investing
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Investing. (Or…how to build wealth since I can’t hit a golf ball like Tiger). I. Understanding Your Objectives. WHY are you investing? What future needs are you planning for? Examples: - college tuition - retirement - down payment for a house. Objectives (con’t.). - PowerPoint PPT PresentationTRANSCRIPT
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Investing
(Or…how to build wealth since I can’t hit a golf ball like Tiger)
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I. Understanding Your Objectives
• WHY are you investing? What future needs are you planning for?
• Examples:
- college tuition
- retirement
- down payment for a house
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Objectives (con’t.)
• WHAT is your time frame?
• WHEN do you need the money?
• HOW long do you have to reach your goal
(all 3 essentially ask the same Q.)
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Risk and Reward
• Understand the relationship between risk and reward:
Higher returns = higher risk
• Assess your tolerance for risk
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Many Kinds of Risk !
• The value of your investments is exposed to a variety of risks:– Inflation risk (is it possible to play it TOO
safe?)– Interest rate risk– Political risk– Many, many more to consider
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Know what you are investing in
• Do you understand HOW your money will grow?
• Are you able to judge for yourself HOW your investment is doing?
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Investment Choices
• There are lots of things that you can invest in….for instance:
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Real Estate
Examples:
•Buy “raw land”
•Buy a “fixer-upper” home to rent
•Buy an apartment building
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Precious Metals
• Gold
• Silver
• Platinum
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Art or “Collectables”
• Buy a painting, photo, sculpture, etc.
• Collectables:
- trading cards
- autographs
- memorabilia
- others
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Commodities
• Generally, most are agricultural products…you make money by correctly deciding if the price by a certain future date will be higher or lower than today’s
• Examples:
- orange juice - coffee
-wheat - pork bellies
http://video.google.com/videoplay?docid=529647372100644969&ei=M-xgS_WaGaDKqQKC9dG0CA&q=trading+places+-site%3Ayoutube.com&hl=en#docid=-2701937519505157898
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The 2 most common investments:
Stocks & Bonds
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BONDS• Are debts…like an I.O.U.
The issuer must repay the bond PLUS interest• Gov’ts sell bonds to raise money for various
reasons: for example,– to pay for the cost of war (WWII war bonds)
– to build schools, hospitals, libraries, courthouses, and other public buildings
– to build roads, bridges, etc.
– in general, to pay for construction projects that benefit the general public
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Who issues bonds?
1. Gov’ts: federal, state, local A. U.S. Gov’t Treasury Bonds Treasury Notes Treasury BillsB. States and local gov’t “municipal bonds” Tax advantages
2. Corporations Corporate Bonds
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Why do Govt’s & Corps. Sell Bonds?
• Financing (paying for) large projects:
1. Gov’t needs to pay for…?
2. Corporations need to pay for…?
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Bonds have 3 “parts”
• Principal – the amount borrowed
• Interest – the amount paid by the borrower for using the money
• Maturity – the date by which the borrower must pay off the loan
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Who invests in bonds?
• People who want to generate an “income stream”
(Investors collect the interest and then get their principal back when the bond matures)
• Those looking for lower-risk investments
• Popular with senior citizens…why?
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Stocks
• A common method for companies to raise large sums of cash is to sell stock in the company…if you own a share of stock, you own a piece of the companyWhen a company sells stock for the 1st time: “Initial Public Offering” (an “IPO”)
• Selling stock means giving up a degree of ownership
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How do I make money in stocks?
• Capital Appreciation: buy low….sell high
• Dividends : cash payment to shareholders by the company from its profits
dividends are not automatic…the Board of Directors decides IF and HOW
MUCH the dividend will be
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Where do shares of stock “trade”?(where are they bought / sold?)
• The New York Stock Exchange (NYSE)
- generally, well-established companies
• The American Stock Exchange
• Nat’l Assoc. of Securities Dealers Automated Quote System…or just
NASDAQ
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Stock symbols
• EVERY stock has its own unique symbol
• Those traded on the NYSE have 1 to 3 letters: for example
- F = Ford Motor Co.
- HD = Home Depot
- IBM = Int’l Business Machines
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Symbols (cont.)
