investing options putting it together to build your wealth

INVESTING OPTIONSPutting it together to build your wealth

What we will cover…• STOCKS• BONDS• MUTUAL FUNDS• EXCHANGE TRADED FUNDS• REAL ESTATE• FUTURES CONTRACTS• COLLECTIBLES• COMMODITIES (INCLUDING CURRENCY)• PUTTING IT ALL TOGETHER USING MODERN

PORTFOLIO THEORY

STOCKSInvesting Option

STOCKS

What is a Stock and How Does the “Market” work? VIDEO

STOCKS

STOCK – OWNERSHIP IN A CORPORATION

(Also called: Shares, Equities, Securities)

STOCKS

Why do Companies

Issue Stock?• To raise capital

for• EXPANSION• NEW

EQUIPMENT & TOOLS

Why Do People Buy

Stock?

• Ownership of successful companies

• Hoping to get dividends

• STOCK SPLITS

Why Do People Sell

Stock?

• To get the money from appreciated stock prices

STOCKSSTEPS NEEDED FOR A COMPANY

TO ISSUE STOCK:

1. Incorporate Business and Get a Charter

2. Find an Investment Banker to issue an Initial Public Offering (IPO)

3. File and Register with the Securities and Exchange Commission

4. List Securities on an Exchange

TOP 10 INVESTMENT BANKERS

J.P. Morgan

Bank of America Merrill Lynch

Goldman Sachs

Morgan Stanley

Credit Suisse

Deutsche Bank

Citi

Barclays Capital

UBS

BNP Paribas

STOCK EXCHANGES

NYSE– Euronext

“New York Stock Exchange”• Largest stock exchange in the world• Over 8,000 listings• Total capitalization of $14.2 trillion• Only exchange that still has brokers on the floor

NASDAQ

“National Association of Securities Dealers Automated Quotations”

• Second-largest stock exchange in the world• 2,711 listings, • Total capitalization of over $4.5 trillion. • The NASDAQ has more trading volume than any other

electronic stock exchange in the world.

HOW TO GET LISTED:

• Caters to well-established companies (IBM, FORD, etc…)

• At least 1.1 million shares of stock outstanding• Boast pre-tax profits of $10 million or more over

the last three years• Have a global MARKET CAPITALIZATION

(number of shares outstanding X stock price) of at least $750 million

HOW TO GET LISTED:

• Gained prominence by trading cool high tech companies (Microsoft, Intuit, Dell)

• Sometimes called OVER THE COUNTER (OTC) Market – no trading floor to see

• At least 1.25 million shares outstanding• Pre-tax income of at least $11 or more over

the last three years• Market cap of $70 million or more

TRADING ON THE NYSE

•Watch a Trade:

TRADING ON THE NYSE

WHO’S WHO ON THE FLOOR?

Designated Market Makers (DMMs) 1. Barclays Capital

2. GETCO Securities, LLC 3. Goldman Sachs & Co.4. Knight Capital Group, Inc.5. J. Streicher & Co., LLC6. Virtu Financial Capital Markets, LLC

Trading Floor Brokers

Supplemental Liquidity Providers

TRADING ON THE NYSE

Designated Market Makers (DMMs)• Trade in booths in the center of the floor• Each DMM only deals with specific stocks (50-100 companies)• Execute trades for those stocks only

Trading Floor BrokersOn outside walls of floor, investment firms need to “buy seats” to have their brokers there on the floor

• Can trade in all stocks• Execute Trades with DMMs• Trading floor brokers use e-Broker hand-held devices, e-Quotes,

and algorithm programs to achieve individual parity with DMMs and the NYSE Display Book.

TRADING ON THE NYSE

Designated Market Makers (DMMs)• Also called, “Specialists” arrange the Opening and the Close• Trade in booths in the center of the floor• Each DMM only deals with specific stocks (50-100 companies)• Execute trades for those stocks only

Trading Floor Brokers• On outside walls of floor, investment firms need to “buy seats” to

have their brokers there on the floor• Can trade in all stocks• Execute Trades with DMMs• Trading floor brokers use e-Broker hand-held devices, e-Quotes,

and algorithm programs to achieve individual parity with DMMs and the NYSE Display Book.

