Chapter © 2010 South-Western, Cengage Learning Investing for the Future, Stocks & Bonds 11, 12, & 13

© 2010 South-Western, Cengage Learning Do Now List ways you know to invest. What is investing? SLIDE 2 Chapter 11

© 2010 South-Western, Cengage Learning SLIDE 3 Chapter 11 Why Invest Investing is the use of long-term savings to earn a financial return. Investing is a proven and powerful way to strengthen your financial position over time. It is an essential part of providing for future needs. It provides a source of income in addition to a paycheck, allowing you to make money on money.

© 2010 South-Western, Cengage Learning SLIDE 4 Chapter 11 Investing Helps Beat Inflation Inflation is a rise in the general level of prices. videovideo Inflation reduces purchasing power over time. As prices rise, it takes more money to buy the same goods and services. Investors seek investments that will grow faster than the inflation rate.

© 2010 South-Western, Cengage Learning SLIDE 5 Chapter 11 Rule of 72 Video The Rule of 72 is a technique for estimating the number of years required to double your money at a given rate of return. Divide the percentage rate of return into 72 to estimate how long it will take to double your money. For example, if an investment is yielding an average of 6 percent, it will take 12 years to double your money (72 ÷ 6).

© 2010 South-Western, Cengage Learning Rule of 72 Examples 1. You are earning 10% on your money. How long will it take you to double your money? 72 ÷ 10 = 7.2 years 2. You have $5,000 and want to double it in 6 years. What rate must your investment earn to achieve $10,000 in 6 years. 72 ÷ 6 = 12%. SLIDE 6 Chapter 11

© 2010 South-Western, Cengage Learning SLIDE 7 Chapter 11 Investing Increases Wealth Financial success grows from the assets that you build up over time. Investing helps you accumulate wealth faster than if you simply saved your excess cash in a savings account. When you invest in stocks and bonds, you are participating in helping businesses make and sell new products and services. You will be rewarded with dividends and interest.

© 2010 South-Western, Cengage Learning SLIDE 8 Chapter 11 Stages of Investing Stage 1. Put-and-take account Stage 2. Initial investing Stage 3. Systematic investing Stage 4. Strategic investing Stage 5. Speculative investing

© 2010 South-Western, Cengage Learning Stages of Investing Stage 1- Put & Take Account An account where you put money to be used as needed, like a savings account. Stage 2- Initial Investing “excess savings” Conservative, low risk Stage 3 – Systematic Investing Making investments on a regular and planned basis SLIDE 9 Chapter 11

© 2010 South-Western, Cengage Learning Stages of Investing Stage 4 – Strategic Investing Careful management of investment alternatives to maximize growth of your portfolio (collection of investments) over the next 5-10 years. Stage 5 – Speculative Investing When you use extra available money to make bold high-risk investments. SLIDE 10 Chapter 11

© 2010 South-Western, Cengage Learning SLIDE 11 Chapter 11 Risk and Return Investing risk is the chance that an investment’s value will decrease. All types of investing involve some degree of risk. The greater the risk you are willing to take, the greater the potential returns. A safe investment has little risk of loss. Some people are willing to take more risks than others.

© 2010 South-Western, Cengage Learning SLIDE 12 Chapter 11 Diversification Diversification is the spreading of risk among many types of investments. Diversification reduces overall risk because not all of your choices will perform poorly at the same time. If one choice does not do well, the others will likely make up some or all of the loss.

© 2010 South-Western, Cengage Learning SLIDE 13 Chapter 11 Types of Risk Interest-rate risk Political risk Market risk Nonmarket risk Company and industry risk

© 2010 South-Western, Cengage Learning SLIDE 14 Chapter 11 Investment Strategies Many individuals never start an investment program because they think they don’t have enough money. But even small sums of money grow over time. To achieve financial security, start investing as soon as you can and continue to invest over your lifetime.

© 2010 South-Western, Cengage Learning SLIDE 15 Chapter 11 Criteria for Choosing an Investment Degree of safety Degree of liquidity Expected dividends or interest Expected growth in value that exceeds the inflation rate Reasonable purchase price and fees Tax benefits

© 2010 South-Western, Cengage Learning SLIDE 16 Chapter 11 Wise Investment Practices Define your financial goals. Go slowly. Follow through. Keep good records. Seek good investment advice. Keep investment knowledge current. Know your limits. Knowledge

© 2010 South-Western, Cengage Learning SLIDE 17 Chapter 11 Temporary and Permanent Investments Temporary investments are investment choices that will be reevaluated within a year or less. Permanent investments are investment choices that will be held for the long run—five or ten years, or longer.

© 2010 South-Western, Cengage Learning SLIDE 18 Chapter 11 Sources of Financial Information Newspapers Investor services and newsletters Financial magazines Brokers Financial advisers Annual reports Online investor education

© 2010 South-Western, Cengage Learning SLIDE 19 Chapter 11 Annual Reports An annual report is a summary of a corporation’s financial results for the year and its prospects for the future. The Securities and Exchange Commission (SEC) requires all public corporations to prepare this report each year and send it to their stockholders. Investors can use the information contained in the report to evaluate the corporation as an investment prospect. Where to get annual reports Online at the SEC web site Company web sites Libraries

© 2010 South-Western, Cengage Learning SLIDE 20 Chapter 11 Investment Choices Low risk/low return Medium risk/medium return High risk/high return

© 2010 South-Western, Cengage Learning Low Risk/Low Return Bonds- debt obligations of corporations. videovideo Face value- amount the bondholder will be repaid at maturity. Safer investment than many other choices because of a fixed interest rate Prices tend to remain steadier than stock prices and they tend to react in the opposite direction of stock prices. Types Corporate Bonds US Government Savings Bonds Bond Fund SLIDE 21 Chapter 11

© 2010 South-Western, Cengage Learning SLIDE 22 Chapter 11 Low Risk/Low Return Corporate Bonds A callable bond is a bond that the issuer has the right to pay off (call back) before its maturity date. Corporations usually agree not to call bonds for the first 5 years Buy from corporation.

