1. Investment and Retirement Never to soon to understand

2. What is Stock?  A share of stock is literally a share in the ownership of a company. When you buy a share of stock, you're entitled to a small fraction of the assets and earnings of that company.  Assets include everything the company owns (buildings, equipment, trademarks)  Earnings are all of the money the company brings in from selling its products and services.

3. Why do Companies Issue Stock?  Why would a company want to share its assets and earnings with the general public? Because it needs the money.  Companies only have two ways to raise money to cover start-up costs or expand the business: It can either borrow money (a process known as debt financing) or sell stock (also known as equity financing).

4. Stocks vs. Loans  The disadvantage of borrowing money is that the company has to pay back the loan with interest.  By selling stock, however, the company gets money with fewer strings attached. There is no interest to pay and no requirement to even pay the money back at all.  Even better, equity financing distributes the risk of doing business among a large pool of investors (stockholders). If the company fails, the founders don't lose all of their money; they lose several thousand smaller chunks of other people's money.

5. Stock Terminology  Investors make money in stocks in two ways:  Dividends  Companies may make payment to shareholders as part of the profits. Different types of companies have different dividend policies, which may change over time  Capital Gains (CG)  Investors purchase shares in companies with the expectation that the price of the shares will increase. This increase in share value is a capital gain. It is an increase in the paper value of the stock 5

6. Stock Terminology  General Classifications of Common Stock  Blue-chip stocks  Stocks of the largest and best managed firms. This is not a specific list, but changes over time  Growth stocks  Companies which are growing faster than average and which generally reinvest dividends.  Value stocks  Companies which are less expensive compared to the market. 6

7. Stock Terminology  Income stocks  Companies which pay dividends regularly  Cyclical stocks  Companies whose share prices move up and down with the state of the economy  Defensive stocks  Companies whose share prices move opposite to the state of the economy

8. Buying Stock  When a company first offers stock (or creates new stock) you can buy directly from the company itself. The first offering of stock to the general public is called an Initial Public Offering (IPO)  Once the company has issued its stock, the stock continues to be traded between those who already own it. Instead of buying from the company, you are buying from somebody else who owns it. This is called a secondary market.

9. Trading Stock  Stock in private companies is only available through private sales. You can’t purchase it through a stock exchange or public market.  Stock in publically traded companies can be purchased through one of the stock markets through a stock broker or one of the on-line stock trading services.

10. Stock Markets  Stocks in publicly traded companies are bought and sold at a stock market (also known as a stock exchange). The New York Stock Exchange (NYSE) is an example of such a market. In your neighborhood, you have a "supermarket" that sells food. The reason you go the supermarket is because you can go to one place and buy all of the different types of food that you need in one stop. The NYSE is a supermarket for stocks.New York Stock Exchange (NYSE)

11. Stock Markets  Modern stock exchanges make buying and selling easy. You don't have to actually travel to New York to visit the New York Stock Exchange. You can call a stock broker who does business with the NYSE, or you can buy and sell stocks online for a small fee.  There are three big stock exchanges in the United States:  NYSE - New York Stock Exchange  AMEX - American Stock Exchange  NASDAQ - National Association of Securities Dealers

12. Stock Indexes  Stock exchanges have an interesting side effect. Because all the buying and selling is concentrated in one place, and since it's all done electronically, we can track the constantly fluctuating price of a stock in real time. Investors can watch, for example, how a stock's price reacts to news from the company, media reports, national economic news and lots of other factors.

13. Why Stocks Fluctuate in Value?  There are many different reasons why stocks fluctuate in value. A few of the more common reasons are due to changes in:  Interest rates  Perceived risk of the company  Expected company earnings, dividends, and cash flow  Supply and demand  Investor sentiment and the market 13

14. Why Stocks Fluctuate in Value  Interest rates  Investors require a certain “expected return” or discount rate to invest in stocks. A major component of this discount rate is interest rates  As interest rates increase, shareholders require a higher discount rate, with all future earnings discounted at this higher rate, reducing the value of the firm

15. Why Stocks Fluctuate in Value  Perceived Risk of the Company  There is an inverse relationship between perceived risk of the firm and price  As the perceived riskiness of a firm decreases, investors are willing to pay more for the company stock, resulting in an increase in stock price  As the perceived riskiness of a firm increases, investors are willing to pay less for the stock, resulting in a decrease in stock price 15

