1.  2004 McGraw-Hill Ryerson Ltd. Kapoor Dlabay Hughes Ahmad Prepared by Cyndi Hornby, Fanshawe College Chapter 10: Fundamentals of Investing 10-1

2.  2004 McGraw-Hill Ryerson Ltd. Learning Objectives – Chapter 10 1.Explain why you should establish an investment program. 2.Describe how safety, risk, income, growth and liquidity affect your investment decisions. 3.Identify the major types of investment alternatives. 4.Recognize the role of the professional financial planner and your role in a personal investment program. 5.Use various sources of financial information that can reduce risks and increase investment returns. 10-2

3.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 1 Explain why you should establish an investment program. 10-3

4.  2004 McGraw-Hill Ryerson Ltd. Establishing Investment Goals Financial goals should be specific and measurable and tailored to your particular financial needs. Ask yourself.. What will you use the money for? How much will you need? How will you obtain it? How long will it take you to obtain the money? How much risk are you willing to assume? Are goals reasonable and are you willing to sacrifice current consumption to invest? What will happen if you don’t reach your goals? 10-4

5.  2004 McGraw-Hill Ryerson Ltd. Performing a Financial Checkup Work and learn to save and to balance your budget. Reduce high interest debt first. Obtain adequate insurance protection. Start an emergency fund you can access quickly. Three to nine months of living expenses. Have access to other sources of cash for emergencies. Line of credit is a short-term loan approved before the money is needed. Cash advance on your credit card. 10-5

6.  2004 McGraw-Hill Ryerson Ltd. Getting the Money Needed to Start an Investing Program Prioritize your investment goals. How badly do you want to achieve them? Pay yourself first. Take advantage of employer-sponsored retirement programs. Participate in elective savings programs. Payroll deduction or electronic transfer. Make extra effort to save one - two months/year. Take advantage of gifts, inheritances, and windfalls. 10-6

7.  2004 McGraw-Hill Ryerson Ltd. Value of Long-Term Investing Programs Many people don’t start investing because they only have a small amount to invest but.... Small amounts invested regularly become large amounts over time. 10-7

8.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 2 Describe how safety, risk, income, growth and liquidity affect your investment decisions. 10-8

9.  2004 McGraw-Hill Ryerson Ltd. Factors Affect the Choice of Investments Safety and risk. The potential return on any investment should be directly related to the risk the investor assumes. Safety in an investment means minimal risk of loss Risk tolerance is the amount of psychological pain you’re willing to suffer for your investments 10-9

10.  2004 McGraw-Hill Ryerson Ltd. Safety and Risk Safest investments include... Savings accounts Canada Savings bonds Canadian Treasury Bills Guaranteed Investment Certificates (GICs) Higher potential income investments include… Government and Corporate bonds. Utility Stocks Preferred and select Common stocks. Mutual funds. Real estate rental property. 10-10

11.  2004 McGraw-Hill Ryerson Ltd. Components of the Risk Factor Inflation Risk Return on investment will not keep up with inflation Interest Rate Risk Changes in the interest rates in the economy Business Failure Risk Business will be less profitable then anticipated Market Risk Values fluctuate because of behaviour of investors in marketplace Global Investment Risk Should be evaluated like domestic investments 10-11

12.  2004 McGraw-Hill Ryerson Ltd. Investment Growth and Liquidity Growth means investments will increase in value Common stock. Growth stocks reinvest retained earnings. Bonds, mutual funds and real estate. Liquidity. Ability to buy or sell an investment quickly without substantially affecting the investment’s value. 10-12

13.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 3 Identify the major types of investment alternatives. 10-13

14.  2004 McGraw-Hill Ryerson Ltd. Investment Alternatives Stock or equity financing. Equity capital is provided by stockholders, who buy shares of a company’s stock. Stockholders are owners and share in the success of the company. A corporation is not required to repay the money obtained from the sale of stock. They are under no legal obligation to pay dividends to stockholders. They may instead retain all or part of earnings. 10-14

15.  2004 McGraw-Hill Ryerson Ltd. Investment Alternatives Corporate and government bonds. A bond is a loan to a corporation, the federal government, or a municipality. Bondholders receive periodic interest payments, and the principal they lent is repaid at maturity (1-30 years). Bondholders can keep the bond until maturity or sell it to another investor. 10-15 (continued)

16.  2004 McGraw-Hill Ryerson Ltd. Investment Alternatives Mutual funds. Investors’ money is pooled and invested by a professional fund manager. You buy shares in the fund. Provides diversification to reduce risk. Funds range from conservative to extremely speculative. Match your needs with a fund’s objective. (continued) 10-16

17.  2004 McGraw-Hill Ryerson Ltd. Investment Alternatives Real Estate. Buy property and sell it when it increases in value. Location, location, location is important. Before you buy property, consider… Is the property priced competitively? Why type of financing is available, if any? How much are the taxes? What is the condition of nearby buildings/houses? Why are the present owners selling? Could the property decrease in value? (continued) 10-17

18.  2004 McGraw-Hill Ryerson Ltd. Investment Alternatives Other investment alternatives. A speculative investment is a high-risk investment made in the cope of earning a relatively large profit in a short time. Typical speculative investments include: Antiques and collectibles. Options. Derivatives. Commodities. Coins and stamps. Precious metals and gemstones. (continued) 10-18

19.  2004 McGraw-Hill Ryerson Ltd. Factors that Affect Investment Choices Diversification Spreading your assets among several types of investments to lessen risk A Personal Investment Plan Establish goals and determine the amount of money needed to obtain them Evaluate risk and potential return on different investments After choosing your investments continue to evaluate your program 10-19

20.  2004 McGraw-Hill Ryerson Ltd. Investment Pyramid Commodities Junk bonds Options Rental property Utility stocks Government Securities Corporate bonds CDs Money Market Savings Accounts Cash High Quality Stocks Mutual funds High risk Low risk 10-20

21.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 4 Recognize the role of the professional financial planner and your role in a personal investment program. 10-21

22.  2004 McGraw-Hill Ryerson Ltd. Factors that Reduce Investment Risk The Role of the Financial Planner Seek professional help from stockbrokers, lawyers, accountants, bankers and insurance agents or Chartered Financial Planners Be aware of how they are paid and how this influences the advice they give 10-22

23.  2004 McGraw-Hill Ryerson Ltd. Your Role in the Investment Process Evaluate potential investments. Monitor the value of your investments. Keep accurate and current records. Be aware of tax considerations, including tax deferred and tax exempt investments. Keep track of capital gains and losses, interest income, rental income, and dividends. Check to see if you qualify for a capital gains exemption 10-23

24.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 5 Use various sources of financial information that can reduce risks and increase investment return. 10-24

25.  2004 McGraw-Hill Ryerson Ltd. Sources of Investment Information The internet and online computer services. Use a search engine such as Yahoo Canada or Alta Vista Canada to find information. View sites such as www.canoe.ca/Money, quicken.ca, and canadianfinance.com Newspapers and news programs. Business periodicals and government publications. Corporate Reports. Statistical Averages. Investor Services and newsletters. Desktop Information Services 10-25