Types of STOCK

Preferred Stock

Common Stock

Growth vs. Value

Blue Chip vs. Penny

Cyclical vs. Defensive

Types of STOCK

PREFFERED STOCK - a type of stock that gives the owner a set dividend that does not fluctuate based on how well the company performs

• Preferred stockholders receive their dividends BEFORE common stock holders

• Sometimes have limited voting rights

COMMON STOCK - what most of us own. • Entitles stockholder to voting privileges • May receive a dividend if the company does well,

dividends will fluctuate from quarter to quarter

Types of STOCK

GROWTH STOCK – company reinvests profits in an attempt to grow their business. Stockholders, therefore, rarely receive dividends.

VALUE STOCK – the company is well established and not trying to grow market share, so it usually gives dividends to stockholders.

vs

Types of STOCK

BLUE CHIP STOCK – from large companies with a long history of strong market performance

PENNY STOCK – stocks usually trading at less than $1.00, but never more than $5.00. They have high volatility.

vs

Types of STOCK

CYLICAL STOCK – stock from companies that are very much affected by the whims of the market

DEFENSIVE STOCK – stock from companies that maintain their value even through recession because people NEED their products

vs

WHAT TYPE OF STOCK IS IT?

What do people mean by “THE MARKET”

AVERAGES AND INDEXES

DOW JONES INDUSTRIAL AVERAGE (DJIA), the “DOW”

• Tracks the 30 largest “blue-chip” companies• Chosen by the Wall Street Journal• Add up price of a single stock from each of the 30 and

divide by a special divisor

The Dow Divisor is currently 0.132129493. Presently, every $1 change in price in a particular stock within the average, equates to a 7.57 (1/0.132129493) point movement.

AVERAGES AND INDEXES

AVERAGES AND INDEXES

STANDARD & POOR’S 500 (S&P 500)• Tracks 500 large companies that together

account for some 75% of the entire US stock market

• Weighted average market capitalization

Take market cap of each stock and sum them all up and divide by a special divisor

AVERAGES AND INDEXES

AVERAGES AND INDEXES

S&P MidCap 400• Tracks 400 medium sized companies

S&P SmallCap 600• Tracks 600 small companies

AVERAGES AND INDEXES

NASDAQ 100• Tracks 100 top stocks from the

NASDAQ• Focuses on tech and biotech• One of the most volatile indexes

Take market cap of each stock and sum them all up and divide by a special divisor

The formula for the divisor is as follows: • (Market Value after Adjustments/Market Value before Adjustments) X

Divisor before Adjustments

AVERAGES AND INDEXES

BEAR MARKET• Averages and indexes

are going down

BULL MARKET• Averages and indexes

are going up

AVERAGES AND INDEXES

INDEX TRACKS 3-Y 5-Y 10-Y

Dow Jones 30 large co 19% 24% 93%

S&P 500 500 large co 28% 24% 88%

S&P MidCap 400 400 med co 40% 58% 214%

S&P SmallCap 600 600 med co 48% 72% 176%

NASDAQ 100 100 leading NASDAQ co 20% 11% 114%

December 29, 2006

AVERAGES AND INDEXES

INDEX TRACKS 3-Y 5-Y 10-Y

Dow Jones 30 large co -15% -13% -2%

S&P 500 500 large co -25% -16% -24%

S&P MidCap 400 400 med co -25% -4% 41%

S&P SmallCap 600 600 med co -23% 0% 54%

NASDAQ 100 100 leading NASDAQ co -23% -14% -31%

December 31, 2008

What the HECK happened?

MAJOR STOCK MARKET DECLINES:

October 19, 1987(Rachel and Alex)

October 27, 1997(Zabron)

September 17, 2001(Tyler and Eric)

Sept-Oct, 2008(Jancas and Pat)

May 6, 2010(Jessica & Andrea)

August , 2011(Alexa and Samantha)

Some Fundamental Stock Measurements

CASH FLOW PER SHARE

Let’s you see what you are paying for a share of the company’s cash flow

Computation:

Company’s cash flow (stream of cash through the business) / number of shares outstanding

CURRENT RATIO

Most popular gauge of a company’s ability to pay its short-term bills. Let’s you see if the company can handle unexpected expenses or opportunities. Look for companies with a current ratio of at least 2-to-1

 Computation:Company’s Assets / Company’s Liabilities

DIVIDEND YIELD

Shows you the company’s annual dividend in relationship to its stock price. Look at Dividend Yield over time and you want to see it going up.

