Investing

Objectives Identify reason to invest Define inflation and explain how it relates to investing Identify factors that will increase or decrease stock prices Examine how bonds are rated

Standard(s) 4.3Evaluate methods of investing. a.Stocks and bonds b.Mutual funds c.Real estate d.Annuities e.Business

Why Invest? Investing - the use of long term savings to earn a financial return a proven powerful way to strengthen your financial position over time helps accumulate faster than just putting excess money in a RSA When you purchase stocks/bonds you are helping businesses grow and offer new products/services

The stock market has generally produced much higher long-term returns than more liquid investments tends to have major ups and downs Consider riskier investments to be long-term investments Understand that a risk of these longer-term investments is the total loss of the investment

Inflation Investing helps beat inflation inflation is a rise in the general price level reduces purchasing power over time as prices rise from year to year, it takes more money to purchase the same number of goods and services

Inflation Investors seek investments that will grow faster than inflation There are investments that offer hope of outpacing inflation over time, such as stocks, bonds, and mutual funds

Check Your Financial IQ Why is it a good idea to invest in something like stocks or bonds?

Investing in Stocks As you know, stocks represent a share or piece of ownership in a company Companies, such as Apple, have issued millions of shares Stock ownership also carries voting rights

Stock Exchanges Initial public offering (IPO) is when a company chooses to “go public” and has the first sale of stock The IPO occurs in what is called the primary market Companies issue and sell stock as a way to raise money for business operations, expansion, and other needs. The initial sale is when employees get to purchase Later, the shares may be bought and sold by many different investors

Stock Exchanges These stock sales occur in the so-called secondary market, which includes the organized stock exchanges such as the New York Stock Exchange (NYSE) or the National Association of Security Dealers Automated Quotation system (NASDAQ). These are the transactions we are more familiar with These are the ones reported on TV and in newspapers such as the Wall Street Journal Publicly traded is when a company starts trading on one of these exchanges

Stock Exchanges People who buy and sell stock go through what’s called a stock broker such as: Merril Lynch Internet Accounts like E*TRADE

Partner Assignment This should not take longer than 5 minutes to complete You and your shoulder partner (the one sitting to the left or right of you) will research 5 of the 20 companies you have been following for the stock prices Please include the company name, current price, and the volume (how many shares of stock distributed) Once you are done, return to your notes and wait to move on.

The Behavior of Investors You already know that the stock market can go up and down frequently “Bull Market” is the term commonly used for markets that are treading upward “Bear Market” is the term commonly used for markets that are trending down Bull and Bear are examples of common jargon that investors use

The Behavior of Investors If you own stock, you are called a share holder You also receive dividends, which is a portion of the company’s profits could be in cash or additional stock this is another way share holders make money in the stock market

Math for Personal Finance Jennifer bought 900 shares of stock for $45 a share in a company’s IPO. Not counting commissions, what was her dollar return if she sold the stock two weeks later for $56 a share?

Solution: 900 x $45 = $40,500 that Jennifer paid for the stock. She sold the stock for $56 x 900 = $50,400. Her return is the difference ($50,400 - $40,500 = $9,900)

The Behavior of Investors Stock investors must be prepared to evaluate their holdings regularly They may opt to sell poor performing stocks in hopes of finding a better investment Investors are generally wise to own a number of different stocks As risky as stocks can be, it is even riskier to depend on a single stock

Checking Your Financial IQ Why do companies sell shares of stock to investors? companies can raise money to use to expand businesses, product lines, etc.

Investing in Bonds Recall that a bond is like an IOU from a company, you have lent them money when you purchased the bond Companies, nonprofit organizations, and government agencies issue bonds as a way of taking a loan Investors buy the bonds and in return, the investor earns interest

How Bonds Work Maturity date the date when the bond expires (matures) Face value is the bond’s maturity value that is printed on the front of the bond Coupon rate is the bond’s interest rate this is paid to the bond holder until the bond expires

Most bonds carry some risk If the bond issuer has financial problems, you may not get the interest you are due or your money back

Math for Personal Finance Kenneth held a bond for five years that had an 8.5 percent coupon rate and a $1,000 face value. How much did Kenneth receive in interest from the bond?

Math for Personal Finance Solution: $1,000 x.085 = $85 per year x 5 years = $425

Types of Bonds Investors can choose from several types of bonds Treasury Bonds Municipal Bonds Federal Agency Bonds Corporate Bonds

Treasury Bonds Treasury bonds are issued by the US Treasury to finance the debt of the United States government no default risk interest earned is subject to federal tax exempt from state and local income taxes

Federal Agency Bonds Federal agency bonds are the types of bonds that encourage home ownership Federal agencies such as the Federal Housing Administration (FHA) and the Government National Mortgage Association (Ginnie Mae) may issue bonds in order to fund projects

Municipal Bonds Municipal bonds are bonds issued by state and local governments to finance large public projects such as water and sewer systems do not pay taxes on interest payments have a slight default risk

Corporate Bonds Corporate bonds are bonds issued by large firms all degrees of risk depending on the strength of the company companies with a solid financial situation will have a lower risk Junk bonds are bonds from companies with the highest risk

The top 4 Ratings are reasonably safe

Buying and Selling Bonds Investors can buy and sell bonds much like they do stocks must use a broker to arrange transactions

Check Your Financial IQ What is supposed to happen at the end of a bond’s maturity date? the bond holder is supposed to get his or her initial investment back from the bond issuer

Other Ways of Investing Mutual Funds best with limited money easy to diversify managed by experienced people Real Estate owning rental property Annuities An annuity is a contract that provides the investor with a series of regular payments, usually after retirement. Owning Your Own Business a large number of millionaires are small business owners with this, be very careful because many small ventures fail Futures are contracts to buy and sell commodities (products that are mined or grown) or stocks for a specified price on a specified date in the future.

In Review Liquid investments are important, but it is important to aim for a return that will beat inflation Stock is partial ownership in a company and a good way to seek a profit Bonds are promissory notes from an issuer to an investor The bond issuer pays interest and has to pay back the face value at the maturity date Mutual funds provide diversification and professional management for a low initial investment

Your Assignment access finance.yahoo.com and search through all 10 of your stocks for each stock on the left hand side of the screen, you will find a menu scroll down to OWNERSHIP and click on Major Holders Please list the TOP Major Direct Holder, TOP Institutional Holder, and the TOP Mutual Fund Holder along with the number of shares each person/institution holds