1. The Fundamentals of Investing
Chapter 8

2. 8.1 Preparing for an Investment Program
Establishing Your Investment Goals
Plan carefully and practice discipline
Sacrifices will be worth it in the long run
Starts with a measurable goal (saving for a car, college, or a down payment on a house)

3. 8.1 Preparing for an Investment Program
Performing a Financial Checkup
Balance your budget: spend less than you make
Have enough insurance to cover financial losses
Start an emergency fund (money that you can access quickly for an immediate need)
Have access to other sources of cash
Line of credit or credit card cash advance

4. 8.1 Preparing for an Investment Program
Obtaining the Money You Need to Get Started
Pay yourself first – consider it a monthly bill
Take Advantage of Employer-Sponsored Retirement Plans – many employers match part or all you put in and it isn’t taxed until you withdraw it, usually at retirement

5. 8.1 Preparing for an Investment Program
Obtaining the Money You Need to Get Started
Participate in an Elective Savings Plan – automatically taken from your check and put into savings or from your account and invested
Make a Special Savings Effort One or Two Months Each Year – cut back sharply at a specific time of year
Take Advantage of Gifts, Inheritances, and Windfalls

6. 8.1 Preparing for an Investment Program
The Value of Long-Term Investment Programs
Some people don’t invest because they only have a small amount or they think they are too young
Even small amounts add up because of the time value of money (the increase in an amount of money as a result of interest or dividends earned)

7. 8.1 Preparing for an Investment Program
Factors That Affect Your Choice of Investments
Safety and Risk
Safety – the chance of losing your money in an investment is fairly small; rate of return will be low
Risk – you cannot be certain about the outcome of your investment; speculative investment (high risk investment in the hope of earning a relatively large profit in a short time)

8. 8.1 Preparing for an Investment Program
Factors That Affect Your Choice of Investments
Five Components of the Risk Factor
Inflation Risk – general rise in prices that affects everybody
Try to stay ahead of inflation by investing
Example on page 246
Interest Rate Risk
Government or corporate bonds have a fixed rate of return; if the interest rate rates go up then the value of your investment will go down and vice versa, but if you wait until maturity to cash in you would get your full amount
Examples on page 247

9. 8.1 Preparing for an Investment Program
Factors That Affect Your Choice of Investments
Five Components of the Risk Factor
Business Failure Risk – applies to common stock, preferred stock, and corporate bonds; you face the possibility that the company you invested in will be less profitable than you had hoped
Research, research, research to protect against this
Financial Market Risk – the value of stocks, bonds mutual funds, and other investments go up or down depending on the overall state of financial markets (social and political conditions)
Example: price of oil stocks may be affected by the political situation in the Middle East

10. 8.1 Preparing for an Investment Program
Factors That Affect Your Choice of Investments
Five Components of the Risk Factor
Global Investment Risk – investing in companies in other countries

11. 8.1 Preparing for an Investment Program
Factors That Affect Your Choice of Investments
Investment Income – source of income
Safest investments – savings accounts, certificates of deposit (CDs), U.S. Savings Bonds, and U. S. Treasury bills
Government bonds, corporate bonds, preferred stock, utility stock, or certain common stocks
Mutual funds and real estate rental
Investment Growth – “growth” means that investments will increase in value
Growth companies reinvest their profits rather than pay dividends (retained earnings – the profits that are reinvested)

12. 8.1 Preparing for an Investment Program
Factors That Affect Your Choice of Investments
Investment Liquidity – the ability to buy or sell an investment quickly without substantially affecting its value
May have to accept a lower price for a house to sell it quickly

13. 8.2 An Overview of Investment Alternatives
Types of Investments
Stock or Equity Financing
Equity capital – money that a business gets from its owners in order to operate
Sole proprietor – sole business owner
Partnership – share in the equity capital
Corporation – gets it money from stockholders
Corporations do not have to repay you what you paid and they don’t have to pay you dividends (distributions of money, stock, or other property that corporation sometimes pays to stockholders)

14. 8.2 An Overview of Investment Alternatives
Types of Investments
Stock or Equity Financing Continued
Common Stock – most basic form of corporate ownership; entitles you to voting privileges and can provide a source of income if the company pays dividends
Preferred Stock – gives the owner the advantage of receiving cash dividends before common stock holders

15. 8.2 An Overview of Investment Alternatives
Types of Investments
Corporate or Government Bonds
Corporate bonds are a corporation’s written pledge to repay a specified amount of money along with interest.
Government bonds are a written pledge of a government or a municipality to repay a specified sum of money with interest
“Buy a Bond” – you are lending money to a corporation or government agency for a certain period of time

16. 8.2 An Overview of Investment Alternatives
Types of Investments
Corporate or Government Bonds Continued
Factors that affect the value of a bond:
Whether the bond will be repaid at maturity
Whether the corporation or government agency will be able to pay interest until maturity
Maturity dates – 1 to 30 years
Paid – every 6 months

17. 8.2 An Overview of Investment Alternatives
Types of Investments
Mutual Funds – an investment alternative in which investors pool their money to buy stocks, bonds, and other securities based on the selections of professional managers who work for an investment company
So, if one of the stocks does poorly it can be made up by the gains of another in the fund

18. 8.2 An Overview of Investment Alternatives
Types of Investments
Real estate – goal is to have the property increase in value so you can sell it at a profit or receive rental income
When buying property consider:
Why are the present owners selling? Is the property in good condition? What is the condition of other properties in the area? Is there a chance that the property will decrease in value and you lose money?

