1. PFIN 11 4 Investment Planning GITMAN/ JOEHNK/ BILLINGSLEY
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2. LEARNING OUTCOMES
1 Discuss the role investing plays in financial planning process and identify several different investment objectives
2 Distinguish between primary and secondary markets as well as between broker and dealer markets
3 Explain the process of buying and selling securities and recognize different types of orders
PFIN4 | CH11
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3. LEARNING OUTCOMES (continued)
4 Develop an appreciation of how various forms of investment information can lead to better investing skills and returns
5 Gain a basic understanding of the growing impact of the computer and Internet on the field of investments
6 Describe an investment portfolio and how you’d go about developing, monitoring, and managing a portfolio of securities
PFIN4 | CH11
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4. Speculating: Future value and expected returns are highly uncertain
Investing
Process of placing money in some medium in the expectation of receiving future benefit
Speculating: Future value and expected returns are highly uncertain
PFIN4 | CH11
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5. Investment Objectives
Enhance current income
Save for major purchase
Accumulate funds for retirement
Seek shelter from taxes
PFIN4 | CH11
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6. Preferred and convertible securities
Ways to Invest
Common stock
Bonds
Preferred and convertible securities
Mutual funds, exchange traded funds (ETFs), and exchange traded notes (ETNs)
Real estate
PFIN4 | CH11
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7. Securities Markets
Marketplace in which stocks, bonds, and financial instruments are traded
Primary market - New securities are sold to the public by an issuer
Secondary market - Old securities are traded between investors
PFIN4 | CH11
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8. Exhibit 11.1 U.S. Broker and Dealer Markets PFIN4 | CH11
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9. Regulating the Securities Markets
To ensure full disclosure of information with respect to new securities
Securities and Exchange Commission (SEC): Regulates the disclosure of information about securities and oversees the operation of the securities exchanges and markets
Securities Act of 1933
To provide SEC power to regulate organized securities exchanges and the OTC market
Securities Exchange Act of 1934
PFIN4 | CH11
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10. Regulating the Securities Markets
To establish rules and regulations for investment companies
Investment Company Act of 1940
To eliminate corporate fraud as related to accounting practices and information released to investors
Sarbanes-Oxley Act of 2002
PFIN4 | CH11
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11. Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010
To improve accountability and transparency in the U.S. financial system
To discontinue the “too big to fail” regulatory approach
PFIN4 | CH11
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12. Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010
To protect American taxpayers from costly government bailouts
To protect consumers from exploitative financial services practices
PFIN4 | CH11
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13. Significant Federal Legislation
Provided for the establishment of trade associations
National Association of Securities Dealers (NASD): Regulates OTC market operations
Maloney Act of 1938
Protects investors against the financial failure of brokerage firms
Securities Investor Protection Act of 1970
PFIN4 | CH11
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14. Bull Market and Bear Market
Associated with investor optimism, economic recovery, and expansion
Characterized by rising securities prices
Bull market
Associated with investor pessimism and economic slowdown
Characterized by falling securities prices
Bear market
PFIN4 | CH11
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15. Stockbroker (Account Executives)
Person who:
Buys and sells securities on behalf of clients
Gives clients investment advice and information
Required to understand the client’s investment objectives
PFIN4 | CH11
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16. Types of Broker Full-service broker Discount broker Online broker
Executes clients’ transactions and offers a full array of brokerage services
Full-service broker
Charges low commissions and offers little or no services to investors
Discount broker
Discount broker through which investors can execute trades electronically/online through a commercial service or on the Internet
Online broker
PFIN4 | CH11
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17. Brokerage Fees
Commissions received by brokerage firms for executing buy and sell orders for their clients
Odd lot: Quantity of fewer than 100 shares of a stock
Round lot: Quantity of 100 shares of stock or multiples thereof
PFIN4 | CH11
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18. Securities Investor Protection Corporation (SIPC)
Nonprofit corporation subject to SEC and congressional oversight
Insures customer accounts against financial failure of a brokerage firm
Arbitration: Used to settle disputes between a brokerage firm and its clients
PFIN4 | CH11
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19. Types of Order Market order
To buy or sell a security at the best price available at the time it is placed
Market order
To either buy a security at a specified or lower price or to sell a security at or above a specified price
Limit order
To sell a stock when the market price reaches or drops below a specified level
Stop-loss (stop order)
PFIN4 | CH11
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20. Annual Stockholders’ Reports
Made available to stockholders and interested parties that includes:
Financial and descriptive information about a firm’s operations in the recent past
PFIN4 | CH11
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21. Financial Press
Describe the general behavior of the securities markets
Market data
Followed measure of stock market performance
Consists of 30 blue-chip stocks listed mostly on the NYSE
Dow Jones Industrial Average (DJIA)
PFIN4 | CH11
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22. Financial Press Standard & Poor’s (S&P) indexes
Similar to the DJIA but employ different computational methods and consist of more stocks
Standard & Poor’s (S&P) indexes
Consists performance of all stocks listed on the New York Stock Exchange
NYSE index
Consists the total market value of the approximately 6,000–7,000 actively traded stocks in the United States
Dow Jones Wilshire 5000 index
PFIN4 | CH11
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23. Asset Allocation
Plan to preserve capital by protecting the portfolio against negative market developments
By dividing a portfolio among different classes of securities
PFIN4 | CH11
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24. Reasons to Re-evaluate Asset Allocations
Change in personal circumstances that changes investment goals
Proportion of an asset rises or falls that changes target allocation
Close to reaching certain goal
PFIN4 | CH11
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25. Exhibit 11.6 Four Model Portfolios PFIN4 | CH11
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26. KEY TERMS Investing Speculating Investment plan Prospectus Bid price
Ask price
Securities and Exchange Commission
National Association of Securities Dealers
Bull market
Bear market
Full-service broker
Discount broker
Online broker
Odd lot
Round lot
Securities Investor Protection Corporation
Market order
Limit order
Stop-loss
PFIN4 | CH11
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27. KEY TERMS Dow Jones Industrial Average Standard & Poor’s (S&P) indexes
NYSE index
Dow Jones Wilshire index
Portfolio
Diversification
Asset allocation
PFIN4 | CH11
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28. SUMMARY
Investing is viewed as a process of purchasing securities wherein stability of value and level of return are somewhat predictable
Each market under the securities market provides a mechanism for bringing the buyers and sellers of securities together
There are different types of market under the securities market and making transactions in each market is simple
PFIN4 | CH11
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