Computation:Annual Cash Dividend / Current Price of Stock

EARNINGS PER SHARE (EPS)

Shows the company’s earnings in relation to the number of shares of stock outstanding. The bigger the number, the better.

 Computation:

Company’s Earnings (reported on Annual Statement) / Number of shares outstanding

NET PROFIT MARGIN

A high profit margin tells you a company is good at managing and controlling costs.

Computation:

Revenue/Expenses

PRICE PER SHARE (P/E) RATIO

Allows you to compare many stocks by determining how much you are paying for a company’s earning power. The higher the P/E, the more risky – but potentially more rewarding

 Computation:

Earnings per share / stock price

RETURN ON EQUITY (ROE)

Shows how much money the company is making off the investments that shareholders have made. A good ROE is anything above 20%

Computation:Net Income/Total Shareholder’s Equity

VOLUME

The amount of stock that’s traded on any given day, well or another other time period. Measures market “interest” on stock.

Rising volume on a rising stock price shows something good is going on at the company

All About BONDS

What are BONDS?

• A bond is a debt security, similar to an I.O.U.

• Also called bills, notes, debt securities, or debt obligations.

BONDSWHY DO COMPANIES ISSUE BONDS?• TO RAISE MONEY• When you purchase a bond, you are lending money to

a government, municipality, corporation, federal agency or other entity known as an ISSUER.

WHY DO PEOPLE BUY/SELL BONDS?• Issuer promises to pay a specified rate of interest

during the life of the bond and to repay the face value of the bond (the principal) when it matures, or comes due.

How BONDS Work:1. You pay $1,000 for a 15 year AT&T Bond at 7.5%

interest/year.

2. Each year, you get $75 (1000*.075)

3. After 15 years, you get your $1000 back

TOTAL EARNED = $75*15 years = $1125

BASIC BOND CHARACTERISTICS• Legal document that details all

the conditions of the bondBond Indenture

• When a bond will be repaid (usually 1-30 years)Maturity

Date• Amount paid to a bondholder at

the maturity date, given the issuer doesn't default.Face Value

BASIC BOND CHARACTERISTICS• The amount of interest paid to

bondholders, normally on an annual basis

Coupon Amount

• Corporate bond earnings are taxable, most government bond earnings are notTax Status

• Allows the company to pay off the bond early and get out of their debt to bondholderCall Feature

BOND BASICS5-6% Return Over Time

SHORT TERM <5 years

LONG TERM 10-30 years

GOVERNMENT (TREASURY)

Safest, federal gov. isn’t going anywhere, lowest return

TIPS (Treasury Inflation-Protected Securities)

VERY safe, sold at auction a few times/year, interest rate stays same, but principle changes with inflation, pay

fed. taxes only

MUNICIPLE (state/local government)

Pretty safe, includes local and state governments

CORPORATELonger term usually has a better return than shorter term, but you are betting the co. will still be around

MORTGAGE BONDSSold by banks, used to be considered a good investment

until sup-prime mortgages hit the market

HIGH YIELD (JUNK)Highest rate of return, but the riskiest of all the bonds

READING A BOND

1. Bond Name

2. Coupon rate

3. Maturity Date

4. Current Bid (expressed as a percentage of par value)

5. Yield – annual return until the bond matures

MUTUAL FUNDS

What is a MUTAL FUND?

Pools of money from investors that a mutual fund manager uses to buy a bunch of stocks, bonds and other assets that meet the fund’s investment criteria.

How does a Mutual Fund work?

