Investing Prepare For Your Future


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Investing Prepare For Your Future

  1. 1. Investing Prepare For Your Future
  2. 2. Investing Basics <ul><li>What is Investing? </li></ul><ul><li>If you choose to save in a way that earns income, then you are investing. </li></ul><ul><li>Savings accounts, CD’s, money markets, and government bonds are all forms of investing. </li></ul><ul><li>You have a wide variety of other investments choices that have the potential earning more than these options. </li></ul><ul><li>But, as with other consumer choices, investments decisions involve trade-offs </li></ul>
  3. 3. Investing Basics <ul><li>To have a chance to make more income on your investments, you must be willing to accept more risk </li></ul><ul><li>Risk and Rate of Return </li></ul><ul><li>The chance that an investment will decrease in value is risk </li></ul><ul><li>The income you earn on an investment is called your return </li></ul>Higher Risk/Higher Returns Medium Risk/Medium Return Lower Risk/Lower Return
  4. 4. Rate of Return <ul><li>You invest $1,000 in a bicycle repair business. </li></ul><ul><li>At the end of one year, your receive $100 as your share of the company’s profit. </li></ul><ul><li>The $100 is 10% of your $1000 investment </li></ul><ul><li>Your rate of return is 10% </li></ul>
  5. 5. Rate of Return <ul><li>Suppose banks are paying 4 percent interest on deposits. </li></ul><ul><li>Your rate of return from investing in the bicycle business is 6 percent larger </li></ul><ul><li>There is no guarantee that the business may have new competition. </li></ul>
  6. 6. Evaluate Your Risk <ul><li>A general rule of investing is: </li></ul><ul><ul><li>The greater the potential rate of return, the greater the risk. </li></ul></ul><ul><li>Limit your risk through diversification </li></ul><ul><ul><li>Investing in various businesses with different levels of risk is called diversification. </li></ul></ul><ul><ul><li>If you are young and have many income-earning years left, you may want to take more risk. </li></ul></ul><ul><ul><li>If you are older and have most of the money you will need for retirement, you may not need of want to take risks. </li></ul></ul>
  7. 7. How to Make Investment Choices <ul><li>There is no one right way to invest. </li></ul><ul><li>Which investment choices are right for you depends a lot on: </li></ul><ul><ul><li>Your Financial Situation </li></ul></ul><ul><ul><ul><li>If you have lots of money to invest then risking some on high rate investments are a good choice </li></ul></ul></ul><ul><ul><li>Your Risk Tolerance </li></ul></ul><ul><ul><ul><li>1 thru 5 – what is your tolerance </li></ul></ul></ul><ul><ul><ul><li>1 being completely conservative </li></ul></ul></ul><ul><ul><li>Your Values </li></ul></ul><ul><ul><ul><li>Community or Social </li></ul></ul></ul>
  8. 8. Questions <ul><li>What is the difference between saving and investing? </li></ul><ul><li>What is an investment’s rate of return, and how is it measured? </li></ul><ul><li>What is the relationship between risk and rate of return? </li></ul><ul><li>How does diversification limit your overall risk? </li></ul><ul><li>If you don’t like taking risk, what kinds of investments should you make? </li></ul>
  9. 9. How to Invest in Corporations <ul><li>Corporate Stocks </li></ul><ul><ul><li>A share of stock is a unit of ownership in a corporation </li></ul></ul><ul><ul><li>Stockholders are the investors who own the corporation because they own shares of its stock. </li></ul></ul><ul><ul><li>Corporations sell shares of stock to investors to raise money for the business. </li></ul></ul><ul><ul><li>If the corporation makes a profit you may expect to receive part of the profit as a dividend </li></ul></ul>
  10. 10. How the Stock Exchanges Work <ul><li>Investors can buy and sell stocks in two ways: </li></ul><ul><ul><li>Through a stock exchange </li></ul></ul><ul><ul><li>Through an electronic system called the NASDAQ </li></ul></ul><ul><li>Transactions are when share are bought or sold </li></ul><ul><li>A stockbroker is a person who handles the transfer of stocks and bonds between buyer and seller. </li></ul>
  11. 11. How the Stock Exchanges Work, cont. <ul><li>A brokerage firm is a company that specializes in helping people buy and sell stocks and bonds. </li></ul><ul><li>A stock exchange is a location where orders to buy or sell stock are sent and carried out. </li></ul>
