INVESTING

1. INVESTING Basics, Choices, Stocks

2. Why Invest? 1. Investing helps beat inflation • INFLATION: the rise in the general level of prices • Inflation reduces your purchasing power. As prices rise, it takes more money to buy the same goods and services. • Therefore, investing helps you protect your purchasing power.

3. Why Invest? 2. Investing Increases Wealth • Financial success grows from the assets that you build up over time. • Investing helps you accumulate wealth faster than if you simply just save your money. • By investing in stocks and bonds, you are participating in helping businesses make and sell new products and services. • You will be rewarded with dividends and interest.

4. Why Invest? 3. Investing is Fun and Challenging • Investors make choices and hope to pick winners. • Once you gain experience, you can have fun choosing investments, buying and selling when the time is right, and using your knowledge to plan for your financial security.

5. STAGES OF INVESTING • STAGE 1: Put-and-Take Account • When you first start earning a paycheck, you will put in an account. • You will pay your bills. And create an emergency fund. • The purpose is to pay for your short-term needs and cover your unexpected expenses.

6. STAGES OF INVESTING • STAGE 2: Initial Investing • Really begins when you have “excess” savings beyond what you need for daily expenses and emergencies. • Your initial investments should be conservative and low risk. • You don’t have enough money yet to take high risks.

7. STAGES OF INVESTING • STAGE 3: Systematic Investing • Making investments on a planned and regular basis. • You set aside money on a regular basis. • As your income grows, your investments grow. • You are investing for a financially secure future.

8. STAGES OF INVESTING • STAGE 4: Strategic Investments • Careful management of investment alternatives to maximize growth of your portfolio (a collection of investments). • Ex: When the growth prospects of one investments decline, you would move your money into another investment where the prospectus for growth seems greater. • You would invest in different types of securities (stocks and bonds) to try to maximize your returns.

9. STAGES OF INVESTING • STAGE 5: Speculative Investing • Happens when you make bold and high risk investment choices. • You can make or lose a lot of money in a short period of time. • Be aware of risks and be prepared to lose. • Beginning investors should avoid this because they can’t afford the losses.

10. Stages of Investing

11. Basic Terminology • Investing risk: the chance that an investment’s value will decrease. • The greater risk you are willing to take, the greater the potential returns. • Diversification: Spreading of risk among many types of investments, such as stocks, bonds, and real estate. • Choose several types of investments. • Reduces overall risk because not all of your choices will perform poorly at the same time.

12. Types of Risk • Interest-rate risk: the chance that inflation will rise faster than the rate on your investment. • Political risk: Actions the government might take that would reduce the value of your investment. (Ex. Increased taxes and certain regulations.) • Company/industry risk: Associated with owning one company’s stock. If that company fails, you lose the investment.

13. Criteria for Choosing an Investment • Degree of safety (risk of loss) • Degree of liquidity (ability to get your money quickly) • Expected dividends or interest • Expected growth in value • Reasonable purchase price and fees • Tax benefits (saving of postponing tax liability) (NO investment offers a high degree of all of these.)

14. Wise Investment Practices Define your goals. • Be specific and measurable. • Identify how you plan to use the money. Go slowly. • Before making investments, gather information. • Avoid get-rich-quick schemes. Follow Through. • Re-evaluate your investments. Keep Good Records. • Pay attention to how your investments are doing. • Keep statements to verify account balances and transfers.

15. Wise Investment Practices Seek Good Investment Advice. • Ask questions. • Seek advice from professionals. Keep Investment Knowledge Current. • Be aware what is new in the financial market. Know Your Limits • Understand your tolerance of risk and the amount of money you can afford to risk.

16. Sources of Financial Information Newspapers • Local papers have financial pages that list all securities. Investor Services/Newsletters • Moody’s Investors Service • Standard and Poor’s Reports • Value Line Financial Magazines • Business Week • Money • Kiplinger’s Personal Finance

17. Sources of Financial Information Brokers Financial Advisers • People who are trained to give investment advice. Annual Reports • A summary of a corporation’s financial results for the year and its prospectus for the future.

