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Chapter ii extended

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  • 1. Investing Fundamentals -arti pradhan
  • 2. Learning Objectives
    • Describe why you should establish an investment program
    • Assess how safety, risk, income, growth and liquidity affect your investment decisions
    • Explain how asset allocation and different investments alternatives affect your investment plan
    • Recognize the importance of your role in a personal investment program
    • Use various sources of financial information that can reduce risks and increase investment returns
  • 3. Preparing for an Investment Program
    • Objective 1: Describe why you should establish an investment program
    • ESTABLISHING INVESTMENT GOALS
    • -- accumulating retirement funds
    • -- enhancing current income
    • -- saving for major expenditures
    • -- sheltering income from taxes
  • 4. Preparing for an Investment Program
    • Objective 1: Describe why you should establish an investment program
    • ESTABLISHING INVESTMENT GOALS
    • Financial goals should be specific and measurable. To develop your goals ask yourself. . .
      • What will you use the money for?
      • How much will you need for your goals?
      • How will you obtain the money?
      • How long will it take you to obtain the money?
      • How much risk are you willing to assume in an investment program?
  • 5. Preparing for an Investment Program (continued)
      • What possible economic or personal conditions could alter your investment goals?
      • Given your economic circumstances, are your investment goals reasonable?
      • Are you willing to make the sacrifices necessary to meet your investment goals?
      • What will the consequences be if you don’t reach your investment goals?
  • 6. Preparing for an Investment Program (continued)
    • PERFORMING A FINANCIAL CHECKUP
    • Work to balance your budget
      • Do your regularly spend more than you make
    • Pay off high interest credit card debt first
    • Start an emergency fund you can access quickly
      • Three to nine months of living expenses
    • Have access to other sources of cash for emergencies
      • Line of credit is a short-term loan approved before the money is needed
      • Cash advance on your credit card
  • 7. Preparing for an Investment Program (continued)
    • GETTING THE MONEY NEEDED TO START AN INVESTMENT PROGRAM
    • How badly do you want to achieve your investment goals
    • Are you willing to sacrifice some purchases to provide financing for your investments
    • What do you value
    • Participate in elective savings programs
      • Payroll deduction or electronic transfer
    • Make extra effort to save one or two months each year
    • Take advantage of gifts, inheritances, and windfalls
  • 8. Preparing for an Investment Program (continued)
    • The value of long term investment program
    • After graduation, you plan to invest Rs. 200 per month in the stock market. If you earn 6% per year on your stocks, how much will you have accumulated after 10 years?
    • Use time value of money calculation:
    • pmt = 200, I = 6/12 = 0. 5, n = 10*12 = 120 FV = ?
    • FV = Rs. 32,775.87 (Use FV function in MS-Excel)
  • 9. Preparing for an Investment Program (continued)
    • The value of long term investment program
    • After graduation, you plan to invest Rs400 per month in the stock market. If you earn 6% per year on your stocks, how much will you have accumulated after 15 years?
    • Use time value of money calculation:
    • pmt = 400, I = 6/12 = 0.5, n = 15*12 = 180 FV = ?
    • FV = Rs. 116,327
  • 10. Preparing for an Investment Program (continued)
    • The value of long term investment program
    • After graduation, you plan to invest Rs.400 per month in the stock market. If you earn 12% per year on your stocks, how much will you have accumulated after 15 years?
    • Use time value of money calculation:
    • pmt = 400, I = 12/12 = 1, n = 15*12 = 180 FV = ?
    • FV = Rs. 199,832
  • 11. Preparing for an Investment Program (continued)
    • The value of long term investment program
    • After graduation, you plan to invest Rs.400 per month in the stock market. If you earn 12% per year on your stocks, how much will you have accumulated when you retire in 30 years?
    • Use time value of money calculation:
    • pmt = 400, I = 12/12 = 1, n = 30*12 = 360 FV = ?
    • FV = Rs. 1,397,985
  • 12. Preparing for an Investment Program (continued)
    • Comparison:
    • Rs. 200, 6%, 10 years  32,775
    • Rs. 400, 6%, 15 years  116,327
    • Rs. 400, 12%, 15 years  199,832
    • Rs. 400, 12%, 30 years  1,397,985
  • 13. Factors Affecting the Choice of Investments
    • Objective 2: Assess how safety, risk, income, growth, and liquidity affect your investment decisions
    • Safety and risk
      • Safety in any investment means minimal risk of loss
      • Risk means a measure of uncertainty about the outcome
  • 14. Factors Affecting the Choice of Investments Company A Company B
  • 15. Factors Affecting the Choice of Investments
    • To get a general idea of a stock’s price variability, we could look at the stock’s price range over the past year.
    52 weeks Yld Vol Net Hi Lo Sym Div % PE 100s Hi Lo Close Chg 134 80 IBM .52 .5 21 143402 98 95 95 49 -3 115 40 MSFT … 29 558918 55 52 51 94 -4 75
  • 16. Factors Affecting the Choice of Investments
      • Investments range from very safe to very risky
    • Annual Rates of Return 1926-2002
    • Standard Deviation Real Average Return
    • Small- 33.2% 13.8%
    • Stock
    • Large- 20.5 9.1
    • Stock
    • Long-term 8.7 3.1
    • Corp-bond
    • Long-term 9.4 2.7
    • Gov-bond
    • T-bill 3.2 0.7
  • 17. Factors Affecting the Choice of Investments
      • The potential return on any investment should be directly related to the risk the investor assumes
      • Speculative investments are high risk
      • The Risk-Return Trade-Off
  • 18. Factors Affecting the Choice of Investments (continued)
  • 19. Factors Affecting the Choice of Investments (continued)
    • Calculate return on an investment
    • Rate of return: income you receive on an investment over a specific period of time divided by the original amount invested
    • Buy 1000 shares of Microsoft at Rs. 25, sell it at Rs. 30 a year later, and you receive Rs. 1 dividend per share. What is the rate of return for this investment?
