COA 4131 Test 3 Study Guide Chapters 11 16 Chapter 11 Fundamentals of Investing o Did you know In 1637 in the Netherlands a singe tulip bulb was worth the cost of the best house in Amsterdam 100 shares of AT T purchased in 1983 at a cost of 16140 is now worth about 74562 representing a 17 7 annual return o Investments commitment of funds to achievement of long term goals Purpose of investment individuals invest to make money Importance of investment to build wealth and security In recent years it has become more critical because o Of rising prices inflation o Salary raises are barley keeping inflation o People are living longer so money has to last longer o Of worries that social security wont exist by the time will be needed o Of the turn toward self directed retirement plans Preparations for Investing to have a stabilized life net worth estimates regular savings no credit card debt and an employee sponsored retirement plan 4 Steps in Investing Setting goals developing investment attitudes o One of the most important factors affecting goals is current income for students its different Short term goals 0 3 years long Long term goals 7 years Midterm Goals 3 7 years o Questions to help in setting goal What do I really want How much will it take to get there How much money do I have How much risk can I take Am I willing to give up things I want now to live better in the future I can realistically expect Assessing Risk and Return o Once goals are set this revolves around 3 questions How long do you plan to invest Refers to investment horizons What amount of expected return are you aiming for Refers to expected returns How do you feel about risk Refers to the change of loss and perhaps significant loss o Investment Horizon the length of time you plan o Expected returns anticipated future returns o Current income money received form to invest investment o Capital gains income that results from an increase in the value of investments o Capital losses loss of income resulting from a decrease of an investment value o Return total income from an investment o Total return annual return on an investment including appreciation dividends or interest o Yield returns on a capital investment typically bonds o Current yield the annual interest on a bond divided by marker price o Investment risk uncertainty over an investments actual return Selecting Instruments and Allocating Assets o Asset allocation target mix of different types of investments investments o Diversity putting money into different types of o Portfolio combined holding to increase diversification and reduce risk o Active portfolio management involved buying and selling Managing Investments o How much should be invested As much as you o How long show investment be held As long as can you can o Who should be involved in investment decisions and processing buy and holds Immediate family and financial advisors should be involved stock brokers help you buy and sell o Managing investments ladder page 262 Step 1 Security cash CDs bonds Safest and most secure step Most secure is cash 2009 economy dropped Step 2 Safety and Income stocks corp bonds Types of Investments Step 3 Growth growth stocks mutual funds You want a lot of growth Step 4 Speculation options commodities Most risky encounter taking chances usually with bran new stocks Savings building your savings is the most simple the goal of savings is to accumulate funds in a risk free conservative manner based on interest Stocks ownership in a corporation represented by shares Bonds investments involving lending money to organizations Mutual funds groups of stocks stock or bond funds managed by investment funds these are good Dividends distributions of money from corporation or government to investors Money markets you lend money to an organization such as a bank or government they offer liquidity and security Usually FDIC insured so it is very safe Real estate It increases in value and you will make a profit but there is no guarantees primary home commercial building things you own Social security Provides a monthly check at retirement gets taken out of your paycheck and safe for you later in life has built in inflation protection o The closer to retirement or already retired will receive a life time of social security checks Company pensions Provides a monthly check at retirement fewer of these today may NOT have built in inflation protection it can be a set number of dollars per month without change Large holdings executives and family owners of companies may have a lot of money tied up in stick in that company Walmart less common large holding in a company Your own business is risky but it can be thought of as an investment Anticipated inheritance naturally things can go wrong a will can change or final health expenses and taxes can take away any more that was left in an estate Precious metals and collectibles most peoples values are over estimated serves as a hedge against inflation Annuities contracts bought from life insurance companies and the company promises the insured a series of periodic payments if the company is secure an annuity pays as long as person lives can be fixed or variable o Con if you 80 years old and you get it you don t get checks until your 90 years old aka Delayed Annuity there bad Transaction costs involved in investing Transaction cost charges for buying and selling securities o Example Ford stock was selling for a 1 a share now it s worth 12 The symbol is F Known for trucks They make military vehicles One to watch as well as general motors o October 2007 was the high point 14 164 last week is closed at 13 000 o They had a flash crash in May 2010 o Avis 41 cents was taken from this stock Conservative Moderate Aggressive graph page 264 o Things to know Decide on your own risk Approach on how you feel your personality and your investment strategy o Conservative one with the most cash o Moderate one with the most bonds o Aggressive one with the most money in the stock market Investing strategies and terms o Risk and investment Risk in loosing money by being too aggressive and by power of being too conservative Most people are aware of being too aggressive but not too conservative o Realized return actual return on investments o Tax free exempt No Tax o Tax shelters No taxes are charged on profits until later date Some investments are tax free exempt No taxes due until you make profit and sell it and then you pay taxes Most typical seller retires o Dollar
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