  12. 12. How the Stock Exchanges Work cont. <ul><li>You want to buy 100 shares of IBM </li></ul><ul><li>Place an order with a local office of a brokerage firm, such as Merrill Lynch. </li></ul><ul><li>The firm owns a membership in a stock exchange that allows it to carry out trades on the exchange. </li></ul><ul><li>Another person wants to sell 100 shares. </li></ul><ul><li>Both brokerage firms would take their orders to a trading desk at the NYSE where IBM transactions are made. </li></ul>
  13. 13. How to Trade on the NASDAQ <ul><li>National Association of Securities Dealers Automated Quotation Systems </li></ul><ul><li>NASDAQ electronically links brokerage firms. </li></ul><ul><li>Through this system, stocks can be bought and sold without using a central location </li></ul>
  14. 14. How Stockholders Earn Returns <ul><li>You can earn returns from your investment in two ways: </li></ul><ul><ul><li>As dividends </li></ul></ul><ul><ul><li>By selling the stock </li></ul></ul><ul><li>If a company makes a profit, you will probably receive a dividend as a return. </li></ul><ul><li>Suppose you bought 100 shares of stock for $2.00 per share. </li></ul><ul><li>A month later you sell it for $3.00 per share </li></ul>
  15. 15. How Stockholders Earn Returns <ul><li>The profit you earn from selling stock at a higher price than you paid for it is called capital gain . </li></ul><ul><li>The amount you lose is called capital loss . </li></ul><ul><li>Why do stock prices change? </li></ul><ul><ul><li>High Profits, Higher dividends, higher demand </li></ul></ul><ul><ul><li>Lower Profits, lower dividends, lower demand </li></ul></ul>
  16. 16. Types of Stocks <ul><li>Preferred Stock </li></ul><ul><ul><li>A non-voting share that pays a fixed dividend </li></ul></ul><ul><ul><li>No matter how well the company performs, preferred stockholders receive the same dividend unless the company suffers a loss. </li></ul></ul><ul><li>Common Stock </li></ul><ul><ul><li>A voting share that does not pay a set dividend </li></ul></ul><ul><ul><li>Each board of directors sets the dividend year to year </li></ul></ul><ul><ul><li>The dividend that the board sets depends on the corporation's profits and its need for money to reinvest in the business </li></ul></ul>
  17. 17. Types of Stocks <ul><li>Common stockholders have the right to vote on important corporate decisions. </li></ul><ul><li>Stockholders normally have one vote for each share they own. </li></ul><ul><li>Preferred stock is less risky than common stock </li></ul><ul><li>Preferred stock holders get paid first for dividends </li></ul>
  18. 18. How to Earn Returns <ul><li>All corporations are not equally successful </li></ul><ul><li>Some earn good profits, Some don’t. </li></ul><ul><li>Some corporations fail even after a long period of good profits. </li></ul><ul><li>There is no way to be sure which corporation will be successful. </li></ul><ul><li>If you investigate the financial histories of different corporations, however, you will probably make better investment choices. </li></ul>
  19. 19. Two general classes of stocks <ul><li>Blue Chip Stocks </li></ul><ul><ul><li>This is a well established company </li></ul></ul><ul><ul><li>Have histories of steady sales and profits </li></ul></ul><ul><ul><li>Pays most of its returns in dividends </li></ul></ul><ul><li>Growth Stocks </li></ul><ul><ul><li>Smaller or younger corporations that produce new products may grow rapidly in their sales and profits. </li></ul></ul><ul><ul><li>They pay no or very small dividends </li></ul></ul><ul><ul><li>Pays by increasing in value </li></ul></ul>
  20. 20. Short Selling <ul><li>Short selling is the selling of a stock that the seller doesn't own. More specifically, a short sale is the sale of a security that isn't owned by the seller, but that is promised to be delivered. That may sound confusing, but it's actually a simple concept. </li></ul>
  21. 21. Short Selling Continued <ul><li>Still with us? Here's the skinny: when you short sell a stock, your broker will lend it to you. The stock will come from the brokerage's own inventory, from another one of the firm's customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later you must &quot;close&quot; the short by buying back the same number of shares (called covering ) and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money. </li></ul>
  22. 22. Corporate Bonds <ul><li>A bond is a written promise to pay interest and a debt by a specified date. </li></ul><ul><li>May companies raise money by selling bonds </li></ul><ul><li>Why own Corporate Bonds? </li></ul><ul><ul><li>Less Risky </li></ul></ul><ul><ul><li>Corporations must make interest payments and repay their bonds on time, even if they earn no profit. </li></ul></ul><ul><ul><li>You will receive money before stockholders </li></ul></ul>
