© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Investment Planning #11

The Objectives & Rewards Of Investing Investing usually long-term expect future value and return to increase over time Speculating usually short-term future value and return highly uncertain Adequate insurance coverage and cash/savings are investment prerequisites

How Do I Get Started? Regularly allocate a portion of earnings for investing Take advantage of automatic investment and dividend reinvestment programs Learn about investments and "play" trading Determine financial objectives PAY YOURSELF FIRST!

What Are Your Investment Objectives? Current Income –appropriate for retired persons Major Expenditures –college education, down payment on a home, or starting a business Retirement –live comfortably in "golden years" Shelter from Taxes –preserve more of your earnings

Coming Up With the Capital How much money will it take? Do you have a lump sum to invest now, or will you systematically save toward your goal? Investment plan provides direction to help attain goal

Different Ways to Invest 1. Common Stock 2. Bonds 3. Preferreds and Convertibles 4. Mutual Funds and Exchange Traded Funds 5. Real Estate

1. Common Stock Represents a share of ownership in a corporation Greater potential returns with a higher level of risk Different Ways to Invest

2. Bonds Represent debt – IOU’s of the issuer Provide interest income Bond values inversely related to changes in interest rates Different Ways to Invest

3. Preferred Stock Equity security that behaves like debt Fixed dividend paid before dividend to common stockholders Convertible Bonds Special type of fixed income security Allows conversion into common stock Provides income and possible price appreciation Hybrid Securities

Different Ways to Invest 4. Mutual Funds Professionally managed portfolio by an investment company Returns and risk depend on portfolio 4. Mutual Funds Professionally managed portfolio by an investment company Returns and risk depend on portfolio Exchange Traded Funds Track a basket or index of securities

5. Real Estate Invest directly or through shares in a REIT Difficult to estimate risk and return Investors must be aware of economic cycles Different Ways to Invest

Securities Markets “Arenas” where financial instruments trade Capital Market - long-term securities maturities >1 year Money Market - low-risk, short-term securities maturities l< 1 year

Securities Markets Primary market new issues available for first time Investment bank underwrites Issuing company gets proceeds Prospectus Secondary market trading previously issued securities Securities exchanges NASDAQ OTC Market

Broker and Dealer Markets Broker Market buyer and seller come together, direct trade takes place between them Party A sells securities directly to Party B Dealer Market buyer and seller never meet buy/sell orders are executed separately through securities dealers acting as market makers

Broker and Dealer Markets

Dealer Markets Bid Price price at which investor can sell a security Ask Price price at which investor can buy a security

Organized securities exchanges exist in over 100 countries Found in major industrialized nations and in emerging economies around the globe Foreign Securities Markets Manila Tokyo

Federal and state laws regulate securities sales Provides for adequate and accurate disclosure of financial information Securities and Exchange Commission (SEC) administers federal securities laws Regulating the Securities Markets

Securities Act of 1933 – ensure full disclosure Securities Exchange Act of 1934 – created SEC Investment Company Act of 1940 – protect mutual fund shares Sarbanes-Oxley Act of 2002 – eliminate corporate fraud Maloney Act of created NASD Securities Investor Protection Act of SIPC Regulating the Securities Markets

Market Trends Bear Market Falling securities prices for extended time period –Investor pessimism –Economic downturn Bull Market Rising securities prices for extended time period –Investor optimism –Favorable economy

Making Transactions in the Securities Markets Stockbrokers buy and sell securities for customers Full-service, discount, or online brokers Brokerage fees Investor protection

Types of Brokers

Brokerage Fees

Odd or Round Lots Odd Lot - fewer than 100 shares –Odd-lot differential Round Lot shares of stock or multiples thereof

Securities Investor Protection Corp. (SIPC) protects customers against financial failure of brokerage firm insures accounts up to $500,000 guarantees securities or cash held by broker –does not guarantee dollar value of securities Arbitration settles disputes between broker and client Investor Protection

Executing Trades Investor establishes account with broker Trades can be executed by phone, at brokerage firm, or online Market orders often take less than two minutes!

Types of Orders Market order - trade now at best available price Limit order - trade when a specified price or better is reached Stop-loss order - sell if stock drops to certain price –use to limit losses

Becoming an Informed Investor Annual Reports Financial Press Industry Data Stock Quotes Advisory Services

Annual Stockholder Reports Highlights or selected financial data sections CEO’s letter Operations in management’s discussion and analysis section Financial statements and notes Auditor’s report Here’s what to read….

Online Investing Online services Educational material Investment tools –Investment planning Research and screening –Portfolio tracking

Managing Your Investment Holdings Build a diversified portfolio based on goals and personal situation Allocate assets according to objectives Track investments, rebalance portfolio as needed

Investor Objectives high current capital income appreciation Trade-off between

Asset Allocation and Portfolio Management Dividing a portfolio among different types of securities Total return is influenced more by asset allocation than by specific security selections

Asset Allocation and Portfolio Management

Keeping Track of Investments