecting Instruments and Allocating AssetsManaging 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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