18. Investment Choices Bonds • Debt obligations of corporations or state or local governments. • When a corporation of government sells a bond, it is borrowing from the investor. • The maturity date of a bond is the date on which the money must be repaid. Stocks • A unit of ownership in a corporation. • The owner is called a stockholder. • You share in the company’s profit, which are paid to you in dividends. • Stocks in well-established companies are reasonably safe.

19. Investment Choices Mutual Funds • The pooling of money from many investors to buy a large selection of securities. • ADVANTAGES • Managed by professionals. • Diversification Real Estate • Houses and land • Have tax benefits

20. OWNING STOCK Stockholders • People who own stock. Ways to earn money: • DIVIDENDS: Money paid to stockholders. • CAPITAL GAINS: An increase in the value of the stock over time. Ex. If you bought a stock for $5 per share and the corporation thrived, its stock price might go up to $10 per share. If so, you could sell it for a substantial profit. If a company fails or goes out of business, you can lose all of your investments.

21. OWNING STOCK Common Stock • Represents a type of stock that’s a variable dividend. • Gives the holder voting rights. • A board of directors is elected and they make decisions about policies. Preferred Stock • Pays a fixed dividend but no voting rights. • Paid a set amount no matter how the company is doing. • Less risky than common stock. • Dividends may be lower than common stockholders would earn, if the company is thriving over time.

22. TYPES OF STOCK INVESTMENTS Growth Stocks • Stocks in corporations that reinvest their profits in the business so that it can grow. • Investors buy for future capital gains. • Often selected by younger people who have more time to let investments grow. Blue Chip Stocks • Stocks of large well-established corporations with a solid record of profitability. • Usually well known by most people ie. IBM, Coca-Cola • Conservative investments. • Safe, stable, but moderate returns.

23. STOCK PRICE Several Factors affect the price you will pay for a share of stock: • The COMPANY. Stock is attractive when the company is doing well. Stock price will continue to rise. • INTERST RATES. When interest rates fall below the rate of inflation, people buy more stock, and the price rises. • The MARKET. If the company is in a popular industry and its products/services are selling, its stock price will rise.

24. The Securities Market Securities Exchanges • A marketplace where brokers who are representing investors buy and sell securities. • New York Stock Exchange (NYSE): largest organized stock exchange in the US. • American Stock Exchange (AMEX) Bull and Bear Market Conditions • The stock market goes through cycles. • Bull Market: • Prolonged period of rising stocks prices • General feeling of investor optimism • Bear Market: • Prolonged period of falling stocks prices • General feeling of investor pessimism

25. Reading Stock Quotes

26. Reading Stock Quotes Columns 1 & 2 52-Week High and Low – The highest and lowest prices the stock traded over the previous 52 weeks (one year) and typically does not include the previous day’s trading.

27. Reading Stock Quotes Column 3 Company Name & Type of Stock – The name of the company. If no special symbol or letter follows the name, it is common stock. Different symbols indicate different classes of shares (i.e., “pf” means preferred stock).

28. Reading Stock Quotes Column 4 Ticker Symbol – The unique alphabetic name which identifies the stock. When looking for stock quotes online, you search for a company by the ticker symbol.

29. Reading Stock Quotes Column 5 Dividend Per Share – The estimate of the anticipated yearly dividend per share in dollars and cents. If this space is blank, the company does not currently pay out dividends.

30. Reading Stock Quotes Column 6 Price/Earnings Ratio – Shows the relationship between a stock’s price and the company’s earnings for the last four quarters. Calculated by dividing the current price per share by the earnings per share.

31. Reading Stock Quotes Column 7 Year-to-Date Percentage Change – Reports gain or loss in each stock’s price as a percentage of its price on January 1.

32. Reading Stock Quotes Column 8 Trading Volume – The total number of shares traded for the day (in hundreds). Add two zeros to the end of the number listed to get the actual number traded.

33. Reading Stock Quotes Columns 9 & 10 Day High and Low – The price range at which the stock has traded throughout the day. These are the maximum and the minimum prices that people have paid for the stock.

34. Reading Stock Quotes Column 11 Close – The last trading price recorded when the market closed on the day. If the closing price is up or down more than 5% than the previous day, the entire listing for that stock is bold-faced.

35. Reading Stock Quotes Column 12 Net Change – The change in the stock price from the previous day’s closing price in dollars. When the net change is positive, it is recorded as being “up for the day.”