CSM 204 Exam 3 Study Guide Chapters 13 17 CSM 204 Exam 3 Review Sheet Chapter 13 Questions Investment goals and financial check up Questions to ask before you invest Slide What will you use money for How much will you need How will you get the money How long will it take Are there obstacles Will you make sacrifices What if you don t reach the goal Book How much money do you need to satisfy your investment goals How will you obtain the money How long will it take you to obtain the money How much risk are you willing to assume in an investment program What possible economic or personal conditions could alter your investment goals Are you willing to make the sacrifices necessary to reach your investment goals What will the consequences be if you don t reach your investment goals Considering your economic circumstances are your investment goals reasonable Performing a Financial Check up Pay your bills on time Balance your budget including an amount for investments Pay off credit cards Start an emergency fund Have access to other cash for emergencies Obtaining money to invest Pay yourself first and make investing automatic Save extra funds like gifts Participate in your employer s retirement plan Make installment payments to yourself Break a habit Get a part time job Make a special effort 1 2 months per year Safety and risk Safety vs risk The safer it is the lower your returns are going to be Conservative Very Conservative 0 1 Moderately Conservative 4 6 Moderate 6 8 Aggressive Moderately Aggressive 8 10 Very Aggressive 10 20 Risk return trade off Risk that you will not receive periodic income payments Risk that an investment will decrease in value VS The return of money you make from keeping your money in longer and investing more aggressively Evaluating risk tolerance Conservative Investments with Less Risk People with no financial training or investment background Older investors Lower income investors Families with children Employees worried about job loss Speculative Investments with High Risk Investors with financial training and investment background Younger investors Higher income investors Married couples with no children or single individuals Employees with secure employment positions Components of Risk and Risk Types Inflation risk Even though you may be getting a higher actual dollar amount at the end of your investment it may buy the same amount or less by the time you actually receive your returns Interest rate risk The interest rate could rise after you invest Business failure risk The business you invested in could go out of business or fail Market risk Systematic Things that affect the market as a whole Has to do with the world or market in crisis Unsystematic Things that affect a segment of the market does not affect the market as a whole Breaches in security such as with Target or Home Depot Global investment risk Things that affect the market may not happen in the US but could happen anywhere in the world Liquidity More factors affecting investment choices Investment income Bought bonds that pay interest or stocks that have large dividends More conservative Investment growth Buy at a low price and selling at a high price later Investment Liquidity How fast can I convert my investment into cash Asset Allocation Deciding how to divide up our money Time Factor Your Age Faster you can turn your investment into cash the more conservative Asset allocation and diversification Asset Allocation The process of spreading you r assets among several different types investments to lessen risk Diversification Not putting all your money into one single investment Growth vs income and the time factor Investments that pay income are conservative How long you have before you need the money from the investment Equity capital corp bond gov bond mutual fund and speculative investment Equity Capital Money that a business obtains from its owners Bonds Government The written pledge of a government or a municipality to repay a specified sum of money along with interest Corporate A corporation s written pledge to repay a specified amount of money along with interest Mutual funds Pools the money from many investors its shareholders to invest in a variety of securities Real estate Property that you buy in order to procure income in some way shape or form Land bought for timber Land bought to be rented out Land bought to be held on to and sell at a higher price Etc of Speculative investments A high risk investment made in the hope of earning a relatively large profit in a short time Your role in the investment process Evaluate potential investments Seek assistance if needed Monitor the value of investments Keep accurate and current records Consider tax consequences of selling Chapter 14 Questions Why corporations issue common stock A form of equity To raise money for start up on going activities or expansion No repayment required Dividends are not mandatory But they lose some control of the company through voting rights Why investors purchase common stock Income from dividends Appreciation of stock value Potential stock split A stock split is a procedure in which the shares of stock owned by existing stockholders are divided into a larger number of shares Cumulative and convertible preferred stock Receive dividends before common stock holders Specified dividend Safer than common stock Can be cumulative Cumulative haven t paid the dividends they owed you they have to pay you in the future May be convertible Convertible bonds turn into common stock Classifications of investment stock Blue Chip A safe investment that generally attracts conservative investors Coca Cola Cyclical A stocks that follows the business cycle of advances and declines in the economy Car Companies Leisure Travel Companies Defensive Stock A stock that provides consistent dividends and stable earnings during declines in the economy Beer Companies Growth A stock issued by a corporation that has the potential of earning profits above the average profits of all firms in the economy Income An investment that pays higher than average dividends Conservative Large cap A stock issued by a corporation that has a large market capitalization in excess of 10 billion Midcap A stock issued by a corporation that has market capitalization of between 2 10 billion Small Cap A stock issued by a company that has a market capitalization of between 300 million 2 billion Micro Cap A stock issued by a company that has a market capitalization 300