The Basics of Investing

Stocks, Bonds & Cash Accounts

Types of Investments: 4 Asset Classes

• Stocks:– Over 5000 individual stocks to choose from!

• Bonds:– Government bonds, corporate bonds, mortgage bonds

• Cash Accounts:– Savings accounts, CD’s, money markets

• Real Estate– Residential, commercial, houses, apartments, etc….

Why Invest Money?• Purchasing power = amount of goods/services money buys

• Money loses purchasing power overtime– Prices for goods rise on average +2.5% per year – rising prices is called inflation

• Investors must earn more than the rate of inflation for purchasing power to rise

Reading: Intro. To Investing

ANSWER KEY:

1)B2)C3)C4)B5)A6)C7)D

Real & Nominal return per year by Asset Class 1925 - 2012

SavingsAccount

Returns before inflation = nominal return

.= real return

Risk vs. Reward? • Holding period = when do you need your money back?

– Time horizon determines which asset class you should invest in

• The longer the holding period----the more risk you should take!– Stocks = long term investment (5-years or longer)

– Bonds = medium term investment ( 1-3 years)

– Bank CD’s = short term investment (30 days to 2 years)

Asset Allocation

Process of picking sectors to invest in

Bonds CashAccount

Stocks

no risk med. risk high risk

I thinkI’m brilliantvery high risk

Rule of “70”

• 70 divided by RETURN = # Years for money to double • Money Doubles in:

• 70/2% = 35 years• 70/5% = 14 years• 70/10% = 7 years• 70/15% = 4.6 years Average return of

stock market over last 75 years

How Money Grows!• Money grows exponentially as it compounds

• $10,000 invested at 4% return for 30-Years:

• $33,000

• $10,000 invested at 15% return for 30-years

• $875,000

The powerof compound

interest!

Bonds• Bonds: are a loan to a Gov’t or business where you earn interest

every year until you are paid back.

• If the company goes bankrupt => you usually will not be paid back!

You buya Bond

U.S. Gov’t 5-Year Bond

$1,000

Gov’t pays you 2% interest per year

$20 per year

Plus $1,000 in 5 years

$1,000 turns into $1,100 over 5 Years

Stocks

• Investors buy shares (stock) in a company and then become part owners– A company will issue stock to raise money to expand their business– Some companies pay dividends on their stock (similar to interest on a bond)

– Investment Banks help companies issue stock

• IPO = initial public offering– When a new company sells stock for the 1st time

– Many employees in an IPO own “stock options”

Recent IPO’s

Key Stock Indices

• S&P 500 Index

– Largest 500 companies by $ value

• Dow Jones Index

– 30 very large American companies

• Nasdaq Index

– primarily technology stocks

WHY INDICES:

A stock index provides the average return of a basket of stocks

Easy way to “match” the market return

ETF’s = exchange traded funds• a way to invest in various stock indices by purchasing 1 stock•Example: SPY = SP500 index MDY = midcap index IWM = smallcap index