PFIN 11 5 Investment Planning GITMAN/ JOEHNK/ BILLINGSLEY Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

LEARNING OUTCOMES 1 Discuss the role investing plays in financial planning process and identify several different investment objectives 2 Distinguish between primary and secondary markets as well as between broker and dealer markets 3 Explain the process of buying and selling securities and recognize different types of orders PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

LEARNING OUTCOMES (continued) 4 Develop an appreciation of how various forms of investment information can lead to better investing skills and returns 5 Gain a basic understanding of the growing impact of the computer and Internet on the field of investments 6 Describe an investment portfolio and how you’d go about developing, monitoring, and managing a portfolio of securities PFIN5| CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Speculating: Future value and expected returns are highly uncertain Investing Process of placing money in some medium in the expectation of receiving future benefit Speculating: Future value and expected returns are highly uncertain PFIN5| CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Investment Objectives Enhance current income Save for major purchase Accumulate funds for retirement Seek shelter from taxes PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Preferred and convertible securities Ways to Invest Common stock Bonds Preferred and convertible securities Mutual funds, exchange traded funds (ETFs), and exchange traded notes (ETNs) Real estate PFIN5| CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Securities Markets Marketplace in which stocks, bonds, and financial instruments are traded Primary market - New securities are sold to the public by an issuer Secondary market - Old securities are traded between investors PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Exhibit 11.1 U.S. Broker and Dealer Markets PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Regulating the Securities Markets To ensure full disclosure of information with respect to new securities Securities and Exchange Commission (SEC): Regulates the disclosure of information about securities and oversees the operation of the securities exchanges and markets Securities Act of 1933 To provide SEC power to regulate organized securities exchanges and the OTC market Securities Exchange Act of 1934 PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Regulating the Securities Markets To establish rules and regulations for investment companies Investment Company Act of 1940 To eliminate corporate fraud as related to accounting practices and information released to investors Sarbanes-Oxley Act of 2002 PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 To improve accountability and transparency in the U.S. financial system To discontinue the “too big to fail” regulatory approach PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 To protect American taxpayers from costly government bailouts To protect consumers from exploitative financial services practices PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Significant Federal Legislation Provided for the establishment of trade associations National Association of Securities Dealers (NASD): Regulates OTC market operations Maloney Act of 1938 Protects investors against the financial failure of brokerage firms Securities Investor Protection Act of 1970 PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Bull Market and Bear Market Associated with investor optimism, economic recovery, and expansion Characterized by rising securities prices Bull market Associated with investor pessimism and economic slowdown Characterized by falling securities prices Bear market PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Stockbroker (Account Executives) Person who: Buys and sells securities on behalf of clients Gives clients investment advice and information Required to understand the client’s investment objectives PFIN4 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Types of Broker Full-service broker Discount broker Online broker Executes clients’ transactions and offers a full array of brokerage services Full-service broker Charges low commissions and offers little or no services to investors Discount broker Discount broker through which investors can execute trades electronically/online through a commercial service or on the Internet Online broker PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Brokerage Fees Commissions received by brokerage firms for executing buy and sell orders for their clients Odd lot: Quantity of fewer than 100 shares of a stock Round lot: Quantity of 100 shares of stock or multiples thereof PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Securities Investor Protection Corporation (SIPC) Nonprofit corporation subject to SEC and congressional oversight Insures customer accounts against financial failure of a brokerage firm Arbitration: Used to settle disputes between a brokerage firm and its clients PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Types of Order Market order To buy or sell a security at the best price available at the time it is placed Market order To either buy a security at a specified or lower price or to sell a security at or above a specified price Limit order To sell a stock when the market price reaches or drops below a specified level Stop-loss (stop order) PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Annual Stockholders’ Reports Made available to stockholders and interested parties that includes: Financial and descriptive information about a firm’s operations in the recent past PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Financial Press Describe the general behavior of the securities markets Market data Followed measure of stock market performance Consists of 30 blue-chip stocks listed mostly on the NYSE Dow Jones Industrial Average (DJIA) PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Financial Press Standard & Poor’s (S&P) indexes Similar to the DJIA but employ different computational methods and consist of more stocks Standard & Poor’s (S&P) indexes Consists performance of all stocks listed on the New York Stock Exchange NYSE index Consists the total market value of the approximately 6,000–7,000 actively traded stocks in the United States Dow Jones Wilshire 5000 index PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Asset Allocation Plan to preserve capital by protecting the portfolio against negative market developments By dividing a portfolio among different classes of securities PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Reasons to Re-evaluate Asset Allocations Change in personal circumstances that changes investment goals Proportion of an asset rises or falls that changes target allocation Close to reaching certain goal PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Exhibit 11.6 Four Model Portfolios PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

KEY TERMS Investing Speculating Investment plan Prospectus Bid price Ask price Securities and Exchange Commission National Association of Securities Dealers Bull market Bear market Full-service broker Discount broker Online broker Odd lot Round lot Securities Investor Protection Corporation Market order Limit order Stop-loss PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

KEY TERMS Dow Jones Industrial Average Standard & Poor’s (S&P) indexes NYSE index Dow Jones Wilshire 5000 index Portfolio Diversification Asset allocation PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

SUMMARY Investing is viewed as a process of purchasing securities wherein stability of value and level of return are somewhat predictable Each market under the securities market provides a mechanism for bringing the buyers and sellers of securities together There are different types of market under the securities market and making transactions in each market is simple PFIN5 | CH11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.