Chapter 11: Investing for your future An aspect of Personal Finance!
Stages of Investing• Stage 1: Put and take account• Stage 2: Beginning Investing• Stage 3: Systematic Investing• Stage 4: Strategic Investing• Stage 5: Speculative Investing• Pgs 303-305
Put and Take Account• This account is known as an emergency fund. This is when you first start to earn a paycheck, and you put money in and take it out to pay your bills.
Beginning Investing• Investing-is the use of savings to earn a financial return.• This is when your savings are permanent and you can afford to invest, in this stage you want to invest in conservative low risk stocks to avoid losing your money.
Systematic Investing• Once you are comfortable with your beginning investments, you then start investing on a regular planned basis. You regularly set aside a certain amount of money each month to invest.• At this stage your goals are long range
Strategic Investing• This is the careful management of investment alternatives to maximize the growth of your portfolio.• When the growth potential of one investment seems to be declining you move our money to a another type of investment.
Speculative Investing• In this stage you can make or lose a great deal of money in a short period of time.• Beginning investors should avoid speculative investing because they cannot afford to take a loss that is likely to occur.
Investing to beat Inflation• Inflation-is a rise in the general level of prices.• Investors should seek investments for a long term that will grow faster then the prices of goods and services.
Investing Increases Wealth• Financial success grows from the assets that you build up over time. Investing helps you accumulate wealth faster than if you simply saved your excess cash.• Investing in stocks and bonds, you are participating in helping the business buy and sell new products and you receive dividends from the profits
Investing is Fun and Challenging• Risk- is the chance that an investment’s value will decrease.• The greater the risk the greater the return. Those that are willing to take a greater risk will receive higher return.• The best method is to choose somewhere between high risk and no risk
Diversification• Diversification-spreading the risk among many types of investments, in other words don’t put all your eggs in one basket.• You want to spread your money in case on stock doesn’t work you won’t lose all your money.
Types of Risk• Interest-rate risk-is that the return on an investment will not keep up with inflation• Political risk-government actions that affect the business conditions.• Market risk-affects many types of investments at once, is caused by business declines, sudden national or world events, or interest rate fluctuations.• Company/industry risk-produced by the effects that affect only one company or industry.
Criteria for Choosing an Investment• Safety (minimal risk of loss)• High Liquidity (getting your money quickly)• High dividends or interest• Growth in value that exceeds inflation rate• Reasonable(low) purchase price (or initial cost)• Tax benefits (saving or postponing tax liability)
Wise Investment practices• Define your financial goals, clearly define goals that are specific and measurable• Go slowly, gather the information you need to make wise investment decisions• Follow through, Act on your important goals now,• Keep good records, in order to keep a clear view of your future goals• Seek good investment advice, don’t be afraid to ask questions• Keep investment knowledge current, keep up on current events and the financial markets.• Know your limits, understand your risk tolerance and the amount of money you can afford to risk.
Chapter 12: Investing in Stocks A lesson in Personal Finance
Characteristics of Stock• Stockholders-also known as shareholders, are the owners of the corporation• Dividends-are the part of the corporation’s profits that are paid to stockholders.• Capital Gain- this is an increase in the value of the stock above the price initially paid• Common Stock- stock that pays a variable dividend and gives the holder voting rights• Proxy-a written authorization to transfer his or her voting rights to someone else• Preferred Stock-the type of stock that pays a fixed dividend and carried no voting rights.
Classifying Stock investments• Income Stocks Vs. Growth stocks• Income stocks-stocks that have a consistent history of paying high dividends• Growth stocks-stocks in corporations that reinvest their profits into businesses so that they can grow
Continued• Less Established vs. Blue Chip Stocks• Less Established-stocks in young often small corporations that have higher overall risks.• Blue Chip-stocks of large well established corporation with a solid record of profitability
Continued• Defensive vs. Cyclical Stocks• Defensive- stock that remains stable and pays a dividend during an economic decline• Cyclical-stock that does well when the economy is stable or growing, but often do poorly during a recession.
Determining a Stocks Worth• Stock value• Par value-is an assigned dollar value to a stock• Market value-the price for which the stock is bought and sold in the marketplace
Stock Price: What to Consider• The Company• Interest rate Risk• The Market• Earnings per share
Types of markets• Securities exchange-marketplace where brokers who are representing investors meet to buy and sell securities• Over-the-counter-network of brokers who buy and sell securities of corporations that are not lister on a securities exchange
Continued• Bull Market-prolonged period of rising stock prices and the general feeling of investor optimism• Bear Market-prolonged period of falling stock prices and the general feeling of investor pessimism.
Short Term Techniques• Buy on Margin• Short Selling• See page 342