Prepare for Your Future Chapter 9 Prepare for Your Future

Investing Basics 9.1 What Is Investing How to Make Investment Choices Investing is saving in a way that earns income Risk and Rate of Return There is ALWAYS a risk when investing The chance that an investment will decrease in value is a risk. Investing in a business instead of an FDIC insured instrument carries more risk. The income you earn on an investment is called the Return. There is no guaranteed interest rate when investing in a business as opposed to a financial institution’s product however the return has the potential to be greater than that of a set interest rate. However, with the chance for bigger reward comes the potential for greater loss. Evaluate Your Risk If an investment seems too good to be true it probably is! With a bank, you may lose interest or pay a fee for early withdraw but if you follow the agreement you made, you will come out with a predetermined amount of money. With a business investment, you have no established reward (though it could be great) and you may walk away with nothing (including your initial investment). Rule of thumb is that the greater the potential the greater the risk is. Limit Risk Through Diversification Diversification is the process of spreading your risk between several different companies and investment opportunities so that if one goes bad the others will help to offset the loss. (Not putting all your eggs into one basket. You choose to diversify based on your needs for your money based on timeframe and security. How to Make Investment Choices Your Financial Situation There is no one right way to invest. Everyone has to make their own decisions on what is right for them. Your age and family situation dictate a lot of your freedom where investing is concerned. Those with much financial obligation or limited earning time must be more careful with their money than those who are single and young. Your Risk Tolerance Your personality and ability to handle risk will help to determine your investment options. Your Values Investing in businesses that are important to you or hold the same values as you may help lead your investment choices. However, be careful not to let emotion and/or personal preference lead you to make bad decisions.

The Risk-Return Relationship: Collect- ables Stocks Mutual funds R e t u r n Bonds Treasury issues CD’s Savings bonds Insured savings accounts Risk

Calculating Return Invest $1000 Receive $100 as your share of profit = .10 or 10% $1000

How to Invest in Corporations 9.2 Corporate Stocks Corporate Bonds How to Buy/Sell/Trade Stocks and Bonds Corporate Stocks Buying stock in a company gives you a certain amount of ownership in that company. You become a Shareholder. Share of Stock is one unit of ownership in a company. You make money from stock in one of 2 ways. You earn a dividend – a payment of part of the profits from the business You sell your share at a higher price than you bought it How Stock Exchanges Work A stock exchange is a location where shares of stock are bought and/or sold. The largest stock exchange is the New York Stock Exchange. Another option for buying or selling stock is through the NASDAQ which is an electronic stock exchange. The Securities and Exchange Commission is responsible for regulating and enforcing rules concerning the trading of stocks and bonds. Why Stock Prices Change Prices go up as demand for stock in a company increases. This happens when a company is doing well and paying good dividends to its stockholders. As businesses start to fail or profits drop and they stop paying dividends their stock prices are in less demand and the price of their stock falls. Types of Stock Preferred Stock – A non-voting share that has first claim to dividends paid but the dividends earned are set. Common Stock - A voting share that has to wait until after preferred stock holders are paid their dividends and if the declared dividends are low then they may not get paid at all but if the dividends are high then their amount of return is not limited and they may walk away with a large amount. How to Earn Returns Blue Chip Stock – Shares in large, well-established corporations. These companies regularly pay dividends and they have a low risk. Growth Stocks – Smaller or younger corporations that produce new products that may take off but also may fail. These companies have a good potential for high pay offs but the risk is larger. When you make money by selling stock at more than you bought it for it is called Capital Gain When you lose money by selling stock at less than you bought it for it is called a Capital Loss Corporate Bonds These work similar to the government bonds we have already discussed in that they are a loan and will be paid back on a certain date at a certain rate of interest. The risk is that if the company is unable to pay its other bills they will also be unable to pay the loan from you. A bond does not represent ownership in the business, you are a creditor and they owe you money. If a company fails, debts are paid out before any dividends are paid to stock holders. Very high risk bonds are called Junk Bonds. Corporate bonds are rated for their degree of risk by companies like Standard and Poor and Moody. They rate the safest bonds at AAA and the riskiest at C or D. How To Buy/Sell/Trade Stocks and Bonds Individuals buy/sell/trade stocks and bonds through a brokerage firm who employs stockbrokers. Stockbrokers work in a variety of capacities. Some advise and council and some just perform the transactions. If an individual wants to research stock/bonds on their own most use The Wall Street Journal or use an online source for finding out rates and trends. Insider Trading is trading/buying/selling stock based on information that is not available to the general public.

How to Invest in Mutual Funds 9.3 Mutual Funds – An Easy Way to Diversify Mutual Funds – An Easy Way to Diversify A mutual fund is a group of investments owned by many investors. The pool of the investors’ money is split up among many different investments The group of investments can vary in risk and price. It is less expensive to diversify by buying mutual funds because your money goes farther because of the pool. Mutual funds are managed by professionals who understand investing an trends. Cost of Mutual Funds Mutual Funds charge fees for maintaining the accounts and making trades. Mutual Funds may also charge a load fee which is a sales fee. Many times the maintenance fees are low because there is a larger load fee. No-load fees are mutual funds that don’t have sales people that help you make decisions and make suggestions. You are in charge of your investments. The company just charges maintenance fees for processing your orders.

Retirement and Other Investments 9.5 Plan Your Retirement Trade-offs of Retirement Planning Other Investment Options Plan Your Retirement You can not count on employer funded retirement to take care of you in the future, neither can you count on Social Security to even be around more or less support your standard of living once you are of an age to stop working. Therefore you will need a retirement strategy so that you don’t have to work past your ability to do so. Trade-offs of Retirement Planning When you put money away for retirement and take the tax benefits of doing so, you have traded the ability to use that money (without a penalty) until you are of age to retire. 401K Plans This is a tax-deferred investment set up so that you can put away part of your earnings now without paying taxes on it and then take it out after you leave the company and/or retire and pay taxes then. Some employers will match the funds you put away into a 401K which is essentially doubling your investment. The only catch is that you can’t touch the money until you are of retirement age. While your money is in the investment it is earning interest and will be compounding to increase your overall investment over time. IRA Plans Traditional IRAs (Individual Retirement Accounts) give people an opportunity to invest on their own (separate from their employer) in their retirement. Like the 401K the money is tax deferred until it is taken out. Currently the amount you can put into an IRA is $2,000 a person per year. Roth IRAs give people an opportunity to invest in their retirement without taking the tax-deferment. These people are taxed on their income and then stick money into a retirement account that has the same “no touch” restrictions as the traditional IRA. The difference is that when they decide to take it out after they reach retirement age, the money is tax free because the taxes have already been paid on it. Other Investment Options Investment clubs – groups of people pool their money and decide where they will invest it. They all take responsibility for the research and risk. Real estate – Buying a home is an investment because traditionally you will be able to sell it for more than you paid for it in the future. However, the liquidity is low (in that you have to wait until someone wants to buy it at the higher price) and sometimes it takes a long time to increase in value. Also it costs a lot to maintain if you want it to be worth more in the future. Real estate as investment property – you can buy land that you hope someone will want later at a higher price and/or homes or apartments that you can maintain and rent out for a source of income. The risk here is that renters won’t pay or they may decrease your value by damaging your property. Also you still have to wait for a buyer if you decide to cash in your investment. Collectibles – Many people invest in items of value that hold personal interest to them. Such items are stamps, coins and art. Many of these items can later be sold for more than they were purchased for but finding a buyer can be difficult and the rate of return uncertain.