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
Download The PPT/PDF document "Chapter 14 Methods of investing" is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Slide1
Chapter 14
Methods of investing
Slide2Learning 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
Slide3Obj
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
Slide4investing
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
Slide5Obj
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)
Slide6Behavior 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
Slide7Stocks 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)
Slide8Slide9Slide10Bonds
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
Slide11Types 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
Slide1214.4 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