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1 Chapter 13 Investments. 2 Section 13.1 Investment Strategies Objectives Explain factors to consider when evaluating investments; Describe principles.

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Presentation on theme: "1 Chapter 13 Investments. 2 Section 13.1 Investment Strategies Objectives Explain factors to consider when evaluating investments; Describe principles."— Presentation transcript:

1 1 Chapter 13 Investments

2 2 Section 13.1 Investment Strategies Objectives Explain factors to consider when evaluating investments; Describe principles for investing wisely; and Identify ways to learn more about investing.

3 3 Investing - means putting money to work so that it makes even more money for you over time Basic Characteristics to Evaluate Investments Return - income that an investment produces  Pay returns at regular intervals  Sell an investment for a profit  Tax advantage

4 4 Basic Characteristics to Evaluate Investments Continued Liquidity - ease of which assets can be converted to cash Volatility - degree to which an investment’s return or value may change (Figure 13-1) Risk - possibility of variation in the return on your investment; investments do not come with guarantees  Conservative – lower risk, lower returns  Related to Volatility and Liquidity  Inflation

5 5 Principles of Investing Continued 1.Identify Your Objectives Amount you can afford to invest Timeline  Shorter – less risk; lower returns  Longer – more volatile; higher risk; potential for better returns More than one goal

6 6 Principles of Investing Continued 2.Focus on a Strategy Income – pay relatively dependable returns at regular intervals Growth – put money into investment that may not pay now, but will grow in value in time Tax reduction

7 7 Principles of Investing Continued 3.Diversify your Investments – invest in a variety of investments to reduce your risk Portfolio – collection of investments that is diversified and well balanced Asset Allocation – percentage of your portfolio for each type of investment

8 8 Learning About Investing Reliable media sources – books, magazines, newspapers, radio, TV shows, websites Courses in financial planning – credit and noncredit courses Investment clubs – group of people who meet regularly to learn about investing and to make investments together  Pool money, share risks and rewards, split task of researching investments, vote, experience investors help new investors NAIC

9 9 Professional advisors – banks, brokerage firms, and independent financial planners  Check credentials  Evaluate the advice  Decide how you want to invest your money

10 10 Section 13.2 Retirement Planning  Objectives Compare and contrast investment options designed for retirement planning; and Explain the need to take an active role in retirement planning.

11 11 Social Security Retirement Benefits Administered by the federal government Funded through a tax paid by citizens who are currently working Benefits are influenced by: How long you work Earned income Age at which you apply  Earliest you can apply is 67, applying early will reduce benefits

12 12 Pension Plans – retirement plan offered to a company’s employees Both contribute, not taxed until employee draws on the account  Defined-benefit plan: (Not Common) employer assumes all risk; employer pays retiring employee a specific amount each month based on salary history and years of employment  Defined-contribution plan: employee assumes all risk; employee chooses to contribute into a retirement fund that is invested on their behalf. Employers may contribute.

13 (K) Plans – type of defined-contribution pension plan to which employee contributes on a pretax basis. By having a percentage of your pay put into the plan, you reduce the amount of income that is subject to tax Some employers will match up to a certain percentage 59 ½ If you leave, you can transfer benefits into another retirement plan Vested - entitled to keep plan benefits; must work with company for a certain number of years to become fully vested

14 14 Other Defined-Contribution Plans Profit-sharing plan – employer allocates a portion of the company’s annual profits to each participating employee; added - incentive to work toward achieving company’s goal Employee Stock Ownership Plan (ESOP) – give participants shares of stock in the company; may not sell until you leave company or retire; disadvantage – not diversified

15 15 Personal Investments Individual Retirement Accounts (IRA) – personal savings plan that enables workers to set aside money for retirement; limited by law to specific dollar amount  Traditional – Tax-deductible; taxed when withdrawn; made up to 70 1/2 & withdrawals must begin; prior to 59 ½ subject to penalties  Roth – not tax-deductible, but earnings are tax-free; can make tax free withdrawals after 5 yrs, if 59 ½ or can use the money to become first time home owner

16 16 Personal Investments Continued Keogh Plans – is a federally approved, defined- contribution, tax-deferred retirement plan designed specifically for self-employed people.  Early withdrawals are subject to penalties.

