UNITS III&IV Investing * The Stock Market* Portfolio Construction Investing, Risk, and Portfolio Management The Stock Market Risk Portfolio Management Investment Goals

How is Investing Different from Saving?

What’s the Difference? When investing money, you could make money, or you could lose some or all of it!

What’s the Difference? Investing offers the possibility of a much higher return than saving.

What’s the Difference? In general, the greater the potential for an investment to increase substantially in value, the greater the risk it might also drop substantially.

Are There Any More Differences?

What’s the Difference? A key difference between saving and investing is the availability of funds- how quickly you can get access to your cash when needed. Savings is used to fund short- or near- term needs. Because of the risk involved, investing is best done with funds that you will not need in the near future (best for longer-term needs).

What’s the Difference? Typically, the interest rate you receive from a Savings account is lower than the rate of inflation (~3%). THAT MEANS If you ONLY saved and did not also invest, your money would be there when you need it, but over time it would decrease in value due to inflation. Typically, the interest rate you receive from a Savings account is lower than the rate of inflation (~3%). THAT MEANS If you ONLY saved and did not also invest, your money would be there when you need it, but over time it would decrease in value due to inflation.

What’s the Difference? Returns from successful investing (~7-10% over time) are significantly higher than the returns from Savings The impact of compounding is much greater for investments.

What Can I Invest In?

Investment Vehicles All bonds are essentially a “LOAN”: US Savings Bond is issued by the government A Corporate Bond is a bond issued by a company. Municipal Bonds are issued by Cities or other local governmental entities. Corporate and Municipal Bonds are not insured by the FDIC The borrower must pay you a predetermined interest rate (the coupon) in exchange for the loan.

Investment Vehicles Unlike a bond, a stock is not a loan!!! The Company does not owe you your money back Shareholders have a claim on the company’s profits (or Bottom Line) If the Company does not make enough money to earn a profit, there is no money available to distribute to shareholders. Unlike a bond, a stock is not a loan!!! The Company does not owe you your money back Shareholders have a claim on the company’s profits (or Bottom Line) If the Company does not make enough money to earn a profit, there is no money available to distribute to shareholders.

Investment Vehicles Funds Are a “Collection’ of Stocks and/or Bonds Index Funds are a common way to invest across the “whole market.”

How Do I Set Investment Goals?

Setting Investment Goals Before Setting Your Goals Consider: Age – How old are you at the time of investment? Time horizon – When is the money needed? Less than 3 years? Longer term? Over 10 years? Risk tolerance – How comfortable are you with risk/market volatility? Dollar amount needed – How much money do you have to make the initial investment? Ability to make regular contributions – How much will be invested on a regular basis after the initial investment? Specific goals –What goals do you plan to fund in the near-term? (e.g. a house, college, graduate school, a car, a vacation) In the long-term? (e.g. retirement; starting a business?)

Setting Investment Goals Consider the Right Vehicle Stocks – growing money over time to meet long-term financial goals (e.g., retirement); dividend income. Bonds – debt investments primarily for fixed income. Cash Investments – protecting cash for short-term financial goals.

Setting Investment Goals Consider Time Horizon INVEST SHORT-TERM (within the next 1-2 years) -Low risk savings vehicles for safety and liquidity INVEST LONG-TERM (5+ years) -Higher risk investment vehicles for growth INVEST MEDIUM-TERM (2-5 years) -Combine higher risk investment vehicles for growth with some lower risk vehicles for safety.

What Do I need to Know About the Stock Market?

The Market You Need to Know… Unbanked The “Law” of Supply and Demand is simple:  if there is a low supply and a high demand, the price will be high.  In contrast, the greater the supply and the lower the demand, the lower the price will be. The “Law” of Supply and Demand is simple:  if there is a low supply and a high demand, the price will be high.  In contrast, the greater the supply and the lower the demand, the lower the price will be.

The Market You Need to Know… Unbanked The stock market is where stocks are bought & sold  When a company issues stock, the buyer gets a “share” of ownership in the company. In exchange, the company gets money it needs to grow.  Investors “own” a share of the Company’s future Earnings (also referred to as Profit, the Bottom Line, or Net Income).  If the Company is profitable, its shareholders benefit.  If a Company is not profitable, its shareholders lose. The stock market is where stocks are bought & sold  When a company issues stock, the buyer gets a “share” of ownership in the company. In exchange, the company gets money it needs to grow.  Investors “own” a share of the Company’s future Earnings (also referred to as Profit, the Bottom Line, or Net Income).  If the Company is profitable, its shareholders benefit.  If a Company is not profitable, its shareholders lose.