  23. 23. Corporate Bonds <ul><li>Junk Bonds </li></ul><ul><ul><li>Higher risk investments </li></ul></ul><ul><ul><li>Offer higher interest rates </li></ul></ul><ul><ul><li>Also called high-yield bonds </li></ul></ul><ul><li>Bond Rating Services </li></ul><ul><ul><li>Look at the bond’s rate of return </li></ul></ul><ul><ul><ul><li>The higher promised rate of return, the higher risk. </li></ul></ul></ul><ul><ul><li>Moody’s or Standard and Poor’s are two of the most popular bond rating services. </li></ul></ul><ul><ul><li>Bonds Rated AAA are the safest </li></ul></ul><ul><ul><li>The riskiest are C or D bonds </li></ul></ul>
  24. 24. Questions <ul><li>Why do corporations sell stock? </li></ul><ul><li>What are the differences in how the stock exchange and NASDAQ work? </li></ul><ul><li>What are the two ways in which you can earn a return from owning stock? </li></ul><ul><li>What are the differences between preferred and common stock? </li></ul><ul><li>Why are blue chip stocks less risky than growth stocks? </li></ul>
  25. 25. Questions <ul><li>Why do corporations sell bonds? </li></ul><ul><li>Why should you invest only part of your money in highly risky stocks? </li></ul><ul><li>Why does buying a corporate bond involve less risk than buying stock in the same corporation? </li></ul><ul><li>What service do Moody’s and Standard and Poor’s provide? </li></ul>
  26. 26. Mutual Funds <ul><li>A mutual fund is a group investment owned by many investors. </li></ul><ul><li>Investors buys shares of the mutual fund, and the fund pools their money to buy a variety of stocks and other investments. </li></ul><ul><li>Mutual funds usually require a minimum investment of $1000 or more. </li></ul>
  27. 27. Cost of Mutual Funds <ul><li>All Mutual Funds charge annual maintenance fees for their service. </li></ul><ul><li>These fees can be as little as 0.2% of the value of your investment or a large as 3 percent or more. </li></ul><ul><li>In addition to maintenance fees, some mutual funds have a load. </li></ul><ul><li>A load is a sales fee that you pay when you invest in a mutual fund </li></ul><ul><ul><li>Front-end load </li></ul></ul><ul><ul><li>Back-end load </li></ul></ul><ul><ul><li>No-load funds – no sales fee – no sales person </li></ul></ul>
  28. 28. Mutual Fund Investment Objectives <ul><li>Some mutual funds invest in safe stocks, such as blue chips. </li></ul><ul><li>Others aim for higher rates of return. </li></ul><ul><li>Types </li></ul><ul><ul><li>Global </li></ul></ul><ul><ul><li>Index </li></ul></ul><ul><ul><li>Bond </li></ul></ul><ul><ul><li>Social responsibility </li></ul></ul><ul><ul><li>Environment Funds </li></ul></ul>Growth Funds Growth and Income Funds Income Funds and Tax Fee Funds
  29. 29. Questions <ul><li>What is a mutual fund? </li></ul><ul><li>What benefits do mutual funds offer investors? </li></ul><ul><li>What is the difference between a load and a non-load fund? </li></ul><ul><li>What are several investment objectives mutual funds follow? </li></ul><ul><li>How can your own investment objectives help you select a mutual fund? </li></ul>
  30. 30. How to Find Investment Information <ul><li>Printed Sources of Information </li></ul><ul><ul><li>Fortune, Forbes, Kiplinger’s Personal Finance Magazine, and Money evaluate and compare mutual funds at least once a year and stocks. </li></ul></ul><ul><ul><li>The Wall Street journal and most local papers are more current. </li></ul></ul><ul><li>Information on the Internet </li></ul><ul><ul><li>Smart Money Interactive </li></ul></ul>
  31. 31. How to Find Investment Information <ul><li>Request Information from Companies </li></ul><ul><ul><li>All mutual funds are required by law to provide investors with a publication that describes how the fund is operated. </li></ul></ul><ul><ul><li>The publication is called a prospectus. </li></ul></ul><ul><li>Ask a Stockbroker </li></ul><ul><ul><li>A full-service stock broker is a stock-broker who provides information and advice in addition to trading stocks and bonds for customers </li></ul></ul>
  32. 32. Investment Schemes <ul><li>Don’t take unnecessary risks </li></ul><ul><li>Look for: </li></ul><ul><ul><li>Unrealistic high promised return with low risk </li></ul></ul><ul><ul><li>Unknown seller that won’t supply contact information </li></ul></ul><ul><ul><li>Demands for immediate payment </li></ul></ul><ul><ul><li>Suggestion the seller knows something no one else knows. </li></ul></ul><ul><ul><li>If it sounds too good to be true, it probably is. </li></ul></ul>