    • Capital gain: 1000 * (30-25) = Rs. 5,000
    • Dividend: 1*1000 = Rs. 5,000
    • Total income: 5000 + 5000 = Rs. 10,000
    • Rate of return : 10,000 / (25* 1000) = 40%
  • 20. Factors Affecting the Choice of Investments (continued)
    • COMPONENTS OF THE RISK FACTOR
    • Inflation risk - during periods of high inflation your investment return may not keep pace with the inflation rate
    • Interest rate risk - you may invest in a bond at a 6%, rates later go up to 8%; your bond price falls
    • Business failure risk - bad management or products affect stocks and corporate bonds and mutual funds that invest in stock
    • Market risk - prices fluctuate because of behaviors of investors
    • Global investment risk - changes in currency affect the return on your investment
  • 21. Factors Affecting the Choice of Investments (continued)
    • INVESTMENT INCOME
    • Safest investments – predictable income
      • Savings accounts and certificates of deposit
      • savings bonds
      • treasury bills (if available)
    • Higher potential income investments include…
      • Corporate bonds
      • Preferred stocks and income common stocks
      • Income mutual funds
      • Real estate rental property
  • 22. Factors Affecting the Choice of Investments (continued)
    • INVESTMENT GROWTH
    • Growth means investment will increase in value
      • Common stock
      • Growth companies pay little or no dividends, but reinvest in the company
      • Mutual funds, government and corporate bonds, and real estate offer growth potential
      • Gemstones and collectibles - more speculative
    • INVESTMENT LIQUIDITY
      • Ability to buy or sell an investment quickly without substantially affecting the investment’s value; e.g. Real estate is not a very liquid investment
  • 23. Asset Allocation and Investment Alternatives
      • Asset Allocation
        • The process of placing your assets among several types of investments which lessens your investment risk
      • Types of assets
      • -- stocks of large corporations
      • -- stocks of medium-sized corporations
      • -- stocks of small companies
      • -- foreign stocks
      • -- bonds
      • -- cash
  • 24. Asset Allocation and Investment Alternatives (contined)
  • 25. Asset Allocation and Investment Alternatives (contined)
      • Time Factor
        • The longer that you are invested the better your returns
      • Your Age
        • The type and style of your investments should change with your age
  • 26.
  • 27. Asset Allocation and Investment Alternatives
    • Investment alternatives
    • Stock or equity financing
      • Equity capital is provided by stockholders who buy shares of a company’s stock.
      • Stockholders are owners and share in the success of the company.
      • A corporation is not required to repay the money obtained from the sale of stock.
      • The corporation is under no legal obligation to pay dividends to stockholders: they may instead retain all or part of earnings.
  • 28. Asset Allocation and Investment Alternatives (continued)
    • CORPORATE AND GOVERNMENT BONDS
    • A bond is a loan to a corporation, the federal government, or a municipality
    • Bondholders receive periodic interest payments, and the principal is repaid at maturity (1-30 years)
    • Bondholders can keep the bond until maturity or sell it to another investor before maturity
  • 29. Asset Allocation and Investment Alternatives (continued)
    • Mutual funds
      • Investors’ money is pooled and invested by a professional fund manager
      • You buy shares in the fund
      • Provides diversification to reduce risk
      • Funds range from conservative to extremely speculative
      • Match your needs with a fund’s objective
  • 30. Asset Allocation and Investment Alternatives (continued)
    • REAL ESTATE
    • The goal of a real estate investment is to buy a property and sell it at a profit. Nationally, 3% appreciation in price a year is average.
    • Location, location, location is important.
    • Before you buy real estate...
      • Is the property priced competitively?
      • What type, if any, of financing is available?
      • How much are the taxes?
      • What is the condition of the buildings and houses in the immediate area?
      • Why are the present owners selling?
      • Could the property decrease in value?
  • 31. Asset Allocation and Investment Alternatives (continued)
    • OTHER SPECULATIVE INVESTMENTS
    • Speculative investments
      • A speculative investment is a high-risk investment made in the hope of earning a relatively large profit in a short time Typical speculative investments include:
        • Antiques and collectibles
        • Call and put options
        • Derivatives
        • Commodities
        • Coins and stamps
        • Precious metals and gemstones
  • 32. A Personal Plan for Investing
    • Establish realistic goals
    • Determine the amount of money needed to meet your goals
    • Specify the amount of money available to fund your investments
    • List different investments you want to evaluate
    • Evaluate risk and potential return for each
    • Reduce possible investments to a reasonable number
    • Choose at least two different investments
    • Continue to evaluate your investment program
  • 33. Factors that Reduce Investment Risk
    • Objective 4: Recognize the importance of your role in a personal investment program
    • YOUR ROLE IN THE INVESTMENT PROCESS
    • Evaluate potential investments
    • Seek the assistance of a financial planner
    • Monitor the value of your investments
    • Keep accurate and current records
    • Consider the tax consequences of selling your investments
  • 34. Sources of Investment Information
    • Objective 5: Use the various sources of financial information that can reduce risks and increase the investment returns
    • The Internet
      • A wealth of investment information is available
      • View sites such as www.money.cnn.com
    • Newspapers and news programs on CNN and UTV Bloomberg
    • Watch business programs like debt to life and smart money
    • Business periodicals such as Smart Money and government publications
    • Corporate Reports
    • Investor services and newsletters and financial calculators