COA4131 Exam 3 Chapters 11 16 1 11 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 Amsterdam o 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 rarity and high demand drove up the price Investment Commitment of funds to achievement of long term goals key to long term success Purpose in investment o Achieve financial goals o Increase current income o Gain wealth o Financial security o 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 inflation o People are living longer money has to last longer o Social Security may not exist by the time it will be needed Preparations for investing stable life net worth no credit card debit regular savings Four Steps in Investing employer sponsored retirement plan o retirement plans are the biggest investment most people have 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 Investment COA4131 Exam 3 Chapters 11 16 2 1 Setting Goals Developing Investment Attitude o Goals should be flexible realistic specific desirable and evaluated o 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 Return o 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 5 o Current income money received from an investment Rent collected by the owner of an apartment o Capital gains income that results from an increase in the value of an investment o Capital losses lost income resulting from a decrease in an investment s value o Return total income from an investment Based on current income plus capital gains or minus capital losses year What is the expected return You get a CD you know how much you ll gain at the end of the o 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 is o Yield return on a capital investment typically bonds Amount you re going to get from the bond o Current yield annual interest on a bond divided by market price o Investment risk uncertainty over an investment s actual return Chance of loss or perhaps a significant loss Everyone handles risk differently COA4131 Exam 3 Chapters 11 16 3 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 assets o Asset allocation allocate your assets and put them in categories o Diversity always want to spread the risk into different categories o 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 time o Pg 261 questions about risk management Investment Ladder o 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 investments o Step 2 o Step 3 o Step 4 SAFETY AND INCOME Preferred stocks corporate bonds etc GROWTH Growth stocks growth mutual funds raw land real estate convertible bonds etc 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 return o Always want to start at the bottom of the ladder 4 Managing Investments o How much should I invest Save a chunk of money when you feel like you re ready invest o How long should investments be held Buying is easy selling is difficult A decent amount of time o Who should be involved investment decisions and processing buy and holds 80 000 registered stockbrokers in the US Get other people involved in the conversation and find out everything you can The more information the better COA4131 Exam 3 Chapters 11 16 But keep the absolute amount and when you want to invest private 4 Bonds are the safest Types of Investing Savings o Have to save money first before you can make any moves o Savings accounts interest Stocks Bonds Mutual funds Money Markets o 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 want o 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 you beginning to make money Corporate bonds or government bonds COA4131 Exam 3 Chapters 11 16 5 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 estate o If you own rental property you have a source of income They re paying you rent every month o Hoping that the real estate will rise in value o Hopefully making a profit o Location and timing of transaction are important Social Security o Lifetime social security checks o Mostly for peoples retirement Company pensions Large holdings o Monthly check at retirement could be fixed o Should be invested with growth
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