Fundamentals of Investing Dr. John P. Abraham Professor UTPA

Investing goals Preserve capital Increase in value Agents: – financial institutions (banks, insurance companies) and financial markets (forums where suppliers and buyers are brought together). –Agents can be: government, business or individuals.

Government Federal, state and local all require vast sums of money. Borrow money to finance projects: war, buildings, schools, housing, bridges, etc. They may loan surplus money for short term.

Business & Individuals Borrow and loan funds

Security Easy to buy and sell Investments –Evidence of ownership in a business –Legal right to acquire or sell an ownership interest in a business –Bonds, stocks, and options Direct investment or indirect investment –Direct – buy security –Indirect – own a share in a company that buys securities.

Property Difficult to buy and sell Real estate –Land, building Tangible personal property –Gold, collectibles Usually long term (longer than one year)

Steps in Investing Carefully developed plan to achieve specific financial goal. Must have living expenses, savings for emergency before investing. Goal of investing: –Example in 3 years accumulate down payment for a house. Selecting investments

Portfolio Collection of investments assembled to meet goals. Diversification –Limit risk and maximize returns Managing portfolio –Selling, buying, rebalancing –Short tem CDs, money market, T-bills –Fixed income securities such as bonds and preferred stocks.

Stocks Common stock –Represents ownership in a corporation –May yield dividends –Capital gain Preferred stock –Ownership in a corporation with a stated dividend rate. (preference over common stock). –Convertible securities. Bond or preferred stock that may be converted to a specified number of shares of common stock.

Options Provide investor with an opportunity to sell or buy an underlying security at a specified price within a given period of time. Good in a volatile market. Call is an option to buy Put is an option to sell.

Mutual Funds Professionally managed diversified portfolio of securities.

Bonds Face value – what the borrower will pay you at maturity Coupon : The agreed upon interest rate which is paid annually or semi annually. Maturity: When the borrower will pay you back. Example. Facevalue 1000, coupon 8%, and a maturity of 10 years. This means you'll receive a total of $80 ($1,000*8%) of interest per year for the next 10 years. Actually, because most bonds pay interest semi-annually, you'll receive two payments of $40 a year for 10 years. When the bond matures after a decade, you'll get your $1,000 back.

Bond price can go up or down In an increasing interest market, value of your bond could decrease (discount). In a decreasing interest market, value of your bond could increase (premium). I explain this in lecture Stock is ownership in a company, bond is lending to the company Bond gives you predictable income

Bond rating Bond Rating GradeRisk Moody\'sS&P/ Fitch AaaAAAInvestmentHighest Quality AaAAInvestmentHigh Quality AAInvestmentStrong BaaBBBInvestmentMedium Grade Ba, BBB, BJunkSpeculative Caa/Ca/CCCC/CC/CJunk Highly Speculative CDJunkIn Default

Government bonds Bills - debt securities maturing in less than one year. Notes - debt securities maturing in one to 10 years. Bonds - debt securities maturing in more than 10 years. Munis Zero coupon bond. (you buy at a discount)

Real Estate Commercial Residential

IRA, SEP-IRA, ROTH-IRA & 401/403K Tax sheltered Pay tax up front and let it earn taxfree Don’t pay tax up front, let earn, pay taxes when your income is low.

Investment Markets IPO – initial public offering –sell directly as in case of Google –Sell through an investment banker (Goldman Sachs or Solomon brothers) Buy stocks at a fixed price (discount price) and take risk of selling it (this is called underwriting). Secondary market –After the initial offering, stock may be traded at secondary markets.

Secondary markets Organized Securities and Exchanges –New York Stock Exchange NYSE –American Stock Exchange AMEX –Nasdaq (National association of securities dealers automated quotation) used to be main OTC. –Options exchanges –Futures Exchanges Over the counter market –Sold over telecommunication network. Unlisted securities. Foreign Securities Markets (ADR – american depositary receipts)

Things to Know Insider trading Bull market Bear market Market crash Types of account –Single or joint, cash or margin Types of orders –Market or limit –Stop loss order

In declining market Short selling Investors sell stocks they don’t have (borrowed selling) – borrowed from broker. Must be purchased eventually

Practical Investment guide Making a budget Savings Real Estate –Home –Rentals Stocks Bonds

Making a budget (live within your means) Budget is a plan Must be realistic Must be mutually agreed upon (if married) Must adhere to it as much as possible –Goal is to remain under budget in spending –And over budget in income My advice: borrowing money is bad. –Using credit card is even worse – if you do not pay off entire amount each month.

Savings The best time to save is when you get your first real job. Do not raise your standard of living immediately; instead save. Minimum savings: –Enough to live for 3 to 6 months if you lost your job. –Enough to pay for a down payment on a house and a car.

Savings in buying Don’t buy anything unless you have daily or periodic use for it. Don’t be an impulsive buyer. Buy items on your buy list. Find different devices that will do the same job, you may be able to save as much as 80% or more. As much as possible, buy things that are on sale without sacrificing quality (moldy bread at deep discount is useless!)

Real estate First investment should be a place to live. Renting vs. buying (show calculation) Only time borrowing is allowed (my opinion) –You are paying with cheaper money while your home is appreciating. –Government is subsidizing your interest.

Real Estate Investments Positives –Appreciation –Tenants pay your loans Negatives –May have negative cash flow –May be vacant –Not liquid

Land vs. income producing Land in the right location will bring profits many fold. Must pay (in my opinion) cash – no loans. Income producing – you can borrow. You need to do most of the repair & maintenance work.

Stocks

Bonds