basic investing concepts
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Basic Investing Concepts. Stages of Investing. Stages of Investing. In Stage 4: Strategic Investing you carefully manage investment alternatives to maximize growth of your portfolio Collection of investments . Risk and Return. Investing risk- chance that an investment’s value will decrease - PowerPoint PPT PresentationTRANSCRIPT
BASIC INVESTING CONCEPTS
Stages of InvestingType of Investment
Strategy Considerations
Put and Take account
Short-term savings Safety SecurityLiquidityShort-term needs
Initial Investing Conservative, low-risk securities
Higher rates of return than savings
Reasonable purchase price
Systematic Investing Retirement funding Long-range planning Growth Future financial security
Strategic Investing Portfolio expansion Maximization of return in the medium term (5-10 years)
DiversifyingPlanningHedging against risk
Speculative Investing High-risk options High profits Uncertain future incomeShort-term profit potential
Stages of Investing In Stage 4: Strategic Investing you
carefully manage investment alternatives to maximize growth of your portfolioCollection of investments
Risk and Return Investing risk- chance that an
investment’s value will decreaseThe greater the risk the greater the potential
return
Diversification Spreading of risk among many types of
investmentsStocks, bonds, real estateLow risk stocks to balance high risk
Minimizes risk
Types of Risk Interest-Rate risk- chance that inflation
will rise faster than the return on your investmentsInflation makes your fixed-rate investments
worth less because they are “locked in” at lower rates
Political risk- actions the government might take that would reduce the value of your investment
Types of Risk Market risk- caused by the business
cycle– periods of economic growth or decline
Nonmarket risk- unrelated to market trends; unpredictable and uncontrollableTerrorism threats, people change their
behavior and want to protect themselves
Types of Risk Company risk- associated with owning
one company’s stock, if the company fails you lose investment
Industry risk- affects groups of businessesIf you invest in the candy industry, a
nationwide trend toward dieting or avoidance of sugar would negatively affect the value
Criteria for Choosing an Investment Degree of safety Degree of liquidity Expected dividends or interest Expected growth in value Reasonable purchase price and fees Tax benefits
Wise Investment Practices Define your financial goals Go slowly
Temporary investments Follow through
Permanent investments Keep good records Seek good investment advice Keep investment knowledge current Know your limits
MAKING INVESTMENT
CHOICES
Sources of Financial Information Newspapers
Financial pages of your local newspaperWall Street Journal
Investor Services and Newsletters Financial Magazines
Business Week, Forbes, Money, Fortune, Kiplinger’s Personal Finance, The Economist
Brokers Financial Advisers Annual Reports Online Investor Education
Broker vs Financial Advisers Full service- provide
clients with analysis and opinions based on their judgments Merrill Lynch, Fidelity
Investments, American Express
Discount- buy and sell securities at a reduced commission For people who are well
informed and know what they want to buy and sell○ E*Trade, Charles Schwab
Certified Financial Planner (CFP)
Trained to give investment advice based on your goals, age, lifestyle, and other factors.
Investment Choices Low Risk/Low Return Medium Risk/Medium Return High Risk/High Return
Investment ChoicesLow Risk/
Low Return
Bonds
U.S. Government
Savings Bonds
Treasury Securities
Medium Risk/
Medium Return
Stocks
Mutual Funds
Annuities
Real Estate
High Risk/ High Return
Futures
Options
Penny Stocks
Collectibles
Low Risk/ Low Return Good for first investments Safe Low return Include in diversified portfolio
Low Risk/ Low Return Bonds
Debt obligations of corporations (corporate bonds) or state or local governments (municipal bonds)
IOUEarn interest Repay amount
borrowed at maturity
U.S. Government Savings BondsSeries EE- discount
bond, purchased for less than the maturity value (half)
Series I- sold at face value and earn interest for up to 30 years, designed for investors wanting to protect against inflation
Low Risk/ Low Return Treasury Securities
U.S. Treasury Bills- short term
U.S. Treasury Notes- matures in 2,5, or 10 years
U.S. Treasury Bonds- interest paid every 6 months and matures in 30 years
Medium Risk/ Medium Return Once you have additional money to
invest Increase return Investing with companies that manage
the investment
Medium Risk/ Medium Return Stocks
Unit of ownership in a corporation
Stock certificate is evidence of ownership
Stockholders share in corporation’s profits called dividends
Riskier than savings bonds, earnings go up or down depending on company’s profits
Investing in well-established companies are safe
Less-stable company= risky investment
Medium Risk/ Medium Return Mutual Funds
Pooling of money from many investors to buy a large selection of securities
Professionally managed
Allows for portfolio diversification
AnnuitiesContract that provides
the investor with a series of regular payments, after retirement
Opposite of life insurance
Real EstateLarge, non-liquid
investment of cashHouses and land
High Risk/ High Return Futures- contracts to
buy and sell commodities or stocks for a specified price on a specified date in the future
Options- right, not obligation, to buy or sell a commodity or stock for a specified price within a specified period of time
Penny stocks- are low-priced stocks of small companies that no track record
Collectibles- coins, art, memorabilia, ceramics, or other items popular at the time