1. The Fundamentals of Investing
Personal Finance
Part 2

2. Stock Exchange Investments are purchased from a stock exchange
(except for real estate and some speculative investments)
Stock exchange provides an organized, central service to buy and sell all stocks, bonds and other investments that are traded
Worldwide, there are many different stock exchanges
A limited number of people are allowed to buy and sell directly from each stock exchange

3. Brokerage Firms Full-service Discount
Brokerage firms facilitate the buying and selling of investments on the stock exchange
Full-service
Offer investment transactions and a financial advisor
Financial advisor – trained professional that helps make investing decisions
Discount
Only completes orders to buy and sell investments
Advice is not offered

4. Discount Brokerage Firm Fees
Will usually charge a fee for completing a buy/sell transaction
Additional fees may include:
Total fees are often lower, but an individual must have the knowledge and time to monitor their investments
Service fee
Maintenance fee
Inactivity fee
Fees specific to an investment

5. Full-Service Brokerage Firm Fees
% of the Investment Value
% of the Amount Invested
Hourly Rate & Flat Fee
Financial advisors are compensated for the time and knowledge they provide investors.
Most charge fees using one of these methods.
In addition to fees, financial advisors may earn commissions paid by the company.

6. Choosing a Brokerage Firm
Important to research the financial advisor and firm he/she works for
Questions to ask:
How are the firm’s financial advisors compensated?
How long has the firm been in business?
Does the firm have a history of positive reviews and success?
How does the firm rank in comparison to other brokerage firms?

7. Tax-Advantaged Investments
Government encourages people to invest in certain types of investments
Savings and investments are a form of unearned income and therefore subject to income tax
Tax-advantaged investments reduce, defer or adjust the current year tax liability
Most common:
Retirement
Education

8. When are taxes for tax-advantaged investments usually paid?
Money is invested and taxes are paid
Money grows untaxed with help from compounding interest
Money is withdrawn
Money is invested
Money grows untaxed with help from compounding interest
Money is withdrawn and taxes are paid OR

9. Investing for Retirement
Choose an investment
Usually mutual funds
Contribute money
Typically tax-advantaged
When possible, use an employer-sponsored plan
Employer may match funds (up to a certain limit)

10. There are many other types of plans available
Retirement Accounts
Employer Sponsored
Similar plans
401(k)
403 (b) (tax-exempt organizations)
Personal Retirement
Traditional IRA (taxes when money withdrawn)
Roth IRA (taxes paid when money deposited)
The trade-off to tax advantages is most accounts have penalties if money is withdrawn early
There are many other types of plans available

11. Bonds
A bond is any interest-bearing or discounted government or corporate security that obligates the issuer to pay the bondholder a specified sum of money, usually at specific intervals, and to repay the principal amount of the loan at maturity. Bondholders have an IOU from the issuer, but no corporate ownership privileges, as stockholders do.
Municipal bonds are bonds issued by local governments to raise money for roads, bridges and other construction projects.
Corporate bonds are loans to the issuer of the bond (corporation). When you buy a bond from a company, you are lending money to that company.

12. Savings Bonds
The price of a Series EE bond is half the redemption value at maturity, so they are said to be discounted 50 percent. Investors pay $50 for a $100 bond, $1,000 for a $2,000 bond, or $5,000 for a $10,000 bond. They make good gifts because the giver buys the bond for only half the price that the bond will be worth at maturity.
The interest rate on US savings bonds is exempt from state and local taxes.
Savings Bonds are purchased from the US Government via

13. Stock
A company raises capital (money) when it issues stock. Since the corporation has not obligation to pay stockholders back the price of the stock, issuing stock does not create a debt, as does issuing bonds or borrowing money from a financial institution or the government.
Stock represents shares of ownership in a corporation. Usually corporations issue stock to raise capital (money) to expand the business. An investor buys stock through a stockbroker, who earns a commission from both the purchase and the sale of stock. Stockholders receive dividends if the company issues dividends, have voting rights, and can sell their stock to another investor at any time. They may also receive dividends.

14. A share of ownership in a company
Stock
Stock
Stockholder or shareholder
Before a company can issue stocks or bonds, it must register with the SEC (Securities and Exchange Commission)
A share of ownership in a company
Owner of the stock
Usually a stockholder owns a very small part of a company

15. IPO
Publicly held corporations have shares of stock (ownership in the company) outstanding that are held by individual investors as well as pension plans and mutual funds. A company converts from a privately held corporation to a publicly held corporation through an Initial Public Offering (IPO) of stock. Investment banks will underwrite the IPO and provide the company with the money they needed to raise and then offer the shares to the public in what is known as the secondary market.
Shareholders have the right to vote at the annual meeting of the corporation. If they are unable to attend, they can vote online or by mail via proxy.

16. Stock Returns - Dividends
Share of profits distributed in cash to stockholders
Stockholder may or may not receive dividends

17. Dividends
A dividend reinvestment plan is designed to help the shareholder acquire additional shares (or partial shares if there is not enough money) of the stock by immediately reinvesting the dividend in the same company’s stock as soon as the dividend is declared. The shareholder is still responsible for paying taxes on the dividends earned.

18. What affects the price of Stock?
Current events (for example, a war or major oil spill), investor confidence, and interest rate levels can all affect the financial markets in general as well as a specific company's stock or bond prices. Diversification is an investing technique that can affect the value of an investor's portfolio but not the price of securities.
Positive news about corporate earnings will make the stock price rise
Negative publicity due to problems with a product or lawsuits which would cost the company money.

19. Penny Stocks and Blue Chip Stocks
In recent years, the stock of many high-tech companies reached a very high price in a short period of time, then declined in value as the company failed, eventually declaring bankruptcy. A stock that trades for less than $1.00 is called a "penny stock." Investing in penny stocks is considered a high risk because there is a high chance that the issuing company may default.
Blue chip stocks are of well-known companies with a long record of profit growth and or dividend payment and a reputation for quality management, products, and services. Some examples of blue chip stocks: General Electric and Dupont.

20. Stock Split
A stock split is when the existing stock divides into a larger number of shares and the price of each share is then reduced accordingly, i.e., a 2-for-1 split on 40 shares that is worth $80 would result in 80 shares at $40 at the time of the split. Among other reasons, companies often decide to declare a stock split when they want to bring in more investors and do not want to issue more stock. Or, they believe that by bringing down the price of the stock through a stock split, that they will increase activity and interest in the corporation’s stock.

21. What’s a Margin?
Margin is a speculative method whereby an investor borrows up to 50% of the money needed from a brokerage firm in order to buy a wanted stock and pays a fee for the privilege.

22. Summary Investments are important to building net worth
A trade-off to higher returns is lower liquidity and higher risk
Investments are ideal for the long-term
Take advantage of portfolio diversification
Discuss your goals with a financial advisor
Use tax-advantaged investments & employer-sponsored plan