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HUSC 3366 Chapter 11 Investing Fundamentals
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HUSC 3366 Chapter 11 Investing Fundamentals

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Fundamentals of Family Financial Planning Course PowerPoint Lectures

Fundamentals of Family Financial Planning Course PowerPoint Lectures

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HUSC 3366 Chapter 11 Investing Fundamentals HUSC 3366 Chapter 11 Investing Fundamentals Presentation Transcript

  • Investing Fundamentals Chapter 11 Department of Human Sciences Univ of Arkansas at Pine Bluff
  • 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?
    13-2 Department of Human Sciences Univ of Arkansas at Pine Bluff
  • Establishing Investment Goals
    • 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 you meet your investment goals?
    • What will the consequences be if you don’t reach your investment goals?
    13-3 (continued) Department of Human Sciences Univ of Arkansas at Pine Bluff
  • Performing a Financial Checkup
    • Work to balance your budget.
      • Do you regularly spend more than you make?
    • Pay off high interest credit card debt first.
    • Obtain adequate insurance protection.
    • 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.
    13-4 Department of Human Sciences Univ of Arkansas at Pine Bluff
  • Getting the Money Needed to Start an Investing Program
    • Pay yourself first.
    • Take advantage of employer- sponsored retirement programs.
    • 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.
    13-5 Department of Human Sciences Univ of Arkansas at Pine Bluff
  • The Value of Long-Term Investing Programs
    • Many people don’t start investing because they only have a small amount to invest, but....
    • Even small amounts invested regularly grow over a long period of time.
    • If you save $2,000 each year at 5%, you would have $241,600 at the end of 40 years. The higher the rate of return the greater the risk.
    13-6 Department of Human Sciences Univ of Arkansas at Pine Bluff
  • Factors Affecting the Choice of Investments
    • Safety and risk.
      • Safety in any investment means minimal risk of loss.
      • Risk means a measure of uncertainty about the outcome.
      • Investments range from very safe to very risky.
      • The potential return on any investment should be directly related to the risk the investor assumes.
      • Speculative investments are high risk.
    13-7 Department of Human Sciences Univ of Arkansas at Pine Bluff
  • Five 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.
    • Market risk - prices fluctuate because of behaviors of investors.
    • Global investment risk - changes in currency affect the return on your investment.
    13-8 Department of Human Sciences Univ of Arkansas at Pine Bluff
  • Investment Income
    • Safest investments – predictable income.
      • Savings accounts and certificates of deposit.
      • U.S. savings bonds.
      • United States treasury bills.
    • Higher potential income investments include…
      • Municipal bonds.
      • Corporate bonds.
      • Preferred stocks and income common stocks.
      • Income mutual funds.
      • Real estate rental property.
    13-9 Department of Human Sciences Univ of Arkansas at Pine Bluff
  • Investment Growth and Liquidity
    • Growth means investment will increase in value.
      • Common stock.
      • Growth companies pay little or no dividends, but reinvest in the company
      • Mutual funds real estate offer growth potential.
      • Gemstones and collectibles - more speculative.
    • 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.
    13-10 Department of Human Sciences Univ of Arkansas at Pine Bluff
  • Asset Allocation and Diversification
    • Asset allocation is the process of spreading your assets among several different types of investments, usually by percentage, to lessen risk.
    • Determine what percent you want in stock, bonds, CDs, and mutual funds based on your time frame, age, and tolerance for risk.
    • Investing in different asset classes provides diversification.
    • Younger investors generally should put a larger percentage in growth-oriented investments.
    13-11 Department of Human Sciences Univ of Arkansas at Pine Bluff
  • Investment Alternatives - Stock
    • 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.
      • They are under no legal obligation to pay dividends to stockholders. They may instead retain all or part of earnings.
    13-12 Department of Human Sciences Univ of Arkansas at Pine Bluff
  • Investment Alternatives - Bonds
    • 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.
    13-13 Department of Human Sciences Univ of Arkansas at Pine Bluff
  • Investment Alternatives – Mutual Funds
    • 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.
    13-14 Department of Human Sciences Univ of Arkansas at Pine Bluff
  • Investment Alternatives - 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.
    13-15 Department of Human Sciences Univ of Arkansas at Pine Bluff
  • Investment Alternatives - Real Estate
    • Before you buy real estate...
      • Is the property priced competitively?
      • Why type of financing is available, if any?
      • 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?
    13-16 (continued) Department of Human Sciences Univ of Arkansas at Pine Bluff
  • Investment Alternatives - Other
    • 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.
        • Options.
        • Commodities.
        • Coins and stamps.
        • Precious metals and gemstones.
    (continued) 13-17 Department of Human Sciences Univ of Arkansas at Pine Bluff
  • A Personal Investment Plan
    • 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.
    13-18 Department of Human Sciences Univ of Arkansas at Pine Bluff
  • Your Role in the Investment Process
    • Evaluate potential investments.
    • Seek the assistance of a financial planner (see Appendix at the back of the text).
    • Monitor the value of your investments.
    • Keep accurate and current records.
    • Consider the tax consequences of selling your investments.
    13-19 Department of Human Sciences Univ of Arkansas at Pine Bluff
  • Sources of Investment Information
    • The internet.
      • A wealth of investment information is available.
      • View sites such as www.fool.com , www.cnn.com , and www.money.com
    • Newspapers and news programs.
    • Business periodicals such as Smart Money and government publications.
    • Corporate Reports.
    • Investor services and newsletters, such as ValueLine or Morningstar.
    13-20 Department of Human Sciences Univ of Arkansas at Pine Bluff