The Basics of Investing Stocks, Bonds & Cash Accounts

Types of Investments : 4 Asset Classes Stocks: –Over 5000 individual stocks to choose from! Bonds: –Government bonds, corporate bonds, mortgage bonds Cash Accounts: –Savings accounts, CD’s, money markets Real Estate –Residential, commercial, houses, apartments, etc….

Why Invest Money? Purchasing power = amount of goods/services money buys Money loses purchasing power overtime –Prices for goods rise on average +2.5% per year –rising prices is called inflation Investors must earn more than the rate of inflation for purchasing power to rise

Reading: Intro. To Investing ANSWER KEY: 1)B 2)C 3)C 4)B 5)A 6)C 7)D

Real & Nominal return per year by Asset Class Savings Account Returns before inflation = nominal return. = real return

Risk vs. Reward? Holding period = when do you need your money back? –Time horizon determines which asset class you should invest in The longer the holding period----the more risk you should take! –Stocks = long term investment (5-years or longer) –Bonds = medium term investment ( 1-3 years) –Bank CD’s = short term investment (30 days to 2 years)

Asset Allocation Process of picking sectors to invest in Bonds Cash Account Stocks no risk med. risk high risk I think I’m brilliant very high risk

Rule of “70” 70 divided by RETURN = # Years for money to double Money Doubles in: 70/2% = 35 years 70/5% = 14 years 70/10% = 7 years 70/15% = 4.6 years Average return of stock market over last 75 years

How Money Grows! Money grows exponentially as it compounds $10,000 invested at 4% return for 30-Years: $33,000 $10,000 invested at 15% return for 30-years $875,000 The power of compound interest!

Bonds Bonds: are a loan to a Gov’t or business where you earn interest every year until you are paid back. If the company goes bankrupt => you usually will not be paid back! You buy a Bond U.S. Gov’t 5-Year Bond $1,000 Gov’t pays you 2% interest per year $20 per year Plus $1,000 in 5 years $1,000 turns into $1,100 over 5 Years

Stocks Investors buy shares (stock) in a company and then become part owners –A company will issue stock to raise money to expand their business –Some companies pay dividends on their stock (similar to interest on a bond) –Investment Banks help companies issue stock IPO = initial public offering –When a new company sells stock for the 1 st time –Many employees in an IPO own “stock options”

Recent IPO’s

Key Stock Indices S&P 500 Index –Largest 500 companies by $ value Dow Jones Index –30 very large American companies Nasdaq Index –primarily technology stocks WHY INDICES: A stock index provides the average return of a basket of stocks Easy way to “match” the market return ETF’s = exchange traded funds a way to invest in various stock indices by purchasing 1 stock Example: SPY = SP500 index MDY = midcap index IWM = smallcap index