CHAPTER 9 INVESTING Prepare for Your Future WHAT’S AHEAD 9.1 Investing Basics 9.2 How to Invest in Corporations 9.3 How to Invest in Mutual Funds 9.4 Research Investments 9.5 Retirement and Other Investments

LESSON 9.1 Investing Basics Economic Education for Consumers 4/20/2017 LESSON 9.1 Investing Basics GOALS Explain the relationship between risk and return when investing. Describe how to evaluate the level of risk you should accept when investing. © 2010 South-Western, Cengage Learning Chapter 9

KEY TERMS Investing – Choosing to save in a way that earns income. Risk – The chance that an investment will decrease in value. Return – The income you earn on an investment. (Stated in Dollars). Diversification – Investing in various businesses with different levels of risk. Rate of Return – The percentage you earn on your investment. (Return/Investment). © 2010 South-Western, Cengage Learning

What Is Investing? Risk and rate of return Evaluate your risks Limit risk through diversification © 2010 South-Western, Cengage Learning

Risk/Return Rate of return Risk High Rate of return High Risk In order to earn a higher return, you must be willing to take more risks. © 2010 South-Western, Cengage Learning

How to Make Investment Choices Your financial situation Your risk tolerance Your values © 2010 South-Western, Cengage Learning

Checkpoint 9.1 Why should you expect an investment with a greater potential return to have more risk? Why should you consider your financial situation, risk tolerance, and values when choosing investments? © 2010 South-Western, Cengage Learning

Checkpoint 9.1 answers Why should you expect an investment with a greater potential return to have more risk? Investors demand a higher return for accepting greater risk. Organizations that offer investment opportunities must offer higher returns as their risk grows. © 2010 South-Western, Cengage Learning

Checkpoint 9.1 answers Why should you consider your financial situation, risk tolerance, and values when choosing investments? Financial situations determine how much an investor can afford to risk. Risk tolerance determines what investments an investor is comfortable making. Investing according to values provides satisfaction beyond financial goals. © 2010 South-Western, Cengage Learning

LESSON 9.2 How to Invest in Corporations GOALS Describe the ways to purchase different types of stock. Explain the difference between investing in corporate stocks or corporate bonds. © 2010 South-Western, Cengage Learning

KEY TERMS corporate stock dollar cost averaging stockholder stockbroker brokerage firm stock exchange NASDAQ Dividend Capital Gain Capital Loss dollar cost averaging preferred stock common stock corporate bond junk bond © 2010 South-Western, Cengage Learning

KEY TERMS corporate stock – a unit of ownership in a corporation. Stockholder – Investors who own the corporation because they own shares of its stock. Stockbroker – a person who handles the transfer of stocks and bonds between buyers and sellers. brokerage firm – a company that specializes in helping people buy and sell stocks and bonds. stock exchange – where orders to buy or sell stock are sent and carried out. (example - NYSE) NASDAQ – electronically links brokerage firms and is the most common way to trade stock. Slide 12 © 2010 South-Western, Cengage Learning

Key Terms dollar cost averaging – investing equal amounts of money at regular intervals. preferred stock – A non-voting share of company stock that pays a fixed dividend. common stock – A voting share that does not pay a set dividend. Most stock is common. corporate bond – Sold by corporations to finance business activities. These are loans – not ownership. Bonds are less risky than stocks and generally pay a smaller return.

Key Terms Dividend – Profit earned by a corporation and distributed to stockholders. Not all companies pay dividends. Capital Gain – Profit you earn from selling stock at a higher price than you paid for it. Capital Loss – Amount you lose if you sell your stock at a lower price than you paid for it. © 2010 South-Western, Cengage Learning

Stock Classifications Blue chip stocks – large, well established corporations. Growth stocks – corporations expected to experience rapid growth. Large cap stocks – corporations with a total stock value of $10 billion or more. Mid cap stocks – corporations with a total stock value from $2 billion to $10 billion. Small cap stocks …less than $2 billion. Sector stocks – companies that operate in a particular industry or sector of the economy. ( ex. - technology) Cyclical and non-cyclical stocks – how close is company’s success linked to economy International stocks – corporations located outside U.S. © 2010 South-Western, Cengage Learning

Checkpoint 9.2 What are the two ways to earn income by purchasing corporate stock? What is the difference between stock and bonds? Why does this difference matter to you as an investor? © 2010 South-Western, Cengage Learning

Checkpoint 9.2 answers What are the two ways to earn income by purchasing corporate stock? You may receive a return from owning stock if it 1) pays a Dividend or 2)increases in value if you sell your stock (Capital Gain). © 2010 South-Western, Cengage Learning

Checkpoint 9.2 answers What is the difference between stock and bonds? Why does this difference matter to you as an investor? Stocks are ownership, and returns depend on the company’s performance. Bonds are loans the company must repay in a specified time frame with a specified interest. Because bonds must be paid on time, they are less risky. © 2010 South-Western, Cengage Learning

LESSON 9.3 How to Invest in Mutual Funds GOALS Explain what mutual funds are and how they benefit investors. Discuss different fund objectives and how to select the right funds for you. © 2010 South-Western, Cengage Learning

KEY TERMS mutual fund portfolio load © 2010 South-Western, Cengage Learning

Mutual Funds An easy way to diversify Costs of mutual funds Annual maintenance fees Front-end load Back-end load No-load funds © 2010 South-Western, Cengage Learning

