1. Fundamentals of Investing
Dr. John P. Abraham
Professor
UTRGV

2. 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.

3. 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.

4. Business & Individuals
Borrow and loan funds

5. 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.

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

7. 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

8. 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.

9. Stocks Common stock Preferred 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.

10. Options
Provide investor with an opportunity to sell or buy an underlying security at a specified price within a given period of time.
Mitigate risk (insurance)
1 option contract is for 100 shares
Volatile stocks have higher option prices
Good in a volatile market.
At expiration options are worthless

11. Call Option
Right to buy a stock at certain price (strike price) within a given time (expiration date), For which you pay premium (option price)
For lower strike price the premium will be higher.
Example, buy 10 option contracts at $50 strike price with 2 months expiration.
Buyer has the right to buy, seller has an obligation to sell
You buy call option if you expect the price to go up
If you end up buying the underlying shares, it is referred to as excersing the options

12. Put Option
Right to a strike price within a fixed period of time.
The Higher the strike price, the higher the premium.
You sell put option if you expect the price is going down

13. Mutual Funds
Professionally managed diversified portfolio of securities.

14. 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. Face value 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. 

15. 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

16. Zero Coupon Bond bought at a price lower than its face value
with the face value repaid at the time of maturity (PAR VALUE)
Examples  U.S. Treasury bills, U.S. savings bonds

17. Bond rating Bond Rating Grade Risk Moody\'s S&P/ Fitch Aaa AAA
Investment
Highest Quality Aa AA
High Quality A
Strong
Baa
BBB
Medium Grade
Ba, B
BB, B
Junk
Speculative
Caa/Ca/C
CCC/CC/C
Highly Speculative C D
In Default

18. 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)

19. Real Estate
Commercial
Residential

20. 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.

21. Investment Markets IPO – initial public offering Secondary market
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.

22. 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)

23. 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

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

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

26. 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.

27. 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.

28. 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!)

29. 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.

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

31. 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.

32. Stocks

33. Bonds