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

NewspapersFinancial 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 Choices

Low 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

StocksUnit of ownership in a

corporationStock 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 FundsPooling 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