The Basics of Investing Stocks, Bonds & Cash Accounts

Why Invest Money? Money loses value overtime –Prices for goods rise on average +2% per year –prices rising = inflation You must earn more than the rate of inflation to increase the real spending power of money

Types of Investments (4-Asset Classes) Stocks Real Estate Bonds Cash Accounts –Checking account, CD’s, money markets Average return per year

Risk vs. Reward? Holding period = when do you need your money back? –Time horizon determines which asset class you should invest in The longer the holding period----the more risk you should take! –Stocks = long term investment (5-years or longer) –Bonds = medium term investment ( 1-3 years) –Bank CD’s = short term investment (30 days to 2 years)

Asset Allocation Process of picking sectors to invest in Bonds Cash Account Stocks no risk med. risk high risk I think I’m brilliant very high risk

Opportunity Cost of Money You must earn more than the rate of inflation to raise wealth $10,000 invested at 4% return for 30-Years: $33,000 $10,000 invested at 15% return for 30-years $875,000 The power of compound interest!

Bonds Bonds: are a loan to a Gov’t or business where you earn interest If the company goes bankrupt => you usually will not be paid back! Your Money U.S. Gov’t 5-Year Bond $1,000 You get 2% interest per year $20 per year Plus $1,000 in 5 years

Stocks Stocks investors become part owner of a company –A company issues stock to raise money to expand their business –Investment Banks help companies issue stock IPO = initial public offering –When a new company sells stock for the 1 st time

Recent IPO’s

Top 10 things to know about Stocks Reading:

The Power of Compounding

Key Stock Indices S&P 500 Index –Largest 500 companies by $ value Dow Jones –30 very large American companies Nasdaq –primarily technology stocks WHY INDICES: There are over 5,000 stocks! Indices give the average Performance of the overall market