• Stocks traded on NASDAQ have 4 letters:
• DELL = Dell Computer
• SIRI = Sirius Satellite Radio
• INTC = Intel Corp.
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Reading a stock quote
http://finance.yahoo.com/marketupdate/overview
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Stock Indexes
• What are they?
Quick way to measure how “the market” is doing:
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The Dow-Jones Industrial Average
• AKA: ‘the Dow”• Group of 30 stocks representing the major sectors
of the US economy
* Ford and GM
* Microsoft
* General Electric
* Coca Cola
* 25 others
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• The Dow is an average of the 30 stocks prices
• In theory, if the average goes up, “the Market” in general has moved higher
• Weakness of the DJIA: not a very large sample (can just 30 stocks really reflect accurately what the overall market is doing?)
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The Standard & Poor’s 500 Index
• S+P 500 for short
• Same concept as the Dow, but uses 500 companies
• S + P 500 is generally the preferred index to assess the overall market
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Other Indexes
• The Russell 2000
• The Wilshire 5000
• The NASDAQ 100
• Dozens of other “specialty” indexes
(e.g. transportation index
utilities index
energy index)
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(don’t need to write the following)
• So…the 1st thing to do when checking your stocks is to get a sense of the overall performance of the market
Do this by checking the Dow and the S&P 500
http://finance.yahoo.com/
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Why do stock prices go up or down?
• Basically….supply and demand! We want to own shares in companies that are increasing profits. Above all else: stock prices are tied to a company’s
future earnings
If investors believe that earnings will grow, demand for shares of stock in that company grows & it’s price will rise (opposite if investors think earnings will decline)
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Be Advised!
• Despite any developments surrounding a company,
1. A company’s stock price is subject to many currents in the economy
• Political events
• Events of the overall economy
• Events in that company’s industry
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Accounting 101
Revenues (“income from sales”)
- Expenses
“Gross Income”
- Taxes____
“Net Income” (aka “net earnings”)
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Net Earnings is a dollar amount
• Company A: net earnings = $2,000,000
• Company B: net earnings = $1,000,000
• Company A would be the better investment, right? Not so fast…
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• Company A has issued 4,000,000 shares
• Company B has issued 1,000,000 shares
• We need to do one simple math operation:
Net Earnings
# Shares
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Comparison
• Company A:
$2,000,000
4,000,000 shares
= $0.50 / share…50¢ per share in net earnings
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• Company B:
$1,000,000
1,000,000 shares
= $1.00 / share…$1.00 per share in
net earnings
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Now, connect the dots…• Recall that above all else: a stock’s value tends to
mirror its earnings… If earnings go up, a stock’s price should go up
As investors, then, we look for:
1. Earnings growth year to year• Improving or deteriorating?• How do your company’s earnings
compare to its competition?
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What could change a company’s earnings?
1. An event or news specific to that company:
• A new and exciting product
• A new contract
• A change of management
• Cost-cutting measures (like closing unprofitable stores or divisions)
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What could change a company’s earnings (continued)
• The industry the company is in could be changing (are there solar companies out there that could be the next Microsoft?)
• Maybe the company & the industry are fine but the entire economy is struggling?
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Types of Stock
• “Growth” stocks: grows in value faster than the overall market
• “Blue Chip” stocks: stock in companies that are well-established…often household names…leaders in their industry
• “Income” stocks: those that pay high dividends
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• “Cyclical” stocks: move with the business cycle…tend to rise when the economy is strong….fall when the economy struggles
• “Defensive” stocks: tend to hold value in poor economic cycles, but do not rise as fast in up cycles
• “Speculative” stocks: high risk stocks that offer the promise of spectacular returns…usually doesn’t happen!
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“Stock-picking” isn’t always easy
• You might have the right industry…but the wrong company
• Negative unforeseen events may occur AFTER you own it
• A “solution”? Spread your risk over many stocks…
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Mutual Funds
• Pools investors’ monies
• Professionally managed
• Buys 100’s…1,000’s of different stocks and or bonds
• DIVERSIFIES your investment $
• Hundreds of “families of funds” to choose from