1. Longwood University 201 High Street Farmville, VA 23901
Personal Finance
Bennie Waller
Longwood University 201 High Street Farmville, VA 23901

2. Investments

3. Investing Set your goals and be ready to invest.
Calculate interest rates and real rates of return.
Manage risk in your investments.
Allocate your assets in the manner that is best for you.
Understand how difficult it is to beat the market.

4. Investing Investing goals should be to protect and make money.
Important to understand investing from a common sense perspective.
A solid grounding in investing will help you reach your financial goals and avoid pitfalls.

5. Investing Goals Write down your goals and prioritize them.
Attach costs to them.
Figure out when the money for those goals will be needed.
Periodically reevaluate your goals.

6. Investing Goals Formalize goals: Goals should be realistic:
Short-term – within 1 year
Intermediate-term – 1-10 years
Long-term – over 10 years
Goals should be realistic:
Consequences, if not accomplished
Willing to make financial sacrifices
How much money is needed?
When do I need the money?

7. Investing Decide on your goals
Understand the difference between investing and speculating.
An investment is an asset that generates a return. For example, many stocks pay dividends, bonds pay interests and rental properties pay rents.
Speculation is in essence a gamble on what might happen in the future. For example, buying a piece of real estate because you heard a rumor that Microsoft was moving into the area.
Baseball cards
Invest, don’t speculate

8. Starting your investment program
Lending Investments—savings accounts and bonds which are debt instruments issued by corporations and the government.
Maturity date
Par Value or Principal
Coupon interest rate
Know ahead of time what return will be
If issuer goes bankrupt, bondholder can lose entire investment

9. Starting your investment program
Ownership Investments—preferred stocks and common stocks which represent ownership in a corporation, along with income-producing real estate
Real estate—your home, rental apartments and investments in income-producing property
Illiquid-hard to sell off
Stock—fractional ownership in a corporation
Owner or equity holder—owns stock
Dividend—a payment by a corporation to its shareholders

10. Interest Rates and Investing
Need to understand interest rates.
Interest rates affect the value of stocks, bonds, and real estate.
Interest rates also determine earnings on savings and tied closely to inflation.

11. Interest rates
Nominal (or quoted) rate of return—the rate of return earned on an investment, without any adjustment for inflation.
Real rate of return—the current or nominal rate of return minus the inflation rate
𝑅𝑎𝑡𝑒=𝑟= 𝑟 ∗ +𝐼𝑃+ 𝑅𝑖𝑠𝑘 𝑃𝑟𝑒𝑚𝑖𝑢𝑚
𝑟 ∗ + IP + DRP + LP + MRP

12. Interest Rates

13. How Interest Rates Impact Other Investments
Expected returns on all investments are related.
What you can earn on one investment determines what you can earn on another.
Interest rates act as a “base” return.
When interest rates go up, investors demand a higher return on other investments.

14. Risk-Return Trade-Off
Risk is related to potential return.
The more risk you assume, the greater the potential reward—but also the greater possibility of losing your money.
You must eliminate risk without affecting potential return.
Balance amount of risk with amount of return needed.

15. Risk/Return Expected return is a function of risk.
“The risk curve is upward sloping”
The more risk you assume, the more return you should expect to earn!
The objective is to optimize the trade-off between risk and return.

16. Risk-Return Trade-Off

17. Risk and Return
E(Return) A
The “Risk Curve” is upward sloping
Risk

18. Risk and Return
E(Return)
The “Risk Curve” is upward sloping B
Risk

19. Risk and Return
Both kickers made 10 field goals. Which one would you want on your team? Why? A B

20. Risk/Return

21. Risk/Return Sources of Risk Interest rate risk - Inflation risk -
Liquidity risk
Business risk – risk associated with particular business
Market risk – overall market fluctuations
Political and regulatory risk
Call risk
Diversification – the reduction of risk by investing in different assets. “Don’t put all of your eggs in one basket”

22. Asset Allocation
How your money should be divided among stocks, bonds, and other investments.
Investments diversified in different classes of investments.
Common stocks more appropriate for the long- term horizon.
Asset allocation is the most important investing task that is not a one-time decision.

23. Asset allocation The Early years (<54)
Your investment horizon is significant, so you can handle fluctuations in the market. A typical portfolio might include 80% in stocks, 20% bonds.
The Golden Years (55-64)
Preserve wealth and plan for retirement
Move out of stocks (due to volatility and investment horizon) and into bonds. (e.g., 60% stocks, 40% bonds)
Retirement
You will be spending more than saving. Income should be primary investment objective. Continue to move into bonds and other liquid assets.