17 17 Taking Charge of Retirement Planning Start Early  Final balance in your retirement account is determined not so much by the total amount invested, but by the number of years the investment is allowed to grow. Review Your Plan Regularly  Set your goals  When to retire?  How much of your income?  How long this income will need to last?

18 18 Taking Charge of Retirement Planning Continued Make estimates and calculations.  Using calculations will allow you to determine if you need other sources of income to live after retirement Adjust your plan if needed  Set aside more if needed for a higher return on your investment

19 19 Objectives Explain basic concept of stock ownership and the stock market; Evaluate the risks involved in stock ownership; and Describe how to research stocks. Section 13.3 The Stock Market

20 20 Stock Market Basics Company sells stock instead of borrowing money from a bank. Stock – ownership interest in the corporation Shares – individual units of ownership, available for purchase Shareholders – investors who purchase shares, part owners

21 21  How Stocks are Traded Initial public offering – when first put on market to sell, it’s offered by company Stock market – organized trading of stocks, like an auction Stock exchange – central location where stocks are sold on a trading floor; Wall Street – New York Stock Exchange (NYSE); American Stock Exchange (AMEX) Listed - meet requirements for being traded on a particular stock exchange Over the Counter Stocks – not listed; NASDAQ (list stocks) not sold on trading floor, traded over phone or Internet

22 22  Regulating the Stock Market – Securities and Exchange Commission (SEC) federal agency that protects interests of investors by regulating stock exchanges, OTC stocks, investment advisors, any companies financial records  Returns on Stocks Dividends – payment to shareholders that represents a part of the company’s net profits; usually paid 4 times a year in a check or more stock shares Capital gains or losses – buy low sell high = gain; buy high sell low = loss

23 23  Working with a Stockbroker (individual or firm that will buy & sell stock for clients according to their instructions) Full service – provide investment advice in addition to handling stock transactions Discount brokers – offer basic service and less expensive Internet – make trades; research materials  Other Ways to Buy Stock 401 K – partially or fully invest in stocks ESOP Mutual Funds Direct stock plan – buy directly from company; fee less than broker

24 24 The Risks of Owning Stocks - volatility  Why Stock Prices Change - number of people who want to own stock, supply and demand The company’s health – well managed and business thriving Industry trends – new federal regulations that impose on business Economic factors – low interest, during recession stocks fall National and world events – election of new leaders, trade legislation, war

25 25  Tracking the Stock Market NASDAQ Composite Index – 5,000 domestic stocks Dow Jones Industrial Average – 30 industries: financial services, technology, retail, entertainment, and consumer goods Standard & Poor’s 500 – 500 prominent industrial, transportation, financial, and utility stocks

26 26  Types of Stock and Their Risks Common stock – entitles shareholders to vote on any matter affecting the company; dividends vary, increasing risk and potential return Preferred stock – no voting rights; has less risk because dividend rate is fixed Blue chip – low in risk because company has proven track record of reliable earnings and dividends Growth stocks – new and innovative companies that are growing – risky Penny stocks - less than a dollar a share, high risk- should be avoided

27 27  Minimizing the Risks Long term investment – don’t invest money that you’ll need in five years, over ten year period-stocks offer higher return than any other form of investment Diversify portfolio – not just companies, but industries Research Don’t worry about day-to-day up and downs – ride out short-term volatility

28 28  Researching Stocks First hand experience - Have you used their product? Did you like it? Company’s annual report – look on website; shows goal and results plus financial data Stock quotes – ticker symbol ­uniquely identifies each stock Read business magazines and newspapers

29 29 Section 13.4 Other Investments Objectives Distinguish between different types of bonds; Explain the advantages of mutual funds; Describe insurance investment products; and Evaluate the risks of investing in real estate, commodities, and collectibles.

