1. © 2008 Thomson South-Western CHAPTER 11 INVESTMENT PLANNING

2. 11-2 The Objectives & Rewards Of Investing  Investing—usually considered a long-term activity. Future values and returns expected to increase through time.  Speculating—usually considered a short- term activity. Future values and returns highly uncertain.  Adequate insurance coverage and cash/savings are investment prerequisites

3. 11-3 How Do I Get Started?  Accumulate money by regularly allocating a portion of your earnings for investing—PAY YOURSELF FIRST!  Take advantage of automatic investment and dividend reinvestment programs.  While saving, learn as much as possible about investments and "play" trading.  Determine your financial objectives.

4. 11-4 What Are Your Investment Objectives?  Supplement current income— appropriate for retired persons  Save for major expenditures— such as college education, down payment on a home, or starting a business  Save for retirement—to live comfortably in your "golden years."  Shelter income from taxes—to preserve more of your earnings.

5. 11-5 Average Annual Returns On Stocks, Bonds, And U.S. T-bills Over Various Holding Periods From 5 - 15 Years

6. 11-6 Different Ways to Invest 1. Common Stock 2. Bonds 3. Preferreds and Convertibles 4. Mutual Funds 5. Real Estate

7. 11-7  Federal and state laws regulate the sale of securities.  Purpose is to provide for adequate and accurate disclosure of financial information.  Securities and Exchange Commission (SEC) is the agency in charge of administering federal securities laws. Regulating the Securities Markets

8. 11-8  Bull market—generally rising securities prices for an extended period of time. –Reflects investor optimism. –Associated with favorable economy.  Bear market—generally falling securities prices for an extended period of time. –Reflects investor pessimism. –Associated with economic downturn. Market Trends

9. 11-9 Making Transactions In the Securities Markets - Stockbrokers  Stockbrokers (account executives, financial consultants) buy and sell securities for investors.  Investor can select from full-service, discount, or online broker  Brokerage services  Consider brokerage fees when making securities transactions.

10. 11-10 Types of Brokers

11. 11-11 Executing Trades  Investor must first establish account with broker.  Trades can be executed by phone, at the brokerage firm, or online.  Market orders generally take less than two minutes!

12. 11-12 Investor places the order with the broker.

13. 11-13 Investor places the order with the broker. Broker transmits order to the market via tele- communications equipment.

14. 11-14 Investor places the order with the broker. Broker transmits order to the market via tele- communications equipment. Order is filled at the market by other buyers and sellers.

15. 11-15 Investor places the order with the broker. Broker transmits order to the market via tele- communications equipment. Order is filled at the market by other buyers and sellers. Execution of the order is confirmed to the broker.

16. 11-16 Investor places the order with the broker. Broker transmits order to the market via tele- communications equipment. Order is filled at the market by other buyers and sellers. Execution of the order is confirmed to the broker. Broker confirms order fulfillment. Investor has 3 days to settle account.

17. 11-17 Margin Trading and Short Sales  Buying on Margin: allows investor to purchase securities on credit by borrowing part of purchase price from broker. Increases gains when returns are positive. Increases losses when returns are negative.

18. 11-18 Becoming an Informed Investor  Types of information to follow: –Economic developments and current events –Alternative investment vehicles –Current interest rates and price quotations –Personal investment strategies

19. 11-19 Available Investment Information  Annual Reports  Financial Press (WSJ and financial magazines)  Brokerage Reports  Advisory Services  Investment Advisors  On-Line Resources

20. 11-20 Annual Stockholder Reports  Read the Highlights or Selected Financial Data sections  CEO’s letter to stockholders  Discussion of operations in management’s discussion and analysis section  Review financial statements and notes  Read the auditor’s report

21. 11-21 Tips for Successful Online Trades

22. 11-22 Managing Your Investment Holdings  Build a diversified portfolio of securities based upon your goals and personal situation.  Allocate your assets according to your objectives.  Track your investments and rebalance your portfolio as your needs change.

23. 11-23 Types of Investments Held by Average Individual Investors

24. 11-24 Asset Allocation and Portfolio Management  How to divide portfolio among different types of securities  Total return on a portfolio is influenced far more by its asset allocation plan than by specific security selections.

25. 11-25 Asset Allocation and Portfolio Management  Asset mix:

26. 11-26 Keeping Track of Investments