InvestingInvesting

Rule No. 1: Don't lose money.Rule No. 1: Don't lose money.Rule No. 2: Don't forget Rule No. 2: Don't forget Rule No. Rule No.

11..

Investing- putting money to work to earn more money

(1) 3 basic investment (1) 3 basic investment categoriescategories

1. Stocks – ownership shares in a 1. Stocks – ownership shares in a corporationcorporation

2. Bonds – loans investors make to 2. Bonds – loans investors make to corporations or govtcorporations or govt

3. Mutual Funds – pools investors money 3. Mutual Funds – pools investors money togethertogether

(2) Investment Opportunities(2) Investment Opportunities Thousands of US stocks, mutual fundsThousands of US stocks, mutual funds

Millions of corporate and govt bondsMillions of corporate and govt bonds

World markets – in developed or World markets – in developed or developing economiesdeveloping economies

……..so…how do you……...so…how do you…….

Invest directly through a companyInvest directly through a company

… ….or…..or…. Invest using a financial advisor or Invest using a financial advisor or

investment companyinvestment company

Invest online…..Invest online…..

……Etrade, etcEtrade, etc

…………can I play?..........can I play?..........

Practice sites – investopedia.comPractice sites – investopedia.com Stock market games onlineStock market games online Investment clubs – real investing Investment clubs – real investing

with others : better-investing.orgwith others : better-investing.org

………….things to know……….things to know………

(3) Balance – liquidity, safety & return(3) Balance – liquidity, safety & return

Liquidity – how easily an investment Liquidity – how easily an investment

can be converted to cashcan be converted to cash

- - high liquidityhigh liquidity – savings account – savings account

- - low liquiditylow liquidity – bonds, stocks, real – bonds, stocks, real estateestate

Safety –Safety –

what is the risk of losing money?what is the risk of losing money?

- - volatility –volatility – sudden swings in value sudden swings in value

Return – the amount of $ made on an Return – the amount of $ made on an investmentinvestment

- safe = lower return- safe = lower return

- riskier = opportunity to make- riskier = opportunity to make

or lose! or lose! more moneymore money

……..be………..careful……….

(4) Risk vs Reward(4) Risk vs Reward

High Risk :High Risk :new stocks, new companiesnew stocks, new companies

Moderate Risk:Moderate Risk:growth stocksgrowth stocks

Limited Risk:Limited Risk:Blue Chip stocks – large, well-Blue Chip stocks – large, well-

established companies – ex GE, Microsoftestablished companies – ex GE, Microsoft Low Risk :Low Risk :

bondsbonds

......which brings us to……........which brings us to……..

(5) (5) DiversificationDiversification – variety in investment – variety in investment

portfolio portfolio (an individual’s investment (an individual’s investment package)package)

** ** include stocks, bonds, mutual funds, & include stocks, bonds, mutual funds, & lower risk investments such as lower risk investments such as savings savings accts, gov’t bonds, etcaccts, gov’t bonds, etc

*** *** include stocks & bonds with varying include stocks & bonds with varying degrees of risk, and vary types of degrees of risk, and vary types of

companiescompanies

…………are you publically traded?........are you publically traded?........

(6)(6) StocksStocks Stocks = ownership shares of a Stocks = ownership shares of a

corporationcorporation IPO = Initial Public Offering IPO = Initial Public Offering

- the first sale of stock by a- the first sale of stock by a

private company to the publicprivate company to the public Stock exchanges:Stock exchanges:

NYSENYSE = New York stock exchange = New York stock exchange

AMEXAMEX = American stock exchange = American stock exchange

NASDAQNASDAQ = National Association of = National Association of Securities Dealers Quotation SystemSecurities Dealers Quotation System

Do Now!! Answer the following& hand in for CW grade!

1. What are stocks?2. What are bonds?3. What is an example of an investment with

low liquidity?4. What is the relationship between risk and

return?5. How do you diversify an investment

portfolio?6. Give an example of each: high risk,

moderate risk, limited risk, low risk.7. Why are bonds less risky than stocks?

(7) Market Capitalization(7) Market Capitalization The total dollar market value The total dollar market value

of all of a company’s sharesof all of a company’s shares……last trade x number of shares = market caplast trade x number of shares = market cap Small Cap = companies with market cap Small Cap = companies with market cap

of less than $1 Billionof less than $1 Billion

Mid Cap = between $1-10 BillionMid Cap = between $1-10 Billion

Large Cap = over $10 BillionLarge Cap = over $10 Billion

(8) Market Cycles(8) Market Cycles Bull Market = a growing marketBull Market = a growing market

-- stock prices are rising-- stock prices are rising

Bear Market = a sluggish marketBear Market = a sluggish market

--- stock prices have dropped--- stock prices have dropped ….zzzzzz…

When is a good time to buy stock??When is a good time to sell??Where are we in the cycle in right now??