Why do people buy MFs?1. Professional Management: A portfolio manager and

team of researchers analyze and purchase suitable investments for the fund

2. Cost Efficiency: Fund managers can buy and sell securities for a fraction of the cost that individual investors pay, and spread the cost of research over thousands of investors

Why do people buy MFs?3. Diversification: Most funds own stock from dozens

(usually 25-100) of companies – possibly across industries

Why do people buy MFs?4. Reasonable Investment Minimums: Usually $1,000

or less. Some funds even offer monthly investment plans

Basic Mutual Fund Characteristics:

TRADE TIME

End of day

4:00pm

Basic Mutual Fund Characteristics:

MANAGEMENT FEE

A fee levied annually for professional mutual fund services – paid regardless of the performance of the fund

(usually around 1%)

Basic Mutual Fund Characteristics:

LOADSThe amount that investors

pay when they purchase (front-end load) or redeem (back-end load) shares in a mutual fund, similar to a commission.

Basic Mutual Fund Characteristics:

NET ASSET VALUEThe total market value of all the assets held

in the mutual fund portfolio less the liabilities, divided by all the outstanding units. That amounts to nothing but the “book value”.

Cost of one unit of fund

Basic Mutual Fund Characteristics:

Can only be bought by investors buying the period they are up for sale – called the New Fund Offer (NFO) period.

Can buy and sell its units at any time – so as an investor, you can purchase and sell your holdings in such funds at any time.

Combines the features of open-ended and closed-ended schemes, making the fund open for sale or redemption during pre-determined intervals.

• Basket of securities (stocks & bonds like mutual funds, or commodities)

• Traded throughout the day, not at closing

• Lower management fee than mutual funds

• Smaller initial investment• DESIGNED TO TRACK A SPECIFIC

INDEX OR BENCHMARK

EXCHANGE-TRADED FUNDS

MOST POPULAR ETFsStandard & Poor’s Depository

Receipt (SPDR). Called Spiders

• Basket of stocks is the S&P 500 index. • Quick and easy significant diversification. • Relatively inexpensive compared to what it would cost

to create this type of portfolio yourself.

Symbol Name Index Holdings

SPY (SPDR)

S&P 500 S&P 500 Apple, EXXON, IBM, MS, GE

DIA Dow Jones Industrial Average

DOW IBM, Chevron, Caterpillar, McDonalds

USO US Oil Fund West Texas Intermediate (WTI) light, sweet crude oil

Morgan Stanley Inst Liquidity Gov Inst, Future Contract On Wti Crude Future Apr12

XLF Financial Select Sector The Financial Select Sector Index

Wells Fargo, JP Morgan, Berkshire Hathaway

Other POPULAR ETFs

COMMODITIES AND FUTURES

COMMODITIES AND FUTURES CONTRACTS

COMMODITIES• Objects that come out of the earth• People buy and sell commodities based

on speculation.

• Example, if you thought hurricanes over Latin America were going to destroy much of the coffee crop, you would call your commodity broker and have them purchase as much coffee as possible.

COMMODITIES

• Grains (wheat, corn, soybeans)• Energy (crude oil, gasoline, heating oil, natural

gas)• Metals (gold, silver, copper)• Softs (many food products, like cocoa, coffee,

sugar, cotton)• Livestock (cattle, hogs)

TYPES:

TRADED ON:Chicago and NY Board of Trades, NY Mercantile

FUTURES CONTRACTS

• Legal agreements to buy or sell a commodity on a specific date or during a specific month

• Also called OPTIONS• Designed for commercial

businesses, NOT individuals

FUTURES CONTRACTS

WHY DO IT?1.Investor sets amount and price

today2.Takes possession in the future

(or sells it once he gets it)3.Sell the product for MORE than

you paid for it

How Do Futures Contracts Work?

Could you make

it in the PIT?

Try to “corner the market” on a single commodity by trading with others

FIRST TEAM TO 250 POINTS WINS!!!

• Buying real estate with the hope that the value will increase

• Buying real estate and renting it for additional income

REAL ESTATE

• Assets that appreciate in value because they are rare and in demand

• Examples: coins, fine art, sports cards, antiques, jewelry, precious metals

• Stay within your CIRCLE OF COMPETENCE (Buffett)

COLLECTIBLES

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