INVESTING IN INVESTING IN STOCKS & BONDSSTOCKS & BONDS

Business DepartmentBusiness Department

Mrs. PollisonMrs. Pollison

InvestingInvesting

The use of savings to earn a financial The use of savings to earn a financial return.return.

Objective: earn money with moneyObjective: earn money with money

Stages of InvestingStages of Investing

Emergency AccountEmergency Account– Short-term savings (3-6 month’s pay)Short-term savings (3-6 month’s pay)

Begin InvestingBegin Investing– Conservative, low riskConservative, low risk

Systematic InvestingSystematic Investing– Retirement, college; long-rangeRetirement, college; long-range

Strategic InvestingStrategic Investing– Self-management; maximize returnSelf-management; maximize return

SpeculationSpeculation– Take changes; quick profit; high riskTake changes; quick profit; high risk

Rule of 72Rule of 72 Quick method to evaluate rate of Quick method to evaluate rate of

returnreturn Double your moneyDouble your money Number of years:Number of years:

– Divide 72 by the rate of returnDivide 72 by the rate of return– Earning 10%Earning 10%– Answer: 72 divided by 10=7.2 yearsAnswer: 72 divided by 10=7.2 years

Rate of return:Rate of return:– Divide 72 by the number of yearsDivide 72 by the number of years– Need $5,000; double in 6 yearsNeed $5,000; double in 6 years– Answer: 72 divided by 6=12%Answer: 72 divided by 6=12%

Why Invest?Why Invest?

Helps beat inflationHelps beat inflation– Inflation = general rise in pricesInflation = general rise in prices

Increases wealthIncreases wealth Fun and challengingFun and challenging

Risk – Risk – chance that an investment’s chance that an investment’s value will decrease.value will decrease.

Short-termShort-term investments are generally investments are generally less riskyless risky

Interest-rateInterest-rate risk risk– Rates don’t keep up with inflationRates don’t keep up with inflation

PoliticalPolitical risk risk– Increased taxes & controlsIncreased taxes & controls

MarketMarket risk risk– Business declinesBusiness declines– Interest rate fluctuationsInterest rate fluctuations

Company or industryCompany or industry risk risk

Sources of Financial InfoSources of Financial Info NewspapersNewspapers

– The Wall Street JournalThe Wall Street Journal– Barron’sBarron’s

Investor Services & NewslettersInvestor Services & Newsletters– Moody’s Investor Service (Moody’s Investor Service (www.moodys.comwww.moodys.com))– Standard and Poor’s Reports (Standard and Poor’s Reports (

www.standardandpoors.comwww.standardandpoors.com)) Financial MagazinesFinancial Magazines

– Business Week (Business Week (www.businessweek.comwww.businessweek.com))– Forbes (Forbes (www.forbes.comwww.forbes.com))– Money (Money (www.money.cnn.comwww.money.cnn.com))

BrokersBrokers Financial Advisors (CFP’s)Financial Advisors (CFP’s) Annual ReportsAnnual Reports Online Investor EducationOnline Investor Education

Low Risk/Low ReturnLow Risk/Low Return

Corporate & Municipal BondsCorporate & Municipal Bonds– Debt obligations of corporations of local Debt obligations of corporations of local

governmentsgovernments US Government BondsUS Government Bonds

– Lending money to US govtLending money to US govt– Series EE – discount bondSeries EE – discount bond

Treasury SecuritiesTreasury Securities (T-Bills) (T-Bills)– $10,000 + increments of $5,000$10,000 + increments of $5,000– Treasury notes & Treasury bondsTreasury notes & Treasury bonds

Medium Risk/Medium ReturnMedium Risk/Medium Return StockStock

– Unit of ownership in a corporationUnit of ownership in a corporation Mutual FundsMutual Funds

– Shares in a large, professionally Shares in a large, professionally managed group of investmentsmanaged group of investments

AnnuitiesAnnuities– Contract sold by insurance co.Contract sold by insurance co.– Provides regular payments (retirement)Provides regular payments (retirement)

Real EstateReal Estate– Houses and landHouses and land

High Risk/High ReturnHigh Risk/High Return FuturesFutures

– Specified price on a specified date in the futureSpecified price on a specified date in the future OptionsOptions

– Right, not obligation, to buy or sell a Right, not obligation, to buy or sell a commodity or stock for specified price, commodity or stock for specified price, specified periodspecified period

Penny stocksPenny stocks– Low-priced stocks of small companies w/no Low-priced stocks of small companies w/no

track recordtrack record CollectiblesCollectibles

– Coins, art, memorabiliaCoins, art, memorabilia

StockStock

Common:Common: Variable dividendVariable dividend Voting rightsVoting rights Proxy: transfer Proxy: transfer

voting authority to voting authority to someone elsesomeone else

Preferred:Preferred: Fixed dividendFixed dividend No voting rightsNo voting rights Less riskyLess risky Lower returnLower return

Terms:Terms:

Income stocksIncome stocks – consistent history of – consistent history of paying high dividends.paying high dividends.– Receive current incomeReceive current income– RetireesRetirees

Growth stocksGrowth stocks – corporations that – corporations that reinvest profits in business to reinvest profits in business to promote growth. promote growth. – Little or no dividendsLittle or no dividends– Future capital gainsFuture capital gains– Long-term investmentsLong-term investments

Bulls and BearsBulls and Bears

Bull Market:Bull Market: Prolonged period of Prolonged period of

rising stock pricesrising stock prices Investor optimismInvestor optimism Confidence in Confidence in

economyeconomy

Bear Market:Bear Market: Prolonged period of Prolonged period of

falling stock pricesfalling stock prices Investor pessimismInvestor pessimism Prices may fall 20%Prices may fall 20% Short & savageShort & savage

Strategies (Short-Term)Strategies (Short-Term)

Buy on MarginBuy on Margin– Borrow money from broker (Margin Account)Borrow money from broker (Margin Account)– Minimum of $2,000 depositMinimum of $2,000 deposit– Leverage = using borrowed money to buy Leverage = using borrowed money to buy

securitiessecurities– Betting that stock will increaseBetting that stock will increase

Short sellingShort selling– Selling stock borrowed from brokerSelling stock borrowed from broker– Must be replaced laterMust be replaced later– Betting that stock price will drop (buy back at Betting that stock price will drop (buy back at

lower price)lower price)

Strategies (Long-Term)Strategies (Long-Term)

Buy and HoldBuy and Hold– Overall trend of non-speculative stocks Overall trend of non-speculative stocks

is upis up– Over years, ride out down timesOver years, ride out down times

Dollar-Cost AveragingDollar-Cost Averaging– Systematic purchase of equal dollar Systematic purchase of equal dollar

amount of same stock at regular amount of same stock at regular intervalsintervals

– Price averages outPrice averages out