Stages of Investing Type of Investment StrategyConsiderations Put and Take account Short-term savingsSafetySecurity Liquidity Short-term needs Initial InvestingConservative, low- risk securities Higher rates of return than savings Reasonable purchase price Systematic InvestingRetirement fundingLong-range planningGrowth Future financial security Strategic InvestingPortfolio expansionMaximization of return in the medium term (5-10 years) Diversifying Planning Hedging against risk Speculative InvestingHigh-risk optionsHigh profitsUncertain future income Short-term profit potential

Stages of Investing  In Stage 4: Strategic Investing you carefully manage investment alternatives to maximize growth of your portfolio Collection of investments

Risk and Return  Investing risk- chance that an investment’s value will decrease The greater the risk the greater the potential return

Diversification  Spreading of risk among many types of investments Stocks, bonds, real estate Low risk stocks to balance high risk  Minimizes risk

Types of Risk  Interest-Rate risk- chance that inflation will rise faster than the return on your investments Inflation makes your fixed-rate investments worth less because they are “locked in” at lower rates  Political risk- actions the government might take that would reduce the value of your investment

Types of Risk  Market risk- caused by the business cycle– periods of economic growth or decline  Nonmarket risk- unrelated to market trends; unpredictable and uncontrollable Terrorism threats, people change their behavior and want to protect themselves

Types of Risk  Company risk- associated with owning one company’s stock, if the company fails you lose investment  Industry risk- affects groups of businesses If you invest in the candy industry, a nationwide trend toward dieting or avoidance of sugar would negatively affect the value

Criteria for Choosing an Investment  Degree of safety  Degree of liquidity  Expected dividends or interest  Expected growth in value  Reasonable purchase price and fees  Tax benefits

Wise Investment Practices  Define your financial goals  Go slowly Temporary investments  Follow through Permanent investments  Keep good records  Seek good investment advice  Keep investment knowledge current  Know your limits

Sources of Financial Information  Newspapers Financial pages of your local newspaper Wall Street Journal  Investor Services and Newsletters  Financial Magazines Business Week, Forbes, Money, Fortune, Kiplinger’s Personal Finance, The Economist  Brokers  Financial Advisers  Annual Reports  Online Investor Education

Broker vs Financial Advisers  Full service- provide clients with analysis and opinions based on their judgments Merrill Lynch, Fidelity Investments, American Express  Discount- buy and sell securities at a reduced commission For people who are well informed and know what they want to buy and sell ○ E*Trade, Charles Schwab  Certified Financial Planner (CFP)  Trained to give investment advice based on your goals, age, lifestyle, and other factors.

Investment Choices  Low Risk/Low Return  Medium Risk/Medium Return  High Risk/High Return

Investment Choices Low Risk/ Low Return Bonds U.S. Government Savings Bonds Treasury Securities Medium Risk/ Medium Return StocksMutual FundsAnnuitiesReal Estate High Risk/ High Return FuturesOptionsPenny StocksCollectibles

Low Risk/ Low Return  Good for first investments  Safe  Low return  Include in diversified portfolio

Low Risk/ Low Return  Bonds Debt obligations of corporations (corporate bonds) or state or local governments (municipal bonds) IOU Earn interest Repay amount borrowed at maturity  U.S. Government Savings Bonds Series EE- discount bond, purchased for less than the maturity value (half) Series I- sold at face value and earn interest for up to 30 years, designed for investors wanting to protect against inflation

Low Risk/ Low Return  Treasury Securities U.S. Treasury Bills- short term U.S. Treasury Notes- matures in 2,5, or 10 years U.S. Treasury Bonds- interest paid every 6 months and matures in 30 years

Medium Risk/ Medium Return  Once you have additional money to invest  Increase return  Investing with companies that manage the investment

Medium Risk/ Medium Return  Stocks Unit of ownership in a corporation Stock certificate is evidence of ownership Stockholders share in corporation’s profits called dividends Riskier than savings bonds, earnings go up or down depending on company’s profits Investing in well- established companies are safe Less-stable company= risky investment

Medium Risk/ Medium Return  Mutual Funds Pooling of money from many investors to buy a large selection of securities Professionally managed Allows for portfolio diversification  Annuities Contract that provides the investor with a series of regular payments, after retirement Opposite of life insurance  Real Estate Large, non-liquid investment of cash Houses and land

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- right, not obligation, to buy or sell a commodity or stock for a specified price within a specified period of time  Penny stocks- are low-priced stocks of small companies that no track record  Collectibles- coins, art, memorabilia, ceramics, or other items popular at the time