Copyright  2002 by Harcourt, Inc. All rights reserved. CHAPTER 11: INVESTMENT PLANNING Clip Art  2001 Microsoft Corporation. All rights reserved.

11-2 Copyright  2002 by Harcourt, Inc. All rights reserved. How Can You Get Started Investing?  Accumulate money by regularly allocating a portion of your earnings for investing.  Take advantage of automatic investment and dividend reinvestment programs.  While saving, learn as much as possible about investments and "play" trade.

11-3 Copyright  2002 by Harcourt, Inc. All rights reserved. What are Your Investment Objectives?  Supplement current income— appropriate for retired persons.  Save for major expenditures— such as college education, down payment on a home, or starting a business.

11-4 Copyright  2002 by Harcourt, Inc. All rights reserved.  Shelter income from taxes—to preserve more of your earnings. Clip Art  2001 Microsoft Corporation. All rights reserved.  Save for retirement—to live comfortably in your "golden years."

11-5 Copyright  2002 by Harcourt, Inc. All rights reserved. Different Ways to Invest  Common Stock  Bonds  Preferreds and Convertibles  Mutual Funds  Real Estate  Commodities, Financial Futures, and Options

11-6 Copyright  2002 by Harcourt, Inc. All rights reserved. Securities Markets  Place (not always physical) where financial instruments are traded.  Capital market—where long-term securities (those with maturities greater than 1 year) are traded.  Money market—where low-risk, short- term securities (those with maturities less than 1 year) are traded.

11-7 Copyright  2002 by Harcourt, Inc. All rights reserved.  Secondary market—for trading previously issued securities. Trading is done between investors; issuing company gets nothing.  Primary market—for new issues which are available for the very first time. The issuing company gets the proceeds.

11-8 Copyright  2002 by Harcourt, Inc. All rights reserved. –Secondary markets for trading listed securities. –Physical marketplaces such as the NYSE, AMEX, and regional exchanges. –Utilize brokers to facilitate trading between buyers and sellers. –Handle transactions of larger, well- known companies' securities.  Organized Securities Exchanges

11-9 Copyright  2002 by Harcourt, Inc. All rights reserved. –Secondary market where securities are traded via a telecommunications network. –Investors trade directly with securities dealers. –Larger, actively traded issues make up NASDAQ, while smaller, thinly traded issues are listed on "pink sheets."  Over-the-counter Market

11-10 Copyright  2002 by Harcourt, Inc. All rights reserved. –Organized securities exchanges exist in more than 100 countries worldwide. –Found in major industrialized nations such as Japan, Great Britain, Germany and Canada. –Also found in developing markets around the globe.  Foreign securities markets

11-11 Copyright  2002 by Harcourt, Inc. All rights reserved.  Federal and state laws regulate the sale of securities.  Purpose is to provide for adequate and accurate disclosure of financial information.  Securities and Exchange Commission (SEC) is the agency in charge of administering federal securities laws. Regulating the Securities Markets:

11-12 Copyright  2002 by Harcourt, Inc. All rights reserved.  Bull market—generally rising securities prices for an extended period of time. –Reflects investor optimism. –Associated with favorable economy.  Bear market—generally falling securities prices for an extended period of time. –Reflects investor pessimism. –Associated with economic downturn. Market Trends:

11-13 Copyright  2002 by Harcourt, Inc. All rights reserved. Making Transactions In the Securities Markets  Stockbrokers purchase and sell securities for investors.  Select from full-service, discount, or online broker, depending on your needs.  Consider brokerage fees when making securities transactions.

11-14 Copyright  2002 by Harcourt, Inc. All rights reserved.  Securities Investor Protection Corp. protects customer accounts against financial failure of brokerage firm.  SIPC insures accounts up to $500,000 (brokerage firms often purchase even greater amounts of coverage).  Guarantees securities or cash held by broker will be replaced (does not guarantee dollar value of securities!). Investor Protection:

11-15 Copyright  2002 by Harcourt, Inc. All rights reserved. Executing Trades:  Market orders generally take less than 2 minutes!  Investor must first establish account with broker.  Trades can be executed by phone, at the brokerage firm, or online with a PC.

11-16 Copyright  2002 by Harcourt, Inc. All rights reserved. Investor places the order with the broker Clip Art  2001 Microsoft Corporation. All rights reserved.

11-17 Copyright  2002 by Harcourt, Inc. All rights reserved. Investor places the order with the broker Broker transmits order to the market via tele- communications equipment. Clip Art  2001 Microsoft Corporation. All rights reserved.

11-18 Copyright  2002 by Harcourt, Inc. All rights reserved. Investor places the order with the broker Broker transmits order to the market via tele- communications equipment. Order is filled at the market by other buyers and sellers. Clip Art  2001 Microsoft Corporation. All rights reserved.

11-19 Copyright  2002 by Harcourt, Inc. All rights reserved. Investor places the order with the broker Broker transmits order to the market via tele- communications equipment. Order is filled at the market by other buyers and sellers. Execution of the order is confirmed to the broker. Clip Art  2001 Microsoft Corporation. All rights reserved.

