Investment Unit Consumer Economics

Unit Overview I. Investment Strategies II. Investment Vehicles III. Establishing a Portfolio

Investment Strategies (cont’d) Timing The shorter your timeline, the less risk you can afford Younger people might prefer riskier investments (why?) Older people like less risky investments (why?) Liquidity The ease with which investments can be converted to cash Real estate – low liquidity Stocks – high liquidity, if a desirable stock Marketability How attractive is an investment to buy or sell?

I.Investment Strategies Risk Tolerance Conservative – low risk / low return Aggressive – high risk / ? return Moderate – in the middle The older you are, the less risky you want to be The question is: how much risk can you take on? Diversification Variety of investments to reduce overall risk “Don’t put all your eggs in one basket”

Investment Strategies (cont’d) Growth Potential Interested in a long-term growth strategy, not immediate gains (video)video For young couples with children (pay for college) Income Potential Interested in dependable returns; an established company Good for retired people who desire a guaranteed, stable income

Establishing a Portfolio Insider Trading Access to information not yet known to the public Illegal to use this information to make investment decisions or share with others intending to do so Violates SEC guidelines Examples: Martha Stewart

II.Investment Vehicles Bonds Way for a company or other organization to borrow money Corporate – issued by corporations Can be purchased through brokers or banks Generally in minimum amounts/increments of $1000 Higher rates of return than gov’t bonds, but riskier Municipal – issued by local and state governments Interest earned not federally taxable, perhaps state also Low risk, but low return Government – issued by federal government (chart – p. 339) Can be in form of savings bonds or treasury securities Low risk, but low return

Investment Vehicles (cont’d) Stocks ownership interest in a corporation Investors purchase shares of stock (part ownership) If the company does well, profits can be “shared” with owners Common Shareholder has voting rights (video)video Dividends vary and are not guaranteed Preferred Shareholder may have no voting rights Dividends guaranteed at a fixed rate

Investment Vehicles (cont’d) Stocks (cont’d) IPO (Initial Public Offering) Occurs when the company first issues stock Investors purchase stock directly from company After IPO, investors must buy it from other investors Dividend Periodic payment to shareholders Represents a portion of the company’s profits Usually paid four times per year Not guaranteed

Investment Vehicles (cont’d) Mutual Funds Group of investments held in common by many investors You give an investment company your money, they do the homework and purchase various investments Investments usually grouped by common characteristic low risk vs. high risk common industry (technology, pharmaceuticals) global vs. national temporary vs. long-term growth Earnings are divided among the fund’s investors

Investment Vehicles (cont’d) Real Estate Purchase of land, buildings, or both Can purchase property and rent to others (apartments, offices) Pros Good investment in anticipation of inflation Rent can be used to pay mortgage Cons Not liquid – can be tough to sell Have to maintain property Finding tenants can be tough

Establishing a Portfolio (cont’d) Online trading Many web sites offer this feature (link)link Require an account Will charge a fee per trade or per month May have minimum purchase amounts per month or minimum number of shares per transaction 24/7 trading abilities

Establishing a Portfolio (cont’d) Researching investments Prospectus Legal document offering investors information about mutual fund or other security Include past performances Issued by the company, so it may be subjective Market type Bull – trend of rising stock prices (good for sellers) Bear – trend of falling stock prices (good for buyers)

Establishing a Portfolio (cont’d) Tracking investments S&P (Standard & Poor’s 500) Measures annual performance of 500 prominent industrial, transportation, financial, and utility stocks Dow Jones (link)link Tracks stocks of 30 large, well-known companies

Who’s in the Dow Jones? 3M American Express AT&T Boeing Caterpillar Chevron Cisco Systems Coca-Cola DuPont ExxonMobil General Electric Goldman Sachs The Home Depot Intel IBM Johnson & Johnson JPMorgan Chase McDonald’s Merck Microsoft Nike Pfizer Procter & Gamble Travelers United Health Group United Technologies Verizon VIsa Wal-Mart Walt Disney

Establishing a Portfolio (cont’d) NYSE Largest stock exchange in the world 2,800 companies valued at nearly $20 trillion in global market capitalization Fewer, but larger companies NASDAQ U.S. stock exchange with over 3,200 companies listed More, but smaller companies