19. 8.2 An Overview of Investment Alternatives
Types of Investments
Real estate continued
When you sell consider:
Can you find an interested buyer? Can the buyer get the necessary financing to buy the property?

20. 8.2 An Overview of Investment Alternatives
Evaluating Investment Alternatives
When you make your choices to invest, it’s wise to diversify
Diversification – process of spreading your assets among several different types of investments to lesson risk

21. 8.2 An Overview of Investment Alternatives
Evaluating Investment Alternatives
Investment Pyramid
Level 4 Speculation
Level 3 Growth
Level 2 Safety and Income
Level 1 Financial Security

22. 8.2 An Overview of Investment Alternatives
Developing a Personal Investment Plan
Establish investment goals
Decide how much money you will need to reach those goals by a certain date
List all the investment you want to evaluate
Evaluate the risks and potential return for each investment on your list
Reduce the list of possible investments to a reasonable number
Choose at least two investments to give you some diversity
Recheck your investment program periodically…investment goals will change over time

23. 8.3 Reducing Investment Risk and Obtaining Investment Information
The Role of the Financial Planner (specialist who is trained to offer specific financial help and advice)
Fee-only planners – charge and hourly rate from $75 to $200 or a flat fee ranging from about $500 to several thousand dollars
Fee-offset planners – charge an hourly or annual fee, but they offset or reduce it with commissions, or earnings they make by buying or selling investments

24. 8.3 Reducing Investment Risk and Obtaining Investment Information
The Role of the Financial Planner continued
Fee and commission planners – charge a fixed fee for a financial plan and earn commissions from the financial products they sell
Commission only planners – earn all their money through commissions they make on sales of insurance, mutual funds, and other investments

25. 8.3 Reducing Investment Risk and Obtaining Investment Information
Do You Need a Financial Planner?
Consider two things…
Your income – if you make less than $40,000 a year you probably don’t need a planner’s advice
How willing are you to make decisions on your own – if you take the time and effort to keep up-to-date on financial developments
You can find a financial planner in the yellow pages, by contacting financial institutions, and by getting names from friends, coworkers, or professional contacts

26. 8.3 Reducing Investment Risk and Obtaining Investment Information
Do You Need a Financial Planner?
Selecting a Financial Planner
Help you assess your current financial situation
Offer a clearly written plan, including investment recommendations, and discuss the features of the plan with you
Help you keep track of your progress
Guide you to other financial experts and services as needed

27. 8.3 Reducing Investment Risk and Obtaining Investment Information
Do You Need a Financial Planner?
Certification of Financial Planners
Requirements vary from state to state
Some require passing an exam
Others issue licenses to either individual planner or planning companies
While others have no regulations at all
Credentials may be Certified Financial Planner (CFP) or Charted Financial Consultant (ChFC)
The federal government requires that the Securities and Exchange Commission (SEC) monitor the largest financial advisors

28. 8.3 Reducing Investment Risk and Obtaining Investment Information
Your Role in the Investment Process – it’s a continual process, even if you have a financial planner you shouldn’t ignore your money
Evaluate Potential Investments
Monitor the Value of Your Investments – helps you to know if you’ve made money or not
Keep Accurate and Correct Records - helps you spot opportunities to increase profits
Tax Considerations – investment income falls into three categories:

29. 8.3 Reducing Investment Risk and Obtaining Investment Information
Your Role in the Investment Process continued
Tax Considerations – investment income falls into three categories:
Tax exempt income – income that is not taxed; most interest you receive from state and municipal bonds is exempt
Tax-deferred income – income taxed later; most common is on a traditional individual retirement account (IRA)
Taxable – all other investments

30. 8.3 Reducing Investment Risk and Obtaining Investment Information
Your Role in the Investment Process continued
Tax Considerations continued
You have to pay tax on dividends, Interest income, and rental income:
Cash dividends
Interest from banks, credit unions, and savings and loans associations
Interest from bonds (unless tax exempt), promissory notes, loans, and U. S. Securities
Rental property

31. 8.3 Reducing Investment Risk and Obtaining Investment Information
Your Role in the Investment Process continued
Tax Considerations continued
Capital Gains and Capital Losses
Capital gains –profit from the sale of an asset such as stock, bonds, or real estate. Taxed according to whether they are short term or long term.
Short term – owned for 12 months or less
Long term – owned for 12 months or more
Capital loss – sale of an investment for less than its purchase price

32. 8.3 Reducing Investment Risk and Obtaining Investment Information
Sources of Investment Information
The Internet and Online Computer Services
Newspapers and News Programs – Wall Street Journal and CNN Financial
Business Periodicals and Government Publications – Barron’s, Business Week, Forbes, Fortune, Harvard Business Review, and the Federal Reserve Bulletin (much of it is free)
Corporate Reports – businesses must provide investors with a prospectus (a document that discloses information about a company’s earnings, assets & liabilities, its products or services, and the qualifications of its managers)

33. 8.3 Reducing Investment Risk and Obtaining Investment Information
Sources of Investment Information
Statistical Averages – indicates whether the category it measures is increasing or decreasing; won’t pinpoint the value of any specific investment but will show the general direction of stocks, bonds, mutual funds, and so on.
Dow Jones Industrial Average or Standard & Poor’s 500 Stock Index
Investor Services – stockbrokers and financial planners periodically mail a free newsletter to their clients
Moody’s Investor Service sells subscription newsletters