Investing Bonds and Stocks

Setting Investment Goals  Investing presents opportunities for people and businesses to increase their income.  Investing is using money to participate in an enterprise that offers the possibility of profit. – Involves careful planning and goal setting

Questions to Ask Yourself: – How do I want to spend my money? – How much money do I need to satisfy my goals? – How will I get it? – How long will it take to save it? – How much risk am I willing to take when I invest? – Are my goals reasonable? – What will happen if I do not meet my goals?

Different Types of Goals  Short-Term: – Save enough money to pay for a vacation  Mid-Term: – To buy a business or home  Long-Term: – Plan for retirement

Types of Securities  A security is a tradable document that shows evidence of debt or ownership. – Includes: Bonds Shares of stock and mutual funds Stock options  The return on an investment is the amount of money the investment earns, or the yield.

Bonds

Investing in Bonds  When corporations or governments need to borrow large amounts of money.  A bond is a certificate issued by a government or company in which it promises to pay back borrowed money at a fixed rate of interest on a specific date – The maturity date

Characteristics of Bonds  Example: – A $1,000 bond with a 6% yield (or coupon rate) will pay $60 once a year or $30 twice a year  Bonds may be sold at a discount, or below their face value – The value of a security that is set by the company or government issuing it. – Bonds accrue interest until they reach their full value

Types of Bonds  Federal Bonds and Securities – Treasury Bills: Issued in units of $1,000; reach maturity in 4, 13, or 26 weeks; discounted securities – Notes: Issued in $1,000 units; maturity between 2 and 10 years – Bonds: Issued in $1,000 units; maturity of 30 years – Savings Bonds: Sold in values of $50 to $10,000; earn interest on the savings they entrust to the government; cannot be bought and sold once purchased—they are redeemed after 1 year

Types of Bonds Cont.  Municipal Bonds – Local and state government issued – Sold to finance city, town, or regional projects such as schools, highways, and airports Gov’ts generally do not tax the interest earned You do not have to hold on to it until it reaches maturity.

Types of Bonds Cont.  Corporate Bonds – Bonds issued by corporations – Can be bought and sold through brokerage firms Usually used to finance construction and equipment – The value of a corporate bond fluctuates according to the overall interest rates in the economy

Advantages and Disadvantages  Advantage: – Most bonds are secure – Bonds pay interest  Disadvantage: – Investor can lose money if a bond is sold or redeemed before it matures – Most are written for a min. of $1,000. Some people can’t afford it

Stocks

Investing in Stocks  A stock is a share of ownership in a corporation.  When you buy stock, you receive a stock certificate  Stocks are one of the risker types of investments

Return on Stocks  The amount of money the stock earns depends on its type of return and rate of return.  There are two ways that you can receive a return on stocks: – Payment of dividends – Selling your shares of stock

Dividends  Dividends are a share of profits given to stockholders. – A corporation can decide to distribute some of the profits they made  Dividends are usually paid quarterly in cash or in more shares of stock

Selling Stock  Selling stock for more than you paid for it results in capital gain.  Capital loss is an amount lost when an asset is sold for less than its cost..  The government taxes the amount received in dividends or capital gain

Rate of Return  The rate of return on stocks is always expressed as a percentage  Example: – $1,000 earns $50 of interest in a savings account one year. The rate of return is 5% ($50/$1,000) – A single share of stock whose value increases from $50 to $55 in a year and pays a $5 dividend during the year has a 20% rate of return ($10/$50)

Types of Stock  Common Stock: stock that provides the most basic form of corporate ownership – Entitles the stockholder to voting privileges – All corporations must issue common stock – For each share that is owned, the stockholder gets a vote in how to run the corporation

Types of Stock Cont.  Preferred Stock: stock that gives the owner the advantage of receiving cash dividends before common stockholders receive any – Preferred stockholders do not vote on company issues – Many preferred stocks specify the limit on what can be paid as far as a dividend

Stockbrokers  A Stockbroker is a person who buys and sells stocks, bonds, and other securities for clients – Act as a link between buyers and sellers – As a fee for their services, they charge a commission

Stock Exchanges  Stock Exchange: an organized market for buying and selling financial securities. – When you buy stocks or bonds through a stockbroker, the order is sent to the broker’s representative on the stock exchange floor – New York Stock Exchange (NYSE) – American Stock Exchange (Amex)

Mutual Funds  Mutual funds lessen the risk of investing in the stock market.  A mutual fund is a fund created by an investment firm that raises money from many shareholders and invests it in a variety of stocks or other investments – Has great buying power

Advantages and Disadvantages  The greater the risk, the greater the possibility of a greater return – Disadvantage: you have more risk of losing your investment – You are not guaranteed a return each year – Advantage: stocks tend to do better over a long period of time – You can also make decisions in the company (with common stock)