The Market You Need to Know… Unbanked  When a company is part of a stock exchange it is a PUBLIC COMPANY. That is, shares in the company are bought, sold, and owned by members of the public (i.e., investors).  A PRIVATE COMPANY does not participate in a stock exchange. Members of the general public cannot purchase stock in private companies.  When a company is part of a stock exchange it is a PUBLIC COMPANY. That is, shares in the company are bought, sold, and owned by members of the public (i.e., investors).  A PRIVATE COMPANY does not participate in a stock exchange. Members of the general public cannot purchase stock in private companies.

The Market You Need to Know… Unbanked  Exchanges constitute the actual “markets” where companies’ shares are bought and sold  The majority of publicly traded companies are listed on the New York Stock Exchange(NYSE) or the Nasdaq.  The New York Stock Exchange is located in New York City, and the companies traded here are typically more established, stable, mature companies. This is the largest stock market where people buy and sell stock in person, trading on the floor of the exchange.  The Nasdaq exchange is typically made up of younger companies with prospects for higher growth (many internet and tech companies). It is the largest electronic stock market; stocks are traded over the computer.  Exchanges constitute the actual “markets” where companies’ shares are bought and sold  The majority of publicly traded companies are listed on the New York Stock Exchange(NYSE) or the Nasdaq.  The New York Stock Exchange is located in New York City, and the companies traded here are typically more established, stable, mature companies. This is the largest stock market where people buy and sell stock in person, trading on the floor of the exchange.  The Nasdaq exchange is typically made up of younger companies with prospects for higher growth (many internet and tech companies). It is the largest electronic stock market; stocks are traded over the computer.

The Market You Need to Know… Unbanked  Supply and Demand for the Company’s stock among investors determine trading prices. Demand is driven by many factors including:  Expected Earnings Investors pay close attention to a Company’s earnings in part because shareholders get paid from bottom-line earnings (Net Income).  Market Expectations Value is driven by what the market expects will happen and what the market thinks the company is worth (and long-term earnings potential). Sometimes it is not as much about earnings, but more about overall potential to create value in the future (particularly for newer companies or industries).  Attitudes and Emotions In addition to the Company’s performance, fear, speculation, rumors, and emotions can also drive the markets.  Supply and Demand for the Company’s stock among investors determine trading prices. Demand is driven by many factors including:  Expected Earnings Investors pay close attention to a Company’s earnings in part because shareholders get paid from bottom-line earnings (Net Income).  Market Expectations Value is driven by what the market expects will happen and what the market thinks the company is worth (and long-term earnings potential). Sometimes it is not as much about earnings, but more about overall potential to create value in the future (particularly for newer companies or industries).  Attitudes and Emotions In addition to the Company’s performance, fear, speculation, rumors, and emotions can also drive the markets.

How Do I Analyze a Stock?

P/E Ratio  Earnings Per Share (EPS) – the denominator – shows how much in earnings an investor “owns”.  The higher the P/E Ratio, the more investors are willing to pay per dollar of earnings. P/E = Stock Price for one share Company’s Earnings per one share (EPS)

Analyze a Stock Table Stock tables are published daily in newspapers including The Wall Street Journal or the New York Times. The tables cover 4 main categories:  Naming (Columns 3 & 4)  Pricing (Columns 1, 2, 7, 9, 10, 11, 12)  Trading Volume (Column 8)  Dividend Activity (Column 5 & 6) Stock tables are published daily in newspapers including The Wall Street Journal or the New York Times. The tables cover 4 main categories:  Naming (Columns 3 & 4)  Pricing (Columns 1, 2, 7, 9, 10, 11, 12)  Trading Volume (Column 8)  Dividend Activity (Column 5 & 6)

Interpret a Stock Chart Stock tables are published daily in newspapers including The Wall Street Journal or the New York Times. The charts cover 4 main categories:  Company Name  Ticker Symbol  Volume  Market Capitalization Stock tables are published daily in newspapers including The Wall Street Journal or the New York Times. The charts cover 4 main categories:  Company Name  Ticker Symbol  Volume  Market Capitalization Range Div/yield3.05/ week EPS40.04 Open440.80Shares908.44M Vol / Avg.8.87M/11.45MBeta0.98 Mkt cap406.79BInst. own64% P/E11.18

How Should I Construct My Portfolio?

29 THE GOAL Maximize return. Minimize risk.

30 The Method: Diversification Reduces risk and increases potential Protects the overall value of your portfolio

31 The Key: Correlation Consider the risks that are specific to a given investment. Balance that with other investments that don’t face the same risks.