Chapter © 2010 South-Western, Cengage Learning Investing for the Future Basic Investing Concepts Making Investment Choices 11

© 2010 South-Western, Cengage Learning SLIDE 2 Chapter 11 Lesson 11.1 Basic Investing Concepts GOALS Explain why you should consider investing. Discuss the stages of investing. Explain the concept of risk. Describe investment strategies and options.

© 2010 South-Western, Cengage Learning SLIDE 3 Chapter 11 Why Invest Investing is the use of long-term savings to earn a financial return. to strengthen your financial position over time. It provides a source of income in addition to a paycheck, allowing you to make money on money.

© 2010 South-Western, Cengage Learning SLIDE 4 Chapter 11 Investing Helps Beat Inflation Inflation is a rise in the general level of prices. Inflation reduces purchasing power over time. As prices rise, it takes more money to buy the same goods and services. Investors seek investments that will grow faster than the inflation rate.

© 2010 South-Western, Cengage Learning SLIDE 5 Chapter 11 Rule of 72 The Rule of 72 is a technique for estimating the number of years required to double your money at a given rate of return. Divide the percentage rate of return into 72 to estimate how long it will take to double your money. If an investment is yielding an average of 6%, it will take 12 years to double your money (72 ÷ 6 = 12). You have $5,000 and want to double it in 10 years. What rate of return do you need? (72 ÷ 10 = 7.2%)

© 2010 South-Western, Cengage Learning Rule of 72 SLIDE 6 Chapter 11

© 2010 South-Western, Cengage Learning SLIDE 7 Chapter 11 Investing Increases Wealth Financial success grows from the assets that you build up over time. Investing helps you accumulate wealth faster than a savings account. When you invest in stocks and bonds, you are participating in helping businesses make and sell new products and services. You will be rewarded with dividends and interest.

© 2010 South-Western, Cengage Learning SLIDE 8 Chapter 11 Stages of Investing Stage 1. Put-and-take account Short term savings, liquid, 3-6 months pay Stage 2. Initial investing Conservative, low risk securities Stage 3. Systematic investing Long-range planning, future financial security Stage 4. Strategic investing Portfolio expansion, diversifying, max return in 5-10 yr. Stage 5. Speculative investing High-risk, high profits, uncertain future income

© 2010 South-Western, Cengage Learning SLIDE 9 Chapter 11 Portfolio A portfolio is a collection of investments.

© 2010 South-Western, Cengage Learning SLIDE 10 Chapter 11 Risk and Return Investing risk is the chance that an investment’s value will decrease. All types of investing involve some degree of risk. The greater the risk you are willing to take, the greater the potential returns. A safe investment has little risk of loss. Short term less risky than long term

© 2010 South-Western, Cengage Learning SLIDE 11 Chapter 11 Diversification Diversification is the spreading of risk among many types of investments. Diversification reduces overall risk because not all of your choices will perform poorly at the same time. If one choice does not do well, the others will likely make up some or all of the loss.

© 2010 South-Western, Cengage Learning SLIDE 12 Chapter 11 Types of Risk Interest-rate risk – inflation will rise faster than the return on investments Political risk – actions by the gov’t that would reduce the value of investments Market risk- business cycle (periods of economic growth or decline) Nonmarket risk – unrelated to market trends – natural disasters, accidents, etc. Company and industry risk – associated with owning company or industry stock

© 2010 South-Western, Cengage Learning SLIDE 13 Chapter 11 Criteria for Choosing an Investment Degree of safety (risk of loss) Degree of liquidity Expected dividends or interest Expected growth in value (exceeds the inflation rate) Reasonable purchase price and fees Tax benefits (saving or postponing tax payments)

© 2010 South-Western, Cengage Learning SLIDE 14 Chapter 11 Wise Investment Practices Define your financial goals. Go slowly. Follow through. Keep good records. Seek good investment advice. Keep investment knowledge current. Know your limits.

© 2010 South-Western, Cengage Learning SLIDE 15 Chapter 11 Temporary and Permanent Investments Temporary investments are investment choices that will be reevaluated within a year or less. Permanent investments are investment choices that will be held for the long run—five or ten years, or longer.

