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Investment Options Part 1
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Three reasons to invest
Investing helps beat inflation Investing increases wealth Investing is fun and challenging Opportunity to take risk Risk- the uncertainty of the outcome of any given situation Gain knowledge
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7 Wise practices of investing
Define your financial goals Go slowly Knowledge is power If it sounds too good to be true it probably is Follow through Keep good records Seek good investment advice Keep knowledge current Know your limits How much money can you afford to risk? How much risk are you willing to take?
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Risk/Reward The greater the potential reward – The greater the risk that must be taken in order to achieve it. Risk Reward
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Risk Pyramid Low risk Savings Bonds Money market CD
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Low risk/Low return Government Savings Bonds Certificates of Deposit
Savings/Money Market Accounts
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Risk Pyramid Medium risk Low risk Stocks Bonds Mutual funds
Real Estate Low risk Savings Bonds Money market CD
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Medium risk/Medium return
Stock Stock is a share of ownership in the assets and earnings of a company core of America’s economic system provide portfolio diversification Diversification- spreading risk among many types of investments
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Why Companies Issue Stock
To grow or expand To pay for ongoing business activities It is popular because: The company does not have to repay the money Paying dividends is optional
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Common Stock Vs. Preferred Stock
2 Basic Types of Stock Common Stock Vs. Preferred Stock
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Common Stock Common stock – shares or units of ownership in a public corporation Most basic form of ownership One vote per share owned to determine company’s board of directors
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Preferred Stock Preferred stock – type of stock that pays a fixed dividend Dividends distribution of a portion of a company's earnings to shareholders Fixed value paid out before common stock IF company fails preferred gets paid before common Less risk than common stock = lower returns No voting rights
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How Well the Stock Market is Doing Overall Part 2
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3 Basic Indicators Dow Jones Industrial Average (“DOW”)
Lists the 30 leading industrial blue chip stocks Standard and Poor’s 500 Composite Index Covers market activity for 500 stocks More accurate than DOW because it evaluates a greater variety of stock National Association of Security Dealers Automated Quotations (“NASDAQ”) Monitors fast moving technology companies Speculative stocks, show dramatic ups and downs
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Ups and Downs bull market -market is doing well
optimistic about the economy and are purchasing stocks bear market -market is doing poorly investors are not purchasing stocks selling stocks already owned
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Purchasing Stock
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Stock brokers Full-service brokers- most expensive
will call with advice keep an eye on stock and call if changes need to be made. Discount brokers- charge less general advice research options available Buy and sell for you Online brokerage sites- Cheapest No advice-you do research for yourself Order takers
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Three Stock Exchanges New York Stock Exchange (NYSE)
Oldest and largest, began in 1792 2,800 companies Strict requirements American Stock Exchange Began in 1849 allowing younger, smaller companies to list National Association of Securities Dealers Automated Quotations over the counter electronic market 4,000 small companies More volatile because companies are young and new
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Stock Transactions Customer- you
Broker- qualified and regulated professional who buys and sells stocks Trader- someone who buys and sells stock shares Specialist- Seller of specific stock. Shows best bids and asked prices to the market during trading hours.
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NEW YORK STOCK EXCHANGE
Traders NEW YORK STOCK EXCHANGE Specialist VERY HUMAN LOCATION Broker Customer
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The guaranteed way to make money in the stock market is simple:
Buy Low and Sell High
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Medium Risk/Medium Return
Mutual funds- shares bought in a large, professionally managed group of investments Pools money of investors to buy large amounts of stocks and bonds Advantages Professional management Diversification- spreading risk among many types of investments
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Risk Pyramid High risk Medium risk Low risk Stocks Bonds Mutual funds
Futures Penny stocks Medium risk Stocks Bonds Mutual funds Real Estate Low risk Savings Bonds Money market CD
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High Risk/High Return Futures- buy and sell stock on a specific date in the future at a specific price Betting the price will go up or down accordingly Penny Stocks- low priced stocks of small companies- risk of failure is high Collectibles- gain or lose value as public tastes change
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