11-20 Copyright  2002 by Harcourt, Inc. All rights reserved. Investor places the order with the broker Broker transmits order to the market via tele- communications equipment. Order is filled at the market by other buyers and sellers. Execution of the order is confirmed to the broker. Broker confirms order fulfillment. Investor has 3 days to settle account. Clip Art  2001 Microsoft Corporation. All rights reserved.

11-21 Copyright  2002 by Harcourt, Inc. All rights reserved. Types of Orders:  Market order—trade now at best available price.  Limit order—trade when a specified price or better is reached; investor is seeking opportunity.  Stop-loss order—sell if price drops to certain price; investor is seeking to limit losses.

11-22 Copyright  2002 by Harcourt, Inc. All rights reserved. Margin Trading:  Allows investor to purchase securities on credit by borrowing part of purchase price from broker. Increases gains when returns are positive. Increases losses when returns are negative. Clip Art  2001 Microsoft Corporation. All rights reserved.

11-23 Copyright  2002 by Harcourt, Inc. All rights reserved. Example of Margin Trade with Profit: Transaction w/out w/margin  Initial investment (100 $50) Amount invested$5,000$2,500 Amount borrowed$ 0$2,500 Total purchase$5,000$5,000  Price INCREASES (100 $70) Gross proceeds$7,000$7,000 Less interest (9%)$ 0$ 225 Net proceeds$7,000$6,775 Net profit$2,000$1,775

11-24 Copyright  2002 by Harcourt, Inc. All rights reserved. Example of Margin Trade with Loss: Transaction w/out w/margin  Initial investment (100 $50) Amount invested$5,000$2,500 Amount borrowed$ 0$2,500 Total purchase$5,000$5,000  Price DECREASES (100 $30) Gross proceeds$3,000$3,000 Less interest (9%)$ 0$ 225 Net proceeds$3,000$2,775 Net loss ($2,000) ($2,225)

11-25 Copyright  2002 by Harcourt, Inc. All rights reserved. Margin Trade Returns: Return = Profit (loss)  Amount Invested w/out w/margin  Price Increase$2,000$1,775 $5,000$2,500 Return 40% 71%  Price Decrease ($2,000) ($2,225) $5,000$2,500 Return (40%) (89%)

11-26 Copyright  2002 by Harcourt, Inc. All rights reserved. Short Selling:  Allows investor to sell securities borrowed from the broker or broker's accounts.  Before period is over, investor must buy securities to replace those borrowed. Investor loses if security’s price has increased. Investor profits if security’s price has declined. Clip Art  2001 Microsoft Corporation. All rights reserved.

11-27 Copyright  2002 by Harcourt, Inc. All rights reserved. Example of Short Sale:  Investor wishes to short 100 shares of ABW now selling at $52.50/share.  Broker sells borrowed shares for investor: 100 x $52.50 = $5,250 proceeds

11-28 Copyright  2002 by Harcourt, Inc. All rights reserved.  Costs 100 x $40 = $4000 to replace shares.  Investor receives: $5250 – $4000 = $1250 profit!! Scenario A: Price of security drops to $40/share & investor repurchases:

11-29 Copyright  2002 by Harcourt, Inc. All rights reserved.  Costs 100 x $60 = $6000 to replace shares.  Investor receives: $5250 – $6000 = ($750) loss!! Scenario B: Price of security rises to $60/share & investor repurchases:

11-30 Copyright  2002 by Harcourt, Inc. All rights reserved. To profit from short selling— not only must the price of the security fall, but it must do so within the given time period. Double jeopardy! Clip Art  2001 Microsoft Corporation. All rights reserved.

11-31 Copyright  2002 by Harcourt, Inc. All rights reserved. Becoming an Informed Investor  Types of Information to Follow: –Economic developments and current events –Alternative investment vehicles –Current interest rates and price quotations –Personal investment strategies

11-32 Copyright  2002 by Harcourt, Inc. All rights reserved. Available Investment Information :  Annual Reports  Financial Press (WSJ and financial magazines)  Brokerage Reports  Advisory Services  Investment Advisors  On-Line Sources

11-33 Copyright  2002 by Harcourt, Inc. All rights reserved. Online Investing  Online services  Educational material  Investment tools  Investment planning  Research and screening  Portfolio tracking  Day trading Clip Art  2001 Microsoft Corporation. All rights reserved.

11-34 Copyright  2002 by Harcourt, Inc. All rights reserved. Using the Internet Wisely:  Do your own research.  Realize that frequent trades mean higher transaction costs.  Don’t believe everything you read.  Avoid online scams.

11-35 Copyright  2002 by Harcourt, Inc. All rights reserved. Questions to Ask:  Is the stock registered?  Who is making the sales pitch?  Is it too good to be true? Refer to SEC Web site:

11-36 Copyright  2002 by Harcourt, Inc. All rights reserved. Managing Your Investment Holdings  Build a diversified portfolio of securities based upon your goals and personal situation.  Allocate your assets according to your objectives.  Track your investments and rebalance your portfolio as your needs change.

Copyright  2002 by Harcourt, Inc. All rights reserved. THE END!