Investing Chapter 9

Investing Risk  The chance that an investment will decrease in value Return  The income you earn on an investment RATE OF RETURN  Return (profit) / Investment  $100 (earned) / $1000 (investment) = 10% Higher Risk = Higher Rate of Return (or Loss!)

Investing Diversification Consider:  You financial situation  Your risk tolerance  Your values

Investing in Corporations Share of stock  Unit of ownership Stockholders  Owners of a company Dividend  Portion of the profits Bought and sold  Stock exchange  Electronic system – NASDAQ  Usually round lots of 100 share

STOCK EXCHANGE Transactions  When shares are bought or sold Stockbroker  Person who handles the transfer of stocks and bonds between buyers and sellers

STOCK EXCHANGE Brokerage firm  Company that specializes in buying and selling stocks and bonds  Fees charged for services Stock exchange  Location where orders to buy or sell stock are sent and carried out NYSE on Wall Street in NY

NASDAQ National Association of Securities Dealers Automated Quotation System  In 1990’s became most common way to trade stock Electronically links brokerage firms Transactions without central location

Making Money from Stocks Dividends Selling  Capital gain  Capital loss

Types of Stock Preferred Stock  Non-voting share  Fixed dividend, unless company incurs loss  Receive assets if company goes under before common stockholders

Types of stock Common Stock  Voting share  No set dividend Board of Directors (elected by shareholders) decide on dividends  No assets if company goes under (and after preferred stockholders)  Riskier than preferred stock (possibility of higher return)  Frequent price changes

Remember.. The only way to earn money is to sell the stock. You are never guaranteed your investment back..  No matter which stock you buy! Investigate a company before buying

Blue chip stocks Large, well-established companies History of steady sales and profits Usually pay dividends Dividends usually grow Values do no change rapidly  AT&T  Ford  GM

Growth stocks Small/young companies New products Little to no dividends Profits used to purchase new equipment or research Expected to experience rapid growth Higher risk

Mutual Funds Group of investments owned by many investors Investors buy shares of the fund Fund pools money to buy a variety of stocks and investments Diversify your investment Benefit of services of investment professionals who make decisions for you

Mutual Funds Minimum deposit ($1000) or more Value changes with the value of stocks or bonds

Mutual Fund Maintenance fees  Annual fees =.2 percent of the value of investment to 3% or more  Some mutual funds have LOAD (5-6%) Front end load – fees paid upon purchase Back-end load – fees paid when sold Pays salespeople who market fund  NO-LOAD No sales people You request an order form, complete, return with payment

Mutual Fund Investment Objectives Growth Funds Growth and income Income funds Tax-free funds (municipal bonds) Lower Risk and Potential Return Greater Risk and Potential Return Growth and Income funds Income funds Growth funds Tax-free funds Higher dividends, lower capital gains Smaller dividends, larger capital gains

Mutual Fund Investment Objectives Risk/Return (see pyramid) Global funds in businesses located in many nations Index funds in stocks that an index is based on  S&P 500 Index – group of stocks economists use to judge the overall performance of the stock market (this fund invests in these stocks)

Mutual Fund Investment Objectives Bond funds invest in corporate and government bonds Social responsibility in companies that are giving Environmental funds in companies protecting the environment

Finding Investment Information Wall Street Journal  Info on businesses, banks, government, foreign nations  Quotes stocks (ticker symbol), bonds, mutual funds Forbes, Fortune, Kiplinger’s Personal Finance Magazine, Money Internet

Finding Investment Information Request annual reports from company Prospectus – mutual fund Ask a stockbroker  Full-service broker – provides info and advice  Discount brokers – no info or advice

Advice Invest through large, well established stock brokerage firms Ask name, address, info of any company asking you to invest—check them out! Get investment offer in writing Avoid a hard sales pitch to buy NOW “inside” information is dishonest and fraudulent Immediate payment is NOT due (5 days)

Regulation National Association of Securities Dealers (MASD) – certifies brokers  Deal with only registered brokers Central Registration Depository Record (CRD) – list of complaints filed against brokers Security and Exchange Commission (SEC) – enforces laws concerning the trading of stocks and bonds and licenses stockholders

Regulation SEC prevents insider trading – trading stock based on info not available to the general public

Retirement Pension plans (not so common any more) 401K plans through employer  Employee matching program  Portable  Choose investment plan May be tax-deferred Individual Retirement Account (IRA)  Traditional – tax-deferred  Roth – no taxes upon usage  Maximum yearly investment ($2,000)

Investments Investment Clubs Real Estate  Your home  Rental property Collectibles  Collecting for profit is risky

Additional information Odd lots vs. round lots Bear market (prices of a certain group fo securities are falling or expected to fall) Bull market (prices are rising or expected to rise) Corporate bonds Municipal bonds American Stock Exchange