30 30 Bonds - corporation and government can obtain funds by issuing certificates of debts Issue bond – borrow money Buy bond – invest money and receives original investment plus additional amount by a certain date = maturity date

31 31 Types of Bonds 1.Savings bonds – very safe; thought of as a form of savings instead of investment 2.Treasury securities – Guaranteed by U.S. government, not taxed; auctioned like stocks (Figure 13-16) 3.Municipal bonds - issued by local and state government; federal tax free and maybe state and local taxes 4.Corporate bonds – minimum $1000; higher rate than government bond, but riskier

32 32 Bond Ratings – S & P’s Rating Service & Moody’s Investor Service Rate the issuer’s ability to repay the debt with interest Rate from AAA (highest) to Aaa (lowest) risk Highest = investment-grade bonds Lowest = high-yield bonds (return) or junk bonds (high risk) Mutual Funds – group of investments that is held in common by many individual investors Advantages  Diversification  Professional management

33 33 Mutual Fund Styles  Money market funds – restricted to certain types of short-term investment; maintain value of investment amount  Bond funds – fixed-income funds; risk and return vary depending on type of bonds invested  Stock funds – Aggressive growth funds- highest risk; growth funds – expected to rise; equity income – current income from their funds; index funds – included on an index, lower management fee  International funds – foreign companies or governments

34 34 Choosing a mutual fund Read the prospectus – legal document that provides potential investors with information about a mutual fund or other security Check out the fees  Load – sales charge for fund transaction

35 35 Insurance as an investment  Endowment Insurance Education or retirement Paying for so many years or reach a certain age, paid a benefit equal to the face value If you die, benefit is paid to the benefactors

36 36 Insurance as an investment Continued  Annuities – contract purchased from an insurance company After 59 ½, provide regular payments If you die, benefit is paid to the benefactors Not high return, but safe  Fixed – fixed rate of return  Variable – variable rate of return depending on how well insurance companies performed  Equity-indexed – guaranteed minimum with chance of higher returns based on the stock market index

37 37 More Investment Options  Real Estate – land and any structures on it  homes, apartment buildings, office and retail space, rentals Usually rises with inflation Disadvantage – not liquid, time consuming and expensive to maintain property, irresponsible renters, not diversified

38 38 More Investment Options Continued  Commodities – basic economic goods bought and sold in quantity Wheat, corn, iron ore, natural gas, precious metals Future contract- agreement to deliver a particularly commodity at a specific price at a certain date in the future Chicago Board of Trade – largest commodities exchange in U.S. Regulated by Commodities Futures Trading Commission (CFTC) Risky, but high return

39 39 More Investment Options Continued  Collectibles Examples Might be sold for profit, but usually the value does not go up often Have to find a willing buyer Enjoy collection more so than value of investment

40 40 Objectives Explain the benefits of estate planning; Describe the purpose of a will and other estate planning documents; and Compare ways to plan for funeral expenses. Chapter 13.5 Estate Planning

41 41 What is Estate Planning? Estate – The assets and liabilities left behind by a deceased person Estate Planning Estate Planning – is the process of making legal and financial arrangements for how one’s property should be administered before and after death Helps people provide financially for loved ones, favorite organization, or cause Reduce the time and legal complications Addresses what happens if a person becomes incapable of making financial and health decisions

42 42 Steps in Estate Planning 1.Review your assets and liabilities by creating a balance sheet 2.Think about objectives and gather information 3.Prepare the necessary legal and financial documents (with an attorney) Preparing a Will Will – a legal document in which a person directs how his or her estate is to be distributed after death

43 43 Functions of a Will Identify an executor  Executor – is the individual who is in charge of handling the affairs of an estate Identify a guardian for children  Younger than 18 years old Give instructions for liabilities  Outstanding debts or obligations must be paid Give instructions for assets  Beneficiary – a person or group designated to receive some or all of a deceased person’s assets

44 44 If there is No Will Intestate – person who dies without a valid will Time consuming and expensive May not be deceased persons wishes After Preparing the Will Requirement: Must be typed, signed, and dated Witnesses (not beneficiaries) of signing Kept in a place accessible to your executor A copy in a safe place (deposit box) Codicil – legal amendment to a will (changes)

45 45 Prepared Other Documents  Living Trust – legal arrangement that can serve as an alternative to a will Trustee – someone who holds and manages assets for someone else Probate – legal process involved in filing a will  Durable Power of Attorney – a legal document assigning someone the right to act on a person’s behalf  Living Will – legal document that outlines a person’s wishes for medical treatment under specific circumstances

46 46 Funeral Planning  Prepaid Funerals Advantages Consumers can pay today’s prices instead of inflated future prices Disadvantages The money is tied up for years and earns no interest May not be transferable if you relocate Funerals may go out of business  Insurance Policies Coverage for funeral cost  Letter of Final Instructions Leave in a place for the people to find


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