24. Efficient Markets
Efficient market—a market in which information about the stock is reflected in the stock price.
The more efficient the market, the faster prices react to new information.
If the stock market were truly efficient, then there would be no benefit from stock analysts.

25. Investments Market efficiency – asset prices reflect information.
Be mindful of trying to “beat” the market
Don’t get overconfident (arrogance) – trading too often
“Disposition” effect – no one wants to be a loser
“House money” effect – don’t take irrational risk
“Herd behavior” effect –

26. SECURITIES MARKETS

27. Securities Markets
Securities—stocks and bonds—are issued by corporations to raise money.
Securities Markets—a place where you buy and sell securities—primary and secondary markets.
After the initial issue, securities are traded among investors.

28. Primary Markets Place where new securities are traded
Initial public offering (IPO) -
Seasoned new issues
Investment Banker -
Underwriter – Investment banks that offer shares to public
Tombstone advertisement - advertisement listing the underwriters or firms associated with a new issue of securities
Prospectus – disclosure that describes a financial security and other facts for potential buyers

29. Secondary Markets-Stocks
Markets in which previously issued securities are traded.
Organized exchange—a physical location where stocks trade (NYSE, AMEX)
Over-the-counter market—transactions conducted over phone or computer (NASDAQ).

30. Secondary Markets-Bonds
Tend to be for smaller, individual investors.
Some bonds trade at the NYSE, most trading by bond dealers deal directly with large financial institutions.
Small investors access bond dealers through broker.
Volume of trading for government bonds is enormous dominated by Federal Reserve, commercial banks, financial institutions.

31. Regulation of Securities markets
SEC - Aimed at protecting investors so that all have a fair chance of making money
Insider trading and market abuses
Churning
Types of Orders
Market order – buy/sell at current market price
Limit order – trade made only at certain price
Stop-loss order – order to sell if price drops some specified amount

32. Security trading Order Size
Odd lots -  anything less than the standard 100 shares for stocks
Round lots shares of a stock, or any group of shares that can be evenly divided by 100
Time Period for Which the Order Will Remain Outstanding
Day orders
Open orders or Good-till-cancelled (GTC) orders

33. Short Selling
Short selling—the more the price drops, the more money your make.
Borrow stock from the broker and then sell it.
Margin requirement—collateral
Sell high and later buy low and return stock to broker.
If price increases, you buy back for more than the sold price, and lose money.

34. Short Selling

35. Making the trade
Most common way to purchase stock is through stockbroker—licensed to buy or sell stocks for others
Full service brokers
Get paid on commissions
Discount brokers – execute trades, but offer no advice
Premium discount brokers
Deep discount brokers

36. Making the trade – “Online”
Day traders—trade, generally on internet, with a very short-term time horizon.
Be prepared to suffer severe financial losses.
Don’t confuse day trading with investing.
Don’t believe claims of easy profits.
Watch out for “hot tips” or “expert advice.”

37. Making the trade Cost of trading includes
Commissions to buy/sell stock
Transaction fees
Day trading is not investing
Good sources of investment information
Financial news
Yahoo! Finance
WSJ

38. Interest Rates
Normal Yield Curve - A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates.

39. Diversification Portfolio—a group of investments held by an individual
Systematic or Market-Related or Nondiversifiable Risk— portion of a security’s risk or variability that cannot be eliminated through diversification.
Unsystematic or Firm-Specific or Company-Unique Risk or Diversifiable Risk—risk or variability that can be eliminated with diversification.

40. Diversification

41. Thank You

43. Learning Objectives
Identify and describe the primary and secondary securities markets.
Trade securities using a broker.
Locate and use several different sources of investment information to trade securities.

44. Learning Objectives Set your goals and be ready to invest.
Calculate interest rates and real rates of return.
Manage risk in your investments.
Allocate your assets in the manner that is best for you.
Understand how difficult it is to beat the market.

45. Summary
As your investment time horizon lengthens, invest in more riskier assets.
Asset allocation ensures diversification and time dimension of investment in different classes.
It is very difficult to beat the market and as a result you should keep to your plan and invest for the long term.

46. Summary Primary securities markets is where new securities are sold.
Previously issued securities are traded in the secondary markets which can be organized exchanges.
Investors must specify time period for orders in day orders, open orders, or fill-or-kill orders.

47. Summary
Short selling involves borrowing stocks from a broker, selling high and buying back low, making a profit, and returning the stocks to the broker.
Be careful on where you get information to make investment decisions.