InvestingBonds and Stocks

Setting Investment GoalsInvesting presents opportunities for people

and businesses to increase their income.

Investing is using money to participate in an enterprise that offers the possibility of profit.– Involves careful planning and goal setting

Questions to Ask Yourself:– How do I want to spend my money?– How much money do I need to satisfy my goals?– How will I get it?– How long will it take to save it?– How much risk am I willing to take when I invest?– Are my goals reasonable?– What will happen if I do not meet my goals?

Different Types of GoalsShort-Term:– Save enough money to pay for a vacation

Mid-Term:– To buy a business or home

Long-Term:– Plan for retirement

Types of SecuritiesA security is a tradable document that shows

evidence of debt or ownership.– Includes:• Bonds• Shares of stock and mutual funds• Stock options

The return on an investment is the amount of money the investment earns, or the yield.

Bonds

Investing in BondsWhen corporations or governments need to

borrow large amounts of money.

A bond is a certificate issued by a government or company in which it promises to pay back borrowed money at a fixed rate of interest on a specific date– The maturity date

Characteristics of BondsExample:– A $1,000 bond with a 6% yield (or coupon rate) will

pay $60 once a year or $30 twice a year

Bonds may be sold at a discount, or below their face value– The value of a security that is set by the company or

government issuing it.– Bonds accrue interest until they reach their full value

Types of BondsFederal Bonds and Securities– Treasury Bills:

• Issued in units of $1,000; reach maturity in 4, 13, or 26 weeks; discounted securities

– Notes: • Issued in $1,000 units; maturity between 2 and 10 years

– Bonds: • Issued in $1,000 units; maturity of 30 years

– Savings Bonds:• Sold in values of $50 to $10,000; earn interest on the

savings they entrust to the government; cannot be bought and sold once purchased—they are redeemed after 1 year

Types of Bonds Cont.Municipal Bonds– Local and state government issued– Sold to finance city, town, or regional projects

such as schools, highways, and airports• Gov’ts generally do not tax the interest earned

• You do not have to hold on to it until it reaches maturity.

Types of Bonds Cont.Corporate Bonds– Bonds issued by corporations

– Can be bought and sold through brokerage firms• Usually used to finance construction and equipment

– The value of a corporate bond fluctuates according to the overall interest rates in the economy

Advantages and DisadvantagesAdvantage: – Most bonds are secure– Bonds pay interest

Disadvantage:– Investor can lose money if a bond is sold or

redeemed before it matures– Most are written for a min. of $1,000.• Some people can’t afford it

Stocks

Investing in StocksA stock is a share of ownership in a

corporation.

When you buy stock, you receive a stock certificate

Stocks are one of the risker types of investments

Return on StocksThe amount of money the stock earns

depends on its type of return and rate of return.

There are two ways that you can receive a return on stocks:– Payment of dividends– Selling your shares of stock

DividendsDividends are a share of profits given to

stockholders.– A corporation can decide to distribute some of the

profits they made

Dividends are usually paid quarterly in cash or in more shares of stock

Selling StockSelling stock for more than you paid for it

results in capital gain.

Capital loss is an amount lost when an asset is sold for less than its cost..

The government taxes the amount received in dividends or capital gain

Rate of ReturnThe rate of return on stocks is always expressed as

a percentage

Example:– $1,000 earns $50 of interest in a savings account one

year. The rate of return is 5% ($50/$1,000)

– A single share of stock whose value increases from $50 to $55 in a year and pays a $5 dividend during the year has a 20% rate of return ($10/$50)

Types of StockCommon Stock: stock that provides the most

basic form of corporate ownership

– Entitles the stockholder to voting privileges– All corporations must issue common stock– For each share that is owned, the stockholder gets

a vote in how to run the corporation

Types of Stock Cont.Preferred Stock: stock that gives the owner

the advantage of receiving cash dividends before common stockholders receive any

– Preferred stockholders do not vote on company issues

– Many preferred stocks specify the limit on what can be paid as far as a dividend

StockbrokersA Stockbroker is a person who buys and sells

stocks, bonds, and other securities for clients– Act as a link between buyers and sellers

– As a fee for their services, they charge a commission

Stock ExchangesStock Exchange: an organized market for

buying and selling financial securities.

– When you buy stocks or bonds through a stockbroker, the order is sent to the broker’s representative on the stock exchange floor

– New York Stock Exchange (NYSE)– American Stock Exchange (Amex)

Mutual FundsMutual funds lessen the risk of investing in the

stock market.

A mutual fund is a fund created by an investment firm that raises money from many shareholders and invests it in a variety of stocks or other investments– Has great buying power

Advantages and DisadvantagesThe greater the risk, the greater the possibility

of a greater return– Disadvantage: you have more risk of losing your

investment– You are not guaranteed a return each year

– Advantage: stocks tend to do better over a long period of time

– You can also make decisions in the company (with common stock)