Post on 16-Dec-2015
INVESTINGBasics, Choices, Stocks
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.
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.
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.
Why Invest?
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.
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.
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.
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.
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.
STAGES OF INVESTING
BUDGET(Income,
Expenses, Savings)
Types of Investments
Strategy Considerations
Put-and-TakeAccount
Short-term savings (3-6 mos.) Safety
•Security•Liquidity•Short-term needs
InitialInvesting
Conservative, low risk
Higher rates of return than savings
•Reasonable purchase price
SystematicInvesting
Retirement funding Long-range planning •Growth•Future finance security
StrategicInvesting
Portfolio expansion Maximization of return in 5-10 yrs.
•Diversifying•Planning
SpeculativeInvesting
High-risk options High profits •Uncertain future income•Short-term potential profit
Stages of Investing
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.
Basic Terminology
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.
Types of Risk
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.)
Criteria for Choosing an Investment
Define your goals.a. Be specific and measurable.b. Identify how you plan to use the money.
Go slowly.c. Before making investments, gather information.d. Avoid get-rich-quick schemes.
Follow Through.e. Re-evaluate your investments.
Keep Good Records.f. Pay attention to how your investments are doing.g. Keep statements to verify account balances and
transfers.
Wise Investment Practices
Seek Good Investment Advice.a. Ask questions.b. Seek advice from professionals.
Keep Investment Knowledge Current.c. Be aware what is new in the financial market.
Know Your Limitsd. Understand your tolerance of risk and the
amount of money you can afford to risk.
Wise Investment Practices
Newspapersa. Local papers have financial pages that list all
securities.
Investor Services/Newslettersb. Moody’s Investors Servicec. Standard and Poor’s Reportsd. Value Line
Financial Magazinese. Business Weekf. Moneyg. Kiplinger’s Personal Finance
Sources of Financial Information
Brokers
Financial Advisersa. People who are trained to give investment
advice.
Annual Reportsb. A summary of a corporation’s financial results for
the year and its prospectus for the future.
Sources of Financial Information
Bondsa. Debt obligations of corporations or state or local
governments.b. When a corporation of government sells a bond,
it is borrowing from the investor.c. The maturity date of a bond is the date on which
the money must be repaid.
Stocksd. A unit of ownership in a corporation.e. The owner is called a stockholder.f. You share in the company’s profit, which are paid
to you in dividends.g. Stocks in well-established companies are
reasonably safe.
Investment Choices
Mutual Fundsa. The pooling of money from many investors to buy
a large selection of securities.b. ADVANTAGES
a. Managed by professionals.b. Diversification
Real Estatec. Houses and landd. Have tax benefits
Investment Choices
Stockholdersa. People who own stock.
Ways to earn money:b. DIVIDENDS: Money paid to stockholders.c. 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.
OWNING STOCK
Common Stocka. Represents a type of stock that’s a variable
dividend.b. Gives the holder voting rights.c. A board of directors is elected and they make
decisions about policies.
Preferred Stockd. Pays a fixed dividend but no voting rights.e. Paid a set amount no matter how the company is
doing.f. Less risky than common stock.g. Dividends may be lower than common
stockholders would earn, if the company is thriving over time.
OWNING STOCK
Growth Stocksa. Stocks in corporations that reinvest their profits
in the business so that it can grow.b. Investors buy for future capital gains.c. Often selected by younger people who have more
time to let investments grow.
Blue Chip Stocksd. Stocks of large well-established corporations with
a solid record of profitability.e. Usually well known by most people ie. IBM, Coca-
Colaf. Conservative investments.g. Safe, stable, but moderate returns.
TYPES OF STOCK INVESTMENTS
Several Factors affect the price you will pay for a share of stock:
a. The COMPANY. Stock is attractive when the company is doing well. Stock price will continue to rise.
b. INTERST RATES. When interest rates fall below the rate of inflation, people buy more stock, and the price rises.
c. The MARKET. If the company is in a popular industry and its products/services are selling, its stock price will rise.
STOCK PRICE
Securities Exchangesa. A marketplace where brokers who are
representing investors buy and sell securities.b. New York Stock Exchange (NYSE): largest
organized stock exchange in the US.c. American Stock Exchange (AMEX)
Bull and Bear Market Conditionsd. The stock market goes through cycles.e. Bull Market:
a. Prolonged period of rising stocks prices b. General feeling of investor optimism
f. Bear Market: a. Prolonged period of falling stocks prices b. General feeling of investor pessimism
The Securities Market
Reading Stock Quotes
Reading Stock Quotes
Columns 1 & 252-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.
Reading Stock Quotes
Column 3Company 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).
Reading Stock Quotes
Column 4Ticker Symbol – The unique alphabetic name which identifies the stock. When looking for stock quotes online, you search for a company by the ticker symbol.
Reading Stock Quotes
Column 5Dividend 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.
Reading Stock Quotes
Column 6Price/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.
Reading Stock Quotes
Column 7Year-to-Date Percentage Change – Reports gain or loss in each stock’s price as a percentage of its price on January 1.
Reading Stock Quotes
Column 8Trading 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.
Reading Stock Quotes
Columns 9 & 10Day 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.
Reading Stock Quotes
Column 11Close – 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.
Reading Stock Quotes
Column 12Net 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.”