1. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Investment Planning #11

2. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Goals Discuss the role investing plays in financial planning process and identify investment objectives Distinguish between primary and secondary markets and between broker and dealer markets Explain buying and selling securities and recognize types of orders Appreciate how information can lead to better skills and returnsUnderstand the impact of computer and internet on investments Describe an investment portfolio, develop/manage a securities portfolio

3. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Objectives & Rewards Of Investing Investing usually long-term expect future value and return to increase over time Speculating usually short-term future value and return highly uncertain Adequate insurance coverage and cash/savings are investment prerequisites

4. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How Do I Get Started? PAY YOURSELF FIRST! Regularly allocate a portion of earnings for investing Take advantage of automatic investment and dividend reinvestment programs Learn about investments and "play" tradingDetermine financial objectives

5. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. What Are Your Investment Objectives? Current Income –appropriate for retired persons Major Expenditures –college education, down payment on a home, or starting a business Retirement –live comfortably in "golden years" Shelter from Taxes –preserve more of your earnings

6. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Coming Up With the Capital How much money will it take? Do you have a lump sum to invest now, or will you systematically save toward your goal? Investment plan provides direction to help attain goal

7. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Different Ways to Invest 1. Common Stock 2. Bonds 3. Preferreds and Convertibles 4. Mutual Funds and Exchange Traded Funds 5. Real Estate

8. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1. Common Stock Different Ways to Invest Represents a share of ownership in a corporation Greater potential returns with a higher level of risk

9. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2. Bonds Different Ways to Invest Represent debt – IOU’s of the issuerProvide interest income Bond values inversely related to changes in interest rates

10. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Different Ways to Invest 3. Preferred Stock Equity security that behaves like debt Fixed dividend paid before dividend to common stockholders Convertible Bonds Special type of fixed income security Allows conversion into common stock Provides income and possible price appreciation Hybrid Securities

11. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Different Ways to Invest 4. Mutual Funds –Professionally managed portfolio by an investment company –Returns and risk depend on portfolio 4. Mutual Funds –Professionally managed portfolio by an investment company –Returns and risk depend on portfolio Exchange Traded Funds Track a basket or index of securities

12. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5. Real Estate Different Ways to Invest Invest directly or through shares in a REITDifficult to estimate risk and returnInvestors must be aware of economic cycles

13. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Securities Markets “Arenas” where financial instruments trade Capital Market - long-term securities with maturities >1 year Money Market - low-risk, short-term securities with maturities l< 1 year

14. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Securities Markets Primary market new issues available for first time Investment bank underwrites Issuing company gets proceeds Prospectus Secondary market trading previously issued securities Securities exchanges NASDAQ OTC Market

15. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Broker and Dealer Markets Broker Market buyer and seller come together, direct trade takes place between them Party A sells securities directly to Party B Dealer Market buyer and seller never meet buy/sell orders are executed separately through securities dealers acting as market makers

16. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Broker and Dealer Markets

17. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Dealer Markets Bid Price price at which investor can sell a security Ask Price price at which investor can buy a security

18. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Foreign Securities Markets Manila Tokyo Organized securities exchanges exist in over 100 countries Found in industrialized nations and emerging economies around the globe

19. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Regulating the Securities Markets Federal and state laws regulate securities sales Provides for adequate and accurate disclosure of financial information Securities and Exchange Commission (SEC) administers federal securities laws

20. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Regulating the Securities Markets Securities Act of 1933 – ensure full disclosure Securities Exchange Act of 1934 – created SEC Investment Company Act of 1940 – protect mutual fund shares Sarbanes-Oxley Act of 2002 – eliminate corporate fraud Dodd-Frank Wall Street Reform and Consumer protection Act of 2010

21. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Market Trends Bear Market Falling securities prices for extended time period –Investor pessimism –Economic downturn Bull Market Rising securities prices for extended time period –Investor optimism –Favorable economy

22. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Making Transactions in the Securities Markets Stockbrokers buy and sell securities for customers Full-service, discount, or online brokers Brokerage feesInvestor protection

23. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Historical Performance of US Stock Markets Measured by NYSE Returns

24. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of Brokers

25. Odd or Round Lots Round Lot 100 shares of stock or multiples thereof Odd Lot fewer than 100 shares Odd-lot differential

26. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Securities Investor Protection Corp. (SIPC) Arbitration settles disputes between broker and client Investor Protection protects customers against financial failure of brokerage firm insures accounts up to $500,000guarantees securities or cash held by brokerdoes not guarantee dollar value of securities

27. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Executing Trades Market orders often take less than two minutes! Investor establishes account with broker Trades can be executed by phone, at brokerage firm, or online

28. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of Orders Market order - trade now at best available price Limit order - trade when a specified price or better is reached Stop-loss order - sell if stock drops to certain price, use to limit losses

29. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Becoming an Informed Investor Annual ReportsFinancial PressIndustry DataStock QuotesAdvisory Services

30. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Annual Stockholder Reports Here’s what to read…. Highlights or selected financial data sections CEO’s letter Operations in management’s discussion and analysis section Financial statements and notes Auditor’s report

31. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Online Investing Online servicesEducational materialInvestment tools Investment planning Investment Research and screening Portfolio tracking

32. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Managing Your Investment Holdings Build a diversified portfolio based on goals and personal situation Allocate assets according to objectives Track investments, rebalance portfolio as needed

33. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Investor Objectives high current capital income appreciation Trade-off between

34. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Asset Allocation and Portfolio Management Dividing a portfolio among different types of securities Total return is influenced more by asset allocation than by specific security selections