  33. 33. Investment Regulation <ul><li>Securities and Exchange Commission (SEC) </li></ul><ul><li>The SEC us responsibly for enforcing the laws concerning the trading of stocks and bonds. </li></ul><ul><li>Congress created the SEC in 1929 because of </li></ul><ul><ul><li>The stock market crash </li></ul></ul><ul><ul><li>Over a few months stocks lost as much as two-thirds of their value. </li></ul></ul>
  34. 34. Insider Trading <ul><li>Insider trading is trading stock based on information that is not available to the general public. </li></ul>
  35. 35. Questions <ul><li>What kinds of information can you get form the Wall Street Journal or form financial magazines? </li></ul><ul><li>What is the differences between a full-service broker and a discount broker? </li></ul><ul><li>Why should you look at a fund’s performance over more than one year? </li></ul>
  36. 36. Questions <ul><li>What are several ways that you can tell an investment offer may be dishonest? </li></ul><ul><li>What is the SEC and how does it work? </li></ul><ul><li>What is insider trading, and why is it legal? </li></ul>
  37. 37. Retirement and Other Investments <ul><li>In the past, some companies had pension plans for their employees, funded completely by the company. </li></ul><ul><li>After spending most of their working years at one company, workers retired and lived on their pensions. </li></ul><ul><li>Today pension plans are less common. </li></ul><ul><li>Workers must take more responsibility for their retirement. </li></ul>
  38. 38. Trade-offs of Retirement Plans <ul><li>The main benefit of retirement plans are their tax advantages. </li></ul><ul><li>Most are taxed-deferred. </li></ul><ul><li>The trade-off for receiving the tax benefits is that you cannot withdraw money from your tax-deferred account before you reach retirement age without paying a large penalty. </li></ul>
  39. 39. Trade-offs of Retirement Plans <ul><li>There are some exceptions to this rule. </li></ul><ul><li>Some plans allow withdraws without penalty for child’s college tuition or for medical emergencies. </li></ul><ul><li>Some kind of retirement plan should be part of your overall saving plan. </li></ul>
  40. 40. 401(k) Plans <ul><li>A 401(k) plan is a taxed-deferred retirement savings plan offered to employees by their employer. </li></ul><ul><li>Only employees at that company may participate in the company’s 401(k) plan. </li></ul><ul><li>Your employer automatically withholds a percentage (that you designate) from your paycheck. </li></ul>
  41. 41. 401(k) Plans <ul><li>Then your employer invests the money in a professionally managed investment account. </li></ul><ul><li>Some have Employer Matching Programs </li></ul><ul><ul><li>You give $50, then you company will give $50. </li></ul></ul>
  42. 42. IRA Plans <ul><li>An Individual Retirement Account (IRA) is a retirement savings plan with special tax benefits. </li></ul><ul><li>Savings in a traditional IRA are taxed deferred. </li></ul><ul><li>Savings in a Roth IRA are not taxed deferred. </li></ul><ul><ul><li>You pay taxes on your income before investing </li></ul></ul>
  43. 43. IRA Plans <ul><li>The law specifies the maximum about you can put into an IRA in one year. </li></ul><ul><li>Currently, the maximum is $4,000 for single people. </li></ul><ul><li>Married people can invest more. </li></ul><ul><li>Since IRAs are not employer-sponsored, there would be no matching money. </li></ul>
  44. 44. Other Investment Options <ul><li>Investment Clubs </li></ul><ul><ul><li>Clubs that invest together </li></ul></ul><ul><ul><li>You should never invest all your money in a club because they are not professionals </li></ul></ul><ul><li>Real Estate </li></ul><ul><ul><li>Your Home as an Investment </li></ul></ul><ul><ul><li>Investing in Other Types of Real Estate </li></ul></ul><ul><ul><li>Real Estate Risks and Responsibilities </li></ul></ul><ul><ul><ul><li>Renters </li></ul></ul></ul>
  45. 45. Other Investment Options <ul><li>Collectibles </li></ul><ul><ul><li>These is no guarantee that the value of collectibles will go up. </li></ul></ul><ul><ul><li>Unless the plan to put in the time and effort to become and expert, don’t invest more in your collection than you are willing to lose. </li></ul></ul>
  46. 46. Questions <ul><li>What does tax-deferred mean? </li></ul><ul><li>How is an IRA different from a 401(k) plan? </li></ul><ul><li>What is the difference between a traditional IRA and a Roth IRA? </li></ul><ul><li>How can you earn returns from investing in real estate? </li></ul><ul><li>What are the risks involved in real estate investing? </li></ul>