© 2010 South-Western, Cengage Learning SLIDE 16 Chapter 11 Lesson 11.2 Making Investment Choices GOALS List and describe sources of investment information. Describe basic investment choices and rate them by risk.

© 2010 South-Western, Cengage Learning SLIDE 17 Chapter 11 Sources of Financial Information Newspapers-WSG Investor services and newsletters- Moody’s Investors Service Financial magazines-Forbes Brokers-Merrill Lynch Financial advisers-CFPs Annual reports-required by SEC Online investor education-Teenvestor

© 2010 South-Western, Cengage Learning SLIDE 18 Chapter 11 Annual Reports An annual report is a summary of a corporation’s financial results for the year and its prospects for the future. The Securities and Exchange Commission (SEC) requires all public corporations to prepare this report each year and send it to their stockholders. Investors can use the information contained in the report to evaluate the corporation as an investment prospect. Where to get annual reports Online at the SEC web site Company Web sites Libraries

© 2010 South-Western, Cengage Learning SLIDE 19 Chapter 11 Investment Choices-Low Risk/Low Return Corporate and municipal bonds Bonds are debt obligations of corporations (corporate bonds) or state or local governments (municipal bonds). Your principal is repaid when the bond matures Interest earned on municipal bonds is tax- free

© 2010 South-Western, Cengage Learning SLIDE 20 Chapter 11 Low Risk/Low Return U.S. government savings bonds A discount bond is purchased for less than the maturity value. Series EE Savings Bonds-the purchase price is half the maturity value Series I Savings Bonds-Sold at face value- for investors wanting to protect against inflation and earn a guaranteed rate of return.

© 2010 South-Western, Cengage Learning SLIDE 21 Chapter 11 Risk/Low Return Treasury securities U.S. Treasury Bill-T-bill-minimum purchase is $100-up to 52 weeks U.S. Treasury Notes—T-notes-2, 5, or 10 years-interest rate slightly>T-bills U.S. Treasury Bonds-30 yr. maturity-interest pd. every 6 mo. Rate >T-bills or t-notes

© 2010 South-Western, Cengage Learning SLIDE 22 Chapter 11 Medium Risk/Medium Return Stocks Stock is a unit of ownership in a corporation. Mutual funds A mutual fund is the pooling of money from many investors to buy a large selection of securities. Annuities An annuity is a contract that provides the investor with a series of regular payments, usually after retirement. Real Estate

© 2010 South-Western, Cengage Learning SLIDE 23 Chapter 11 Futures - High Risk/High Return Futures are contracts to buy and sell commodities (products that are mined or grown) or stocks for a specified price on a specified date in the future. The investor is betting that the price of the commodity or stock will be higher on that future date than it is at the time of the contract. If prices fall, the investor loses. If prices rise, the investor makes a lot of money. Not for beginners or for individuals who cannot afford to lose their investment.

© 2010 South-Western, Cengage Learning SLIDE 24 Chapter 11 Options - High Risk/High Return An option is the right, but not the obligation, to buy or sell a commodity or stock for a specified price within a specified time period. As with futures, the investor is betting that, during the option period, the price of the stock will rise. If it does, the investor can choose to buy it at the lower option price, resulting in an instant profit. Options are risky and not for inexperienced investors.

© 2010 South-Western, Cengage Learning SLIDE 25 Chapter 11 Penny Stocks - High Risk/High Return Penny stocks are low-priced stocks of small companies that have no track record. The stock usually sells for under $5 per share. The small companies often have low revenues and few assets to assure future growth. Occasionally, a penny stock will be successful, and the investor will make a large windfall. Generally, penny stocks are highly risky.

© 2010 South-Western, Cengage Learning SLIDE 26 Chapter 11 Collectibles Collectibles include: Coins Art Memorabilia Ceramics The market for collectibles fluctuates. If you collect an item that goes up in value, you can reap large rewards by selling. Collectibles gain value when interest is high and lose value when interest is low.