Investment Planning Chapter 11

Investing Placing money in some medium such as stocks, bonds or real estate in the expectation of receiving some future benefit

Speculating Future returns are highly uncertain

Risk Averse Attitude towards risk – choosing the option with the lowest risk

Investment Prerequisites Ample insurance Liquidity – Adequate cash & savings

Getting Started What is your risk factor? Use only investment capital Educate yourself on the market Start a paper portfolio and follow it to be sure you understand the investments you are considering Set an objective (a goal)

Coming up with the Capital

Debt Capital – Capital you lend to corporations or the government. Bonds or Certificates of Deposit

Equity Capital Stocks, Commodities, Real Estate

Investment Plan How will investment capital will be invested

Setting Goals Current Income Major expenditures – Purchase a home – Education – Start a business Retirement Shelter from taxes

Ways to Invest Common Stock Bonds Preferred stock and convertibles Mutual Funds Exchange Traded Funds Real Estate

Securities Market

Markets Primary A new issue to the public that is sold by the corporation through and investment banker. Secondary The transaction is executed by individual investors and does not generate cash for the corporation

Bid and Ask Bid The price at which one can sell a security Ask The price at which one can purchase a security

Market Conditions Bull Investor Optimism Bear Investor Pessimism

Stock Brokers Full Service Broker – Offers a full line of brokerage service Discount Broker – executes trades at a discounted commission Online Broker – executes trades electronically through a commercial service or the internet

Security Lots Odd Fewer than 100 shares of stock – Higher fees are charged when purchased or sold Round 100 shares of stock or multiples thereof are purchased or sold

Investor Protection Securities Investor Protection Corporation (SIPC) – Created by congress that insures customer accounts against the financial failure of a brokerage firm. Arbitration – A procedure to settle disputes between a brokerage firm and its clients

Market Order Purchase at the best price at the time the order is placed.

Limit Order An order to buy when the price is at a specified lower price or to sell when a price reaches a specified higher price

Stop-Loss (stop order) An order to sell a stock if it drops below a certain level. (protecting capital)

Trades Margin Borrowing funds to purchase a security. Short The process of selling borrowed securities that can be replaced at a later date. Hopefully at a lower price

Becoming an Informed Investor Information you should follow Economic developments and current events – Helps you evaluate the investment environment Alternative investment vehicles – To stay current with market developments Current interest rates and price quotations – Monitor investments and recognize opportunities Personal investment strategies – To hone investment skills and stay alert for new techniques as they develop

Market Data Dow Jones Industrial Average – Most widely followed measure of stock market performance (consists of 30 blue chip stocks) Standard and Poor’s Indexes (S&P) - Similar to Dow but employs different computational methods and consist of far more stocks NYSE Index – index of the performance of all stocks listed on the New York Stock Exchange NASDAQ – track the 100 largest (nonfinancial) firms traded on NASDAQ

Managing Your Investment Holdings Portfolio – A collection of Securities to meet investment goals Diversification Choosing securities with dissimilar risk – return characteristics

Asset Allocation Dividing a portfolio amount different classes of securities to protect the portfolio against negative market developments

Investment Pyramid