……..fun facts………..fun facts………

Overall, the market has risen Overall, the market has risen

more than fallenmore than fallen

Between 1960 & 1999, there were Between 1960 & 1999, there were

only 6 bear marketsonly 6 bear markets

Danger! – Avoid selling stocks during a Danger! – Avoid selling stocks during a bear market!bear market!

…….wait……there’s more……...wait……there’s more…….. Investors who have held a portfolio Investors who have held a portfolio

through any 15 year period through any 15 year period

since 1926 have always since 1926 have always

come out aheadcome out ahead

…….and some other stock stuff…….and some other stock stuff……(9) Terms(9) Terms Dividend – money earned on stockDividend – money earned on stock

while you own itwhile you own it

- quarterly, taxed as income- quarterly, taxed as income

Capital Gain - profit made Capital Gain - profit made

when you sell stock (also taxed)when you sell stock (also taxed)

Capital loss – when you lose moneyCapital loss – when you lose money

by selling stock for less than you paid for itby selling stock for less than you paid for it

Stock splitStock split

- If the price of shares get too high- If the price of shares get too high

- A corporation may “split” the shares- A corporation may “split” the shares

to reduce the price to make shares to reduce the price to make shares

more affordablemore affordable

- Typically 2 for 1 - Typically 2 for 1

Example: 10 shares @ $10 eachExample: 10 shares @ $10 each

worth $100worth $100

becomes 20 shares @ $5 eachbecomes 20 shares @ $5 each

worth $100worth $100

(10) Bonds (also known as “securities”)(10) Bonds (also known as “securities”) A loan made by an investor to a A loan made by an investor to a

corporation corporation or govt for a specified or govt for a specified amount of timeamount of time

Investor buys a bond & gets paid back Investor buys a bond & gets paid back principal and interest principal and interest

Bonds earn full interest at maturity dateBonds earn full interest at maturity date Generally low-risk investmentGenerally low-risk investment

-- except “junk bond” – higher risk with -- except “junk bond” – higher risk with potential higher yieldpotential higher yield

(11) Mutual Funds(11) Mutual Funds Pools investors money together into a Pools investors money together into a

variety of investments (stocks & bonds)variety of investments (stocks & bonds)

Growth fund – investing in growing Growth fund – investing in growing companies for stock market value companies for stock market value

– – value of stock increases over timevalue of stock increases over time Value fund – companies that are Value fund – companies that are

undervalued in the market undervalued in the market

– – price is low relative to potential price is low relative to potential earning earning

……..more mutual funds fun……..more mutual funds fun……

Blended fund = combines growth & Blended fund = combines growth & valuevalue

Life-cycle fund – Life-cycle fund –

- adjusts investments over time - adjusts investments over time

- more aggressive early, more - more aggressive early, more conservative later conservative later

(12) Investing Strategies(12) Investing Strategies

Investing for incomeInvesting for income

- in stocks or mutual fund to make - in stocks or mutual fund to make money money from dividendsfrom dividends

Investing for growthInvesting for growth

- in stocks or mutual funds for growth in - in stocks or mutual funds for growth in the market value & stock splits the market value & stock splits

- dividends are re-invested- dividends are re-invested

– – will sell eventually for capital gainwill sell eventually for capital gain

The value of starting EARLY!!!!The value of starting EARLY!!!!

In this hypothetical example, 10-year old Tim starts putting In this hypothetical example, 10-year old Tim starts putting aside $500 a year until the age of 25 and then stops making aside $500 a year until the age of 25 and then stops making contributions. Over this time, he puts aside a total of $8,000. contributions. Over this time, he puts aside a total of $8,000. On the other hand, Sally doesn’t start making contributions On the other hand, Sally doesn’t start making contributions until she is 46 and puts aside $4,000 a year until she until she is 46 and puts aside $4,000 a year until she reaches age 65. Over that time, her contributions total reaches age 65. Over that time, her contributions total $80,000. In both cases, their account grows 8% a year. $80,000. In both cases, their account grows 8% a year. Despite the fact that Sally contributes 10 times as much as Despite the fact that Sally contributes 10 times as much as Tim, at age 65 her account is less than half the size of Tim’s Tim, at age 65 her account is less than half the size of Tim’s account. This clearly illustrates the benefit of starting early account. This clearly illustrates the benefit of starting early and the power of compounding. and the power of compounding.