CH 11 1 Underlying principle is that to build wealth one needs a investment plan and a good return on money 2 Investment Defined a This is because investments stretch your income further a Investment commitment of funds capital to the achievement of long term goals or objectives i Investments are important because they concern the management of wealth which is the key to long term financial success b Purpose of investment Invest to make money i ii Helps money grow wealth college retirement c Importance of investing i Investing is important part of buiiding wealth and security because 1 Of rising prices inflation 2 Many job salary raises are barely keeping pace with inflation 3 People are living longer so their money must last longer 4 Social security might not exist when it is needed most 5 Turn to self directed retirement plans a This is when the individual guides how retirement funds are invested 3 Preparations for investing a These tasks must be completed before you start investing i Stable life good job car is running bills are paid for ii Part of this is having a net worth estimate what you own what you owe and a budge of how much you take in spend and will have left after investment iii Regular savings plan and money set aside for emergencies iv No credit card debt 1 Important cause it doesn t make sense to pay 18 on credit cards and make only 5 on investments v Employer sponsored retirement plan These have tax advantages and most employers match at least part of your contribution 4 Four steps of investing a Setting goals developing an investment attitude i Most important factor affecting goals is current income ii As a student college is a good time to think about what you iii Your goals should be flexible realistic specific desirable and want to achieve evaluated iv Ask What do I really want How much money will it take to get there How much risk can I take b Assessing risk and return i This revolves around How long do you plan to invest What amount of expected returen are you aiming for How do you feel about risk Investment horizon how long before you need the money ii iii Expected returns anticipated future returns iv Current income money received from an investment 1 Rent collected by the owner provides current income v Capital gains income that results from an increase in the value for the owner of an investment value of an investment sold vi Capital losses lost imcome resulting from a decrease in the vii Capital gains losses are realized only when an investment is viii Return total income from an investment ix Total return annual return on an investment including appreciation and dividends on interest in a year x Yield return on a capital investment typically bonds xi Current yield annual interest on a bond divided by market xii price The actual rate of return Investment risk uncertainty over what an investment s actual return may be over a period of time 1 Greater the uncertainty greater the risk but also the c Selecting investments and allocating assets greater the chance for a higher return Investors seek a comfortable workable level of assets i ii Asset allocation target mix of stocks bonds and cash investments such as Treasury bills CDs and money market funds iii Diversity putting money into different types of investments such as stocks bonds mutual funds and real estate 1 Investment strategy that is employed to balance risk by ensuring that not all your eggs are put into one basket iv Portfolio combined holdings to increase diversification and to reduce risk 1 Assets are held by an investor are evaluated and managed as a group 2 Active portfolio management involves buying and selling v Steps of investing 1 Security Cash CDs gov savings bonds insurance a Money is most secure so it s the most safe 2 Safety and income preferred stocks corporate bonds gov and municipal bonds other than savings bonds 3 Growth Growth stocks growth mutal funds raw land real estate convertible bonds 4 Speculation options commodiites junk bonds penny stocks collectibles metals gems 5 As you go up the ladder more risks may be encountered but the possibility of a higher rate of return is possible d Managing investments i How much should be invested 1 Any amount is good to start investing Better with bigger chunks though ii How long should investments be held 1 Short and long term strategies include a Buy and Hold This is a long term strategy involving keeping investments for many years b More activity In short term strategies the performance of individual investments often leads to changes iii Who should be involved in investment decisions and processing buy and sell orders 1 Stockbrokers firm institution e Types of investments i Savings 1 Savings accumulate funds in a risk free conservative manner based on interest amount earned on the amount placed in the investment over time ii Stocks bonds mutual funds money markets 1 Stocks ownership in a corporation represented by 2 Bonds investments involving lending to organizations shares for a period of time a Issuer of the bond is obligated to pay you at specific intervals and repay the principal amount of the loan at maturity b Corporate bond payments come from a company c Government bond written pledge of government to repay a sum of money 3 Dividends distributions of money that a corporation or government pays to bondholders or stockbrokers 4 Mutual funds groups of funds and bonds managed by an investment company a Key advantage are the diversification they offer a low minimum amount to get started and professional management 5 Money market you lend money to an organization and they offer security and liquidity 6 Real estate if you own or rent property it s a source of income and a hedge against inflation a Real estate increases in value and you will make a profit but there are no guarantees b Location and timing of transactions are c Real estate is less liquid less readily turned into important cash 7 Social security kind of investment pay in when working and will later get it back 8 Company pensions provide a monthly check at retirement Functions like social security but doesn t have built in inflation protection 9 Large holdings family owners of large companies land business and they need to protect it 10 You own business risky but can be thought of as an investment since owning a stake is similar to owning a stock in a large corporation If business is successful then it can be a great investment 11 Anticipated inheritances things can go
View Full Document
Unlocking...