16. Why Stocks Fluctuate in Value  Expected Earnings, dividends, and cash flow  As earnings, dividends, and cash flow per share increase beyond what was expected, generally investors are willing to pay more for the stock, and the stock price increases  As earnings, dividends, and cash flow per share decreases beyond what was expected by the market, investors are less willing to pay for the stock, and hence the stock price declines 16

17. Why Stocks Fluctuate in Value  Supply and demand  Stock prices may rise or fall based on supply and demand for their shares  If a large shareholder needs to sell shares of a stock to meet cash needs, supply increases and the price is likely to decline  Likewise, if a large investor gets new money into their account, and decides to increase their holding in the stock, the price of that stock will likely rise as the investor must pay a higher price to encourage others to sell the stock 17

18. Why Stocks Fluctuate in Value  Investor sentiment and the market  Stock prices may rise or fall based on general investor sentiment and how the overall market is performing  If investors are generally positive on stocks, and the market is performing well, investors will likely bid up the price of all stocks  If investors sentiment is negative, and the market is performing poorly, investors will likely reduce their willingness to purchase the stock, resulting in a lower stock price 18

19. Stock Indexes  The Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite Index are always reported on the evening news.  These aren't individual stock prices, but broad market averages designed to give you a general idea of how companies traded on the stock market are doing.  The Dow Jones Industrial Average is the sum of the value of 30 large American stocks divided by the number of companies plus any stock splits.Dow Jones Industrial Average  The S&P 500 is the average value of 500 of these large companies.S&P 500  The NASDAQ Composite is the average of all stocks listed on the NASDAQ exchange (more than 2,800) and includes both domestic and global companies.NASDAQ exchange

20. What Are Bonds?  A bond is a debt security, similar to an I.O.U. When you purchase a bond, you are lending money to a government, municipality, corporation, federal agency or other entity known as an issuer.*  In return for that money, the issuer provides you with a bond in which it 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.  Among the types of bonds available for investment are: U.S. government securities, municipal bonds, corporate bonds, mortgage-and asset-backed securities, federal agency securities and foreign government bonds.

21. Trading Bonds  Like Stocks, bonds are traded on a secondary market and the price will rise and fall depending on a number of factors.  Perceived Risk  Interest Rates compared to the return from the bond.  Supply and Demand  Economic Conditions

22. Why Bonds  Bonds typically generate a fixed income each month in interest payments  Bonds typically remain much more stable than the share price of a stock. Because of this relative stability in price and regular interest payments, bonds are considered safer investments than stocks.  This is especially true with government bonds which are backed by the full faith and credit of the U.S. government. In addition, some municipal bonds may even be insured.  Bonds are generally used by investors to offset some of the risk in their portfolio.  Stocks can fluctuate from one day to the next by a significant margin, but bonds tend to remain fairly stable, and of course, pay out interest.  So, by adding bonds to your portfolio you can mitigate some of the risk you’re taking in stocks by having some stable income from bonds

23. The Good and Bad of Bonds  Bonds typically have a low rate of return compared to other investments, which offsets the fact that they are usually less risky.  A US treasury Bond is VERY safe. It also pays a very low rate of return.  Someone who can’t stand risk, would want a lot of bonds.  Someone who is investing over the long term to grow a portfolio would want relatively little in bonds….normally.  Bonds are a safe place to shelter money in a down market temporarily.

24. Bond Risk  Some Bonds carry Risk.  Corporate Bonds  Bonds based on mortgage loans and other securities  Government Bonds from financially unstable countries (Greece)

25. Commodities  Commodities are agreements to buy and sell virtually anything except, for some reason, onions.onions  The primary commodities that are traded are oil, gold and agricultural products. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options.  These are agreements to buy or sell at an agreed upon price on a specific date. The commodities markets are in Chicago (Chicago Board of Trade) and New York (New York Board of Trade, and the New York Mercantile Exchange).

26. Commodities Futures  If the price goes up, the buyer of the futures contract makes money, because he gets the product at the lower, agreed-upon price and can now sell it at the higher, market price. If the price goes down, the seller makes money, because he can buy the commodity at the lower market price, and sell it to the buyer at the higher, agreed-upon price.  Commodities futures, since they are traded on an open market, do a pretty job of accurately assessing the price of each commodity.  Since they are futures contracts, they also forecast the value of the commodity into the future.  The values are set by commodities traders and analysts, who spend all day every day researching their particular commodity.

27. Other Investments  Real Estate  Financial instruments  Precious Metals

28. How to Invest Wisely  Establish a Goal  Make a careful consideration of how much you can afford to invest  Understand risk vs. reward and understand how much risk is appropriate for your goals.  When do you need the money?  What are the consequences of the investment losing value?

