Bennie Waller wallerbd@longwood 434-395-2046

1. Bennie Waller wallerbd@longwood.edu 434-395-2046 Longwood University201 High StreetFarmville, VA 23901

3. Understand the difference between investing and speculating. • An investment is an asset that generates a return. For example, many stocks pay dividends and bonds pay interests. • Speculation is in essence a gamble on what might happen in the future. For example, buying a piece of real estate because you heard a rumor that Microsoft was moving into the area. • Gold coins • Baseball cards • Speculation revolves largely around supply and demand • Invest, don’t speculate

4. Starting your investment program • Pay yourself first. • Make investing automatic. • Take advantage of Uncle Sam and your employer. • Windfalls • Make two months each year investment months.

5. Securities – stocks and bonds issued by companies to raise capital • Securities markets – where you buy and sell securities • Primary market – where companies take the company “public” (IPO) • Seasoned new issues – • Investment banking • Secondary market – marketplace where previously issued securities trade • Organized exchanges, (NYSE) • OTC – NASDAQ

6. Regulation of Securities markets • SEC • Insider trading • Churning • Types of Orders • Market order – buy/sell at current market price • Limit order – trade made only at certain price • Stop-loss order – order to sell if price drops some specified amount

7. Short selling – very dangerous! • If you believe that stock will drop, you borrow stock from broker account and sell it. • IF stock price does drop, you buy it back at the lower price and return to broker account • HOWEVER, if price goes up, you must buy it back at higher price and return to broker account.

8. Full service brokers • Get paid on commissions • Discount brokers – execute trades, but no advice • Cost of trading includes • Commissions to buy/sell stock • Transaction fees • Day trading is not investing • Good sources of investment information • Financial news • Yahoo! Finance • WSJ

9. Derivative securities – a security whose value is dependent upon the value of some underlying asset, e.g., MBS

10. Options – a security (financial instrument) that gives the owner the right to buy or sell an asset (typically common stock) for a specified price over a specified period of time. • Call option – gives the owner the right to purchase an asset at a given price (strike price) before the expiration of the option. e.g., if you believe that a stock will increase in price, you could purchase a call option. If the stock goes above the strike price, the option could be exercised and the underlying stock purchased. • Put option – give the owner the right to sell an asset at a given price before the expiration of the option.

11. Investment goals should consist of short-term (<1 year), intermediate (1-10 yrs.) and long term (>10 yrs.) • Basic Investment choices • Lending (Debt) investments – • Bonds (corporate or government) • Savings account • Ownership (Equity) investments – ownership in an income producing asset • Stocks • Real estate

12. Returns on investments • Holding period return • Tax considerations • Capital gains (or loss) – • Income – • Stocks – dividend payments • Bonds – interest payments • Real Estate – rental payments

13. Interest rates • Affect the value of assets • Interest rates are affected by a number of factors. The Federal Reserve, which is charged with maintaining the stability of the nation's financial system, raises or lowers short-term interest rates in an effort to maintain that stability(bankrate.com) • Nominal Interest rate - + IP + DRP + LP + MRP

14. Normal Yield Curve - A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates.

15. Expected return is a function of risk. • “The risk curve is upward sloping” • The more risk you assume, the more return you should expect to earn! • The objective is to optimize the trade-off between risk and return.

16. Both kickers made 10 field goals. Which one would you want on your team? Why? A B

17. E(Return) A The “Risk Curve” is upward sloping Time

18. E(Return) The “Risk Curve” is upward sloping B Time

20. Sources of Risk • Interest rate risk - • Inflation risk - • Liquidity risk • Business risk – risk associated with particular business • Market risk – overall market fluctuations • Diversification – the reduction of risk by investing in different assets. “Don’t put all of your eggs in one basket”

22. The Early years (<54) • Your investment horizon is significant, so you can handle fluctuations in the market. A typical portfolio might include 80% in stocks, 20% bonds. • The Golden Years (55-64) • Preserve wealth and plan for retirement • Move out of stocks (due to volatility and investment horizon) and into bonds. (e.g., 60% stocks, 40% bonds) • Retirement • You will be spending more than saving. Income should be primary investment objective. Continue to move into bonds and other liquid assets.

23. Calculating returns • Holding period return

24. Market efficiency – asset prices reflect information. • Be mindful of trying to “beat” the market • Don’t get overconfident (arrogance) – trading too often • “Disposition” effect – no one wants to be a loser • “House money” effect – don’t take irrational risk • “Herd behavior” effect –