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Chapter 14 Methods of investing Chapter 14 Methods of investing

Chapter 14 Methods of investing - PowerPoint Presentation

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Chapter 14 Methods of investing - PPT Presentation

Learning Objectives Understand the reasons for investing Describe the process of investing in stocks Describe the process of investing in bonds Describe the process of investing in mutual funds Explore other options for investing ID: 782514

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Presentation Transcript

Slide1

Chapter 14

Methods of investing

Slide2

Learning Objectives

Understand the reasons for investing

Describe the process of investing in stocks

Describe the process of investing in bonds

Describe the process of investing in mutual funds

Explore other options for investing

Slide3

Obj

1: understand the reasons for investing

Why invest?

First priority in financial plan = cash reserve in liquid investments

(checking accounts, CDs, savings accounts)

Experts suggest building a cash reserve large enough to pay for 3-6 months worth of your bills

High liquid investments = very low interest rates which is why you should invest

You must keep pace with inflation (if you put $5,000 in a savings account and left it there for several years, it would buy less than it did when you started)

Things that will outpace inflation = stocks, bonds, mutual funds

Slide4

investing

With the promise of higher returns comes higher risk

Investments go up and down in value unpredictably

You can lose money you’ve earned in the stock market in a matter of hours

Because of that, riskier investments should be considered long-term investments

You should avoid - or get out of - such investments (like stocks) if you expect to need the money in the near future

Slide5

Obj

2: Describe the process of investing in stocks

Investing in Stocks

STOCKS: certificates that represent pieces of ownership in a company

Example: If one company issues 100 shares of stocks, each share is equivalent to 1% of the firm’s value

Companies like Microsoft and Apple have issued millions of stocks

Companies issue/sell stock as a way to raise money for business operations and expansions

Initial Public Offering (IPO)

– when a company goes public, this is it’s first sale of stock

– during IPO is when a company receives money for the sale of its stock and occurs in the

PRIMARY MARKET

Transactions

after

IPO are what you’re more familiar with – seen on TV and in newspapers

After IPO, there is the

secondary market

(a company is said to be publicly traded when its stocks are bought and sold in the secondary market)

Slide6

Behavior of investors

There are many types of investors who trade (buy and sell) stocks

Institutional investors trade large volumes of stocks on behalf of large institutions

Investors trade stocks to make a profit

Most attempt first and foremost to buy a stock at a

low price with the expectation of selling it later at a higher priceThe stock market can go up and downBull market – markets are trending upwardsBear market- markets are trending down

Slide7

Stocks vocabulary

Shareholders – people who own stocks in the company

Dividends

– cash distributed to the company shareholders

Securities and Exchange Commission/SEC

– regulates and monitors stock marketSecurities – term used for investments issued by corporations or governments in which the investor receives proof of ownershipCommissions – fee for carrying out a transaction (how brokerage firms make money, they charge commissions)

Slide8

Slide9

Slide10

Bonds

WHAT IT IS: a promissory note, or a promise to repay a certain amount of money at some point in the future

Each bond has a face value typically $1,000 and a stated rate of interest that will be paid to the bondholder

until the bond expires

(aka the

maturity date

ranging from 5-30 years)

On it’s maturity date, the investor is paid their initial investment

Face value = a bond’s maturity value is printed on the front of the bond

Interest rate is often called

coupon rate

because bonds used to come with booklets of prewritten coupons for the interest due on each bond

In general, the

lower

the bond rating (shown on next slide), the

higher

the interest rate the bond pays.

Obj 3: Describe the process of investing in bonds

Slide11

Types of bonds

Treasury bonds – finance the debt of the US government

Federal agency bonds – the Federal Housing Administration and Government National Mortgage Association (

Ginnie

Mae) may issue bonds to buy mortgages to encourage home ownership

Municipal bonds – finance large public projects such as water and sewer systems (investors do NOT pay federal taxes on the interest earned from municipal bonds)Corporate bonds – issued by large firmsJunk bonds – issued from companies with high risk/anything rated below the top four categories of bonds

Slide12

14.4 and 14.5

Mutual Funds

WHAT IT IS: sell shares to investors in order to collect a pool of money that is then used to buy various investments

Advantage = DIVERSIFICATION – investing in multiple investments and therefore reducing risk

Mutual funds are managed by experienced people

Tax sheltered retirement – any time your money grows tax free

Examples: 401(k) or Roth IRA

Other Ways of Investing

Real Estate – the value of homes in a given area is MOST dependent on supply and demand for homes in the area

When supply is greater than demand, the price of houses will go down and vice versa

Some people invest in real estate by buying rental properties

Another way is owning a business (restaurants, retail stores, other services)

Be careful, many small ventures fail

Obj 4: Describe the process of investing in mutual funds

Obj 5: Explore other options for investing