29. How to Invest Wisely  Diversification  Putting all your eggs in one basket or even one type of investment is risky  Spread between types of stocks, stocks and bonds, and other types of investments  Get professional advice

30. Mutual Funds  A mutual fund is a company that pools investors' money to make multiple types of investments, known as the portfolio. Stocks, bonds, and money market funds are all examples of the types of investments that may make up a mutual fund.Stocksmoney market  The mutual fund is managed by a professional investment manager who buys and sells securities for the most effective growth of the fund. As a mutual fund investor, you become a "shareholder" of the mutual fund company. When there are profits you will earn dividends. When there are losses, your shares will decrease in value.

31. Mutual Funds  Mutual funds are, by definition, diversified, meaning they are made up a lot of different investments. That tends to lower your risk (avoiding the old "all of your eggs in one basket" problem).  Because someone else manages them, you don't have to worry about diversifying individual investments yourself or doing your own record keeping. That makes it easier to just buy them and forget about them. That's not always the best strategy, however -- your money is in someone else's hands, after all.

32. Mutual Funds  Mutual funds fall into three categories:  Equity (Stock) funds are made up of investments of only common stock. These can be riskier (and earn more money) than other types.  Large Cap  Small Cap  Blue Chip  Growth  Indexed  International markets

33. Types of Mutual Funds  Index funds  Index funds are mutual funds designed to match the returns of a specific index or benchmark  Index funds can track many different benchmarks, including the S&P500 (Large-cap stocks), Russell 5000 (small-cap stocks), MSCI EAFE (international stocks), Lehman Aggregate (corporate bonds), DJ REIT (Real estate investment trusts), etc.  Index funds are tax efficient since they do little in buying and selling of securities  Their goal is to match the return of their relative benchmarks

34. Mutual Funds  Fixed-income funds are made up of government and corporate securities that provide a fixed return and are usually low risk.  Balanced funds combine both stocks and bonds in the investment pool and offer a moderate to low risk.  While low risk may sound good, it is also accompanied by lower rates of return-meaning you risk less, but your investment won't earn as much..

35. Types of Mutual Funds  Asset allocation funds  Asset allocation funds are mutual funds which rotate among stocks, bonds, and cash  Asset allocation funds invest the fund’s assets in the asset classes expected to perform the best over the coming period of time  Their goal is to exceed the return of their percentage-weighted relative benchmarks after costs and fees

36. Types of Mutual Funds  Life-cycle funds  Life cycle funds are funds which change their allocation between stocks and bonds depending on the age of the investor  As an investor ages, life cycle funds reduce their allocation to stocks and increase their allocation to bonds, more consistent with the goals and objectives of an older investor  These funds seek to perform the asset allocation decision normally done by the investor and to reduce transaction costs as well

37. 401K  401K plan is a very effective way to save for retirement  It has advantages over other methods of retirement savings  Also has disadvantages.  The 401k plan has gained steadily in popularity. Total assets in 401k plans passed traditional pension funds in 1996. An estimated $1 trillion dollars are invested the plans. Studies show that 70% of companies with 100 or more employees offer a 401k plan.

38. History of 401K  In 1978, Congress decided that Americans needed a bit of encouragement to save more money for retirement. They thought that if they gave people a way to save for retirement while at the same time lowering their state and federal taxes, they might just take advantage of it.state and federal taxes  The Tax Reform Act was passed. Part of it authorized the creation of a tax-deferred savings plan for employees. The plan got its name from its section number and paragraph in the Internal Revenue Code -- section 401, paragraph (k).

39. How 401K Works  After 3-6 months of working for employer, you are able to join a company sponsored or administered 401k retirement plan.  You automatically contribute a certain percentage of your salary from your monthly pay before tax is deducted. This amount is deducted even before you get paid, so there's an obvious advantage to it; you can never skip a savings contribution! On top of your contribution, your employer will "match your contributions" by a certain percentage. Most organizations match by 5-10%.  The total contributions by you and your employer are then administered by a 401k plan administrator who invests this money in to mutual funds, stocks, bonds and other investments. It is up to you where you want to invest your money in. Your 401k plan administrator will give you a list of all investment vehicles available and their associated risk levels; you can clarify the risk taking level you are willing to take.

41.  Total assets in 401k plans passed traditional pension funds in 1996. An estimated $1 trillion dollars are invested the plans.  Studies show that 70% of companies with 100 or more employees offer a 401k plan.