© 2010 South-Western, Cengage Learning Low Risk/Low Return Types of Corporate Bonds A debenture is a corporate bond that is based on the general creditworthiness of the company. A secured bond, also called a mortgage bond, is backed by specific assets which serve as security to assure repayment of the debt. A convertible bond is a corporate bond that can be converted to shares of common stock. SLIDE 23 Chapter 11

© 2010 South-Western, Cengage Learning Low Risk/Low Return U.S. government savings bonds A discount bond is purchased for less than the maturity value. Municipal Bonds Savings Bonds Purchased through treasury direct. SLIDE 24 Chapter 11

© 2010 South-Western, Cengage Learning Low Risk/Low Return Municipal Bonds- A bond issued by state and local governments Municipal bonds generally pay a lower interest rate than corporate bonds. The interest is exempt from federal taxes (and often state and local taxes as well), so the effective rate is higher than the stated rate. A revenue bond is a municipal bond issued to raise money for a public-works project. SLIDE 25 Chapter 11

© 2010 South-Western, Cengage Learning Low Risk/Low Return Savings Bonds You can buy U.S. savings bonds three ways: From commercial banks Through payroll deduction plans Directly from a Federal Reserve Bank You can buy up to $20,000 worth of these bonds a year. SLIDE 26 Chapter 11

© 2010 South-Western, Cengage Learning Low Risk/Low Return Bond Fund Bond fund- group of bonds that have been bundled together and sold in shares to investors. A bond fund would contain some investment-grade bonds along with bonds of some newer companies, and foreign bonds. Reading Corporate Bond Listings SLIDE 27 Excerpt from stock exchange (bond) listings: Name Type/ Rating Coup.Mat. 3 p.m. Bid Net Chg. Yld AK Steela/BB /08 98½unch9.46 Allied Wasteb/B /11 102unch9.57 Am Stda/BB /10 98½–1¼7.56

© 2010 South-Western, Cengage Learning SLIDE 28 Chapter 11 Medium Risk/Medium Return Stocks Stock is a unit of ownership in a corporation. Mutual funds A mutual fund is the pooling of money from many investors to buy a large selection of securities. Fastest growing segment Annuities An annuity is a contract that provides the investor with a series of regular payments, usually after retirement. Real Estate

© 2010 South-Western, Cengage Learning Medium Risk/Medium Return Stocks- videovideo People who own shares of stock are called stockholders, or shareholders, of the corporation. Two ways to profit from owning stock: Dividends are money paid to stockholders from the corporation’s earnings (profits). Capital gain is an increase in the value of the stock over time. Traded in 2 ways Odd lots- fewer then 100 shares Round lots- multiple of 100 shares SLIDE 29 Chapter 11

© 2010 South-Western, Cengage Learning Medium Risk/Medium Return Common Stock Common stock represents a type of stock that pays a variable dividend and gives the holder voting rights. Can be issued without par value Preferred Stock Preferred stock represents a type of stock that pays a fixed dividend but has no voting rights. SLIDE 30 Chapter 11

© 2010 South-Western, Cengage Learning Medium Risk/Medium Return Types of stock Investments Income stocks Growth stocks Emerging stocks Blue chip stocks Defensive stocks Cyclical stocks SLIDE 31 Chapter 11

© 2010 South-Western, Cengage Learning Medium Risk/Medium Return Stocks- The Securities Market A securities exchange is a marketplace where brokers who are representing investors meet to buy and sell securities. NASDAQ AMEX NYSE SLIDE 32 Chapter 11

© 2010 South-Western, Cengage Learning Medium Risk/Medium Return Stocks- Investing Strategies Short-term Buy on Margin- Borrow money from broker to buy Sell Short- Selling stock borrowed from a broker that must be replaced at a later time- videovideo Long-term Buy & Hold- Hold on to stock for extended time Direct Investment- Buying directly from a corporation. Dividend Reinvestment- Using dividends to buy more shares. SLIDE 33

© 2010 South-Western, Cengage Learning Medium Risk/Medium Return Reading the Stock Listings SLIDE 34 Chapter 11 Excerpt from stock exchange listings: 52 Wks StockDivYld% P/E Ratio Sales 100sHighLowClose Net Change HighLow Enger – Eng pf Entld Epsco Exlab z ExeB

© 2010 South-Western, Cengage Learning SLIDE 35 Chapter 11 High Risk/High Return Futures- contracts to buy and sell commodities or stocks for a specified price on a specified date in the future. Options- the right, but not the obligation, to buy or sell a commodity or stock for a specified price within a specified time period. Penny stocks- low-priced stocks of small companies that have no track record. (under $5) Collectibles- saving physical items in hopes they will increase in value