Copyright © Cengage Learning. All rights reserved Traditional Investment Alternatives Portfolio management –Depends on your investment goals, tolerance for risk, financial resources available for investment Asset allocation, the time factor, and your age –Asset allocation—the process of spreading your money among several different types of investments to lessen risk –The time factor—investing for the long term or the short term –Age—growth-oriented investments versus conservative investments 20 | 1

Copyright © Cengage Learning. All rights reserved Investment Alternatives 20 | 2

Copyright © Cengage Learning. All rights reserved Traditional Investment Alternatives (cont’d) Bank accounts –Advantages—bank accounts are safe (low risk) and have definite rates of return –Disadvantage—low risk means low investment returns Corporate bonds –Primarily a long-term, income-producing investment with a value that fluctuates with market interest rates and the financial condition of the issuer Convertible bonds –Interest-bearing corporate bonds that can also be exchanged for a specific number of shares of common stock –Bond market value is equal to the underlying value of the stock 20 | 3

Copyright © Cengage Learning. All rights reserved Bond Ratings 20 | 4 Source: Moody’s Investors Service, October 27, 2008; Standard & Poor’s Corporation, Standard & Poor’s Bond Guide, September 2008.

Copyright © Cengage Learning. All rights reserved Traditional Investment Alternatives (cont’d) Government bonds –Considered risk free; pay low interest –Treasury bills—sold in minimum units of $1,000; short maturities –Treasury notes—issued in $1,000 units with maturity of 1 to 10 years –Treasury bonds—issued in minimum units of $1,000 with maturities from 10 to 30 years –Savings bonds—(EE bonds) purchased for ½ their maturity value –Municipal bonds—issued by a state or local government; may be exempt from federal taxes 20 | 5

Copyright © Cengage Learning. All rights reserved Traditional Investment Alternatives (cont’d) Common stock –Dividend income Stock dividend—a dividend in the form of additional stock Dividend payments—cash payments as the result of a distribution of the company’s profits –Increase in dollar value Capital gain—the difference between a security’s purchase price and its selling price Market value—the price of one share of a stock at a particular time –Stock splits A division of each outstanding share of a corporation’s stock into a greater number of shares Reduces the stock price to a price range that management feels is attractive for the stock 20 | 6

Copyright © Cengage Learning. All rights reserved Sample Common Stock Transaction 20 | 7 Source: Price data and dividend amounts were taken from the Yahoo Finance website, accessed October 26, 2008.

Copyright © Cengage Learning. All rights reserved Traditional Investment Alternatives (cont’d) Preferred stock –Stock in a corporation that has a claim on the dividends that supersedes common stock –Cumulative preferred stock Stockholders have priority claim to full payment of all omitted dividends and corporate assets –Convertible preferred stock Stock that pays dividends and can also be exchanged for a fixed number of shares of common stock 20 | 8

Copyright © Cengage Learning. All rights reserved Traditional Investment Alternatives (cont’d) Mutual funds –A professionally managed investment vehicle that combines and invests the funds of many individual investors –Closed-end funds Funds with a fixed number of shares –Open-end funds Funds with an unlimited number of shares –Net asset value (NAV) Net asset value Value of the fund’s portfolio – Liabilities Number of shares outstanding = Current market value of a mutual fund’s portfolio minus the mutual fund’s liabilities and divided by the number of outstanding shares 20 | 9

Copyright © Cengage Learning. All rights reserved Traditional Investment Alternatives (cont’d) Mutual funds (cont’d) –Load funds Investors pay sales and purchase fees every time they purchase shares –No-load funds No sales or purchase fees are charged –Yearly management fee –Managed funds Professional fund manager chooses securities in the fund –Index funds Managers buy stocks or bonds contained in an index (such as Standard & Poor’s 500) –Family of funds A group of mutual funds managed by one investment company 20 | 10

Copyright © Cengage Learning. All rights reserved Traditional Investment Alternatives (cont’d) Types of mutual fund investments –Aggressive growth stock funds –Global stock funds –Growth stock funds –High-yield (junk) bond funds –Income stock funds –Index funds –Long-term U.S. bond funds –Sector stock funds –Small-cap stock funds 20 | 11

Copyright © Cengage Learning. All rights reserved Traditional Investment Alternatives (cont’d) Real estate –Advantage One of the best hedges against inflation –Disadvantages Risk of the property losing of value due to poor location Buyers may be difficult to locate Real estate market may be in decline at time of sale Taxes, mortgage interest, and Installment payments can be a heavy burden 20 | 12

Copyright © Cengage Learning. All rights reserved Real Estate Checklist 20 | 13