Mutual Fund Classifications Index funds Balanced funds Large cap funds Mid cap and small cap funds Aggressive funds Sector funds International funds Bond funds Tax-free funds Exchange traded funds © 2010 South-Western, Cengage Learning

Risk/Return Pyramid for Mutual Funds Balanced Funds Tax-Free Funds Growth and Income Funds Aggressive Funds Greater Risk and Potential Return Lower Risk and Potential Return © 2010 South-Western, Cengage Learning

Checkpoint 9.3 How do mutual funds work? How can the classifications of mutual funds help you select the right fund? © 2010 South-Western, Cengage Learning

Checkpoint 9.3 answers How do mutual funds work? By investing in a mutual fund, small investors can benefit from sharing the cost of employing professionals with other owners of the fund. © 2010 South-Western, Cengage Learning

Checkpoint 9.3 answers How can the classifications of mutual funds help you select the right fund? The major classifications can help people choose mutual funds that have investment philosophies that are similar to their own. © 2010 South-Western, Cengage Learning

LESSON 9.4 Research Investments GOALS Identify sources of investment information. Discuss signs of dishonest investment schemes and how to protect yourself. Describe types of regulation placed on the investment industry. © 2010 South-Western, Cengage Learning

KEY TERMS Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB) insider trading © 2010 South-Western, Cengage Learning

How to Find Investment Information Printed sources of information Mutual funds Stocks Information on the Internet Request information from companies Ask a stockbroker © 2010 South-Western, Cengage Learning

Make an Investment Plan An investment plan is part of a life-span plan. Investors can make their own investment decisions or obtain the help of stockbrokers and financial planners. Most stockbrokers earn income from fees. Financial planners charge a flat fee. © 2010 South-Western, Cengage Learning

Investment Schemes Any promise of a large return at low risk should make you suspicious. Check out investment offers. © 2010 South-Western, Cengage Learning

Investment Regulation Stockbroker self-regulation Securities and Exchange Commission SEC protections Investment scandals Insider trading © 2010 South-Western, Cengage Learning

Checkpoint 9.4 Why might you receive better advice from a financial planner than from a full-service stock broker? What clues tell you that an investment may be dishonest? How can you protect yourself from shady deals? What forms of regulation are used for firms that advise and trade stocks or bonds for investors? © 2010 South-Western, Cengage Learning

Checkpoint 9.4 answers Why might you receive better advice from a financial planner than from a full-service stock broker? Full-service stock brokers’ incomes depend on fees charged when they complete transactions for investors. Financial planners may provide better advice if they are paid a flat fee for their service rather than a commission for sales. © 2010 South-Western, Cengage Learning

Checkpoint 9.4 answers What clues tell you that an investment may be dishonest? How can you protect yourself from shady deals? Some clues are hard-sell approach, unrealistically high promised return with supposedly low risk, unknown seller who won’t supply contact information or a written offer, demands for immediate payment, and the suggestion that the seller knows something no one else knows. To protect yourself, ask for information in writing and check it out. Invest with established brokerages. If it sounds too good to be true, it probably is. © 2010 South-Western, Cengage Learning

Checkpoint 9.4 answers What forms of regulation are used for firms that advise and trade stocks or bonds for investors? The FINRA is a stockbrokers’ professional organization that regulates its members by testing brokers and registering those who passed the test. FINRA also maintains a database of complaints filed against registered brokers. The SEC is responsible for enforcing trading laws and overseeing stockbrokers and the firms that employ them. © 2010 South-Western, Cengage Learning

LESSON 9.5 Retirement and Other Investments GOALS Identify strategies you may use to create and carry out a financial plan for your retirement. Describe ways to earn a return on nonfinancial investment options. © 2010 South-Western, Cengage Learning

KEY TERMS tax-deferred 401(k) plan individual retirement account (IRA) 403(b) plan real estate investment trust (REIT) © 2010 South-Western, Cengage Learning

Plan Your Retirement Pension plans are less common today than in the past. Workers must take more responsibility for their own retirement savings. Many retirement plans are tax-deferred. The trade-off for receiving a tax advantage is a penalty for early withdrawal. © 2010 South-Western, Cengage Learning

Types of Retirement Plans 401(k) plans Employer matching programs IRA plans 403(b) plans © 2010 South-Western, Cengage Learning

Other Investment Options Real estate Your home as an investment Other types of real estate investments Real estate investment trusts (REIT) Collectibles © 2010 South-Western, Cengage Learning

Checkpoint 9.5 What are several tax-deferred plans available to investors in the United States? How might you earn a return from nonfinancial investments? © 2010 South-Western, Cengage Learning

Checkpoint 9.5 answers What are several tax-deferred plans available to investors in the United States? Traditional and Roth IRAs 401(k) plans 403(b) plans © 2010 South-Western, Cengage Learning

Checkpoint 9.5 answers How might you earn a return from nonfinancial investments? Nonfinancial investments can be made in real estate or collectibles. Real estate usually increases in value over time, so investors can earn a capital gain by selling the property later or by renting out the property to earn current income. Investing in collectibles involves substantial risk and is best undertaken by professionals. © 2010 South-Western, Cengage Learning