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Chapter 11 Notes

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  • MYPF 12/16/10 Chapter 11
  • Transcript

    • 1. Investing for the Future 11
    • 2. Investment Essentials
      • Personal Investing
        • The use of your savings to earn a financial return.
        • The overall objective is to earn money with money.
      SLIDE Chapter 11
    • 3.
      • Initial Savings / Beginning Investments should be conservative and low risk.
      • These investments can provide certain tax advantages.
        • Tax deductible
        • Tax deferred
        • Nontaxable
      • Beginning investments are permanent and should be maintained for the long term.
      SLIDE Chapter 11
    • 4. Types of Investments
      • Systematic investment : a type of permanent investment centering on retirement planning.
      • Speculative investment : a type of investment that is made in the hope of earning a relatively large profit in a short time.
      SLIDE Chapter 11
    • 5. Reasons for Investing
      • Investing is an important part of personal financial management.
      • An investment program should begin with an emergency fund.
      • An emergency fund is a certain amount of money that can be obtained quickly in case of immediate need.
      SLIDE Chapter 11
    • 6. Other Reasons to Invest
      • To supplement earned income
      • To make a profit
      • To minimize tax burdens now and in the future
      • To provide income for retirement
      • To stay ahead of inflation
      SLIDE Chapter 11
    • 7. Investing Helps Beat Inflation
      • Inflation is a rise in the general level of prices.
      • Inflation reduces purchasing power over time.
        • As prices rise, it takes more money to buy the same goods and services.
      • Investors seek investments that will grow faster than the inflation rate.
      SLIDE Chapter 11
    • 8.
      • At retirement, people need to have more income than social security or retirement benefits will provide.
      • The chief difference among investments is how fast growth occurs.
      • The greatest opportunity for growth is an investment in common stock.
      • One of the safest investments, such as a certificate of deposit, provides a predictable but limited growth potential.
      SLIDE Chapter 11
    • 9. Rule of 72
      • The Rule of 72 is a technique for estimating the number of years required to double your money at a given rate of return.
        • Divide the percentage rate of return into 72 to estimate how long it will take to double your money.
        • For example, if an investment is yielding an average of 6 percent, it will take 12 years to double your money (72 ÷ 6).
      SLIDE Chapter 11
    • 10. 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 in a savings account.
      • When you invest in stocks and bonds, you are participating in helping businesses make and sell new products and services.
      • You will be rewarded with dividends and interest.
      SLIDE Chapter 11
    • 11. Investing Is Fun and Challenging
      • Investors make choices and hope to pick winners.
      • Once you gain experience, you can have fun choosing investments, buying and selling when the time is right, and using your knowledge to plan for your financial security.
      SLIDE Chapter 11
    • 12. Risk and Return
      • Risk in an investment means a measure of uncertainty about the outcome.
      • Safety in an investment means minimal risk of loss.
      • One way to minimize risk is through diversification.
      SLIDE Chapter 11
    • 13. Diversification
      • Diversification is the spreading of risk among many types of investments.
      • Diversification reduces overall risk because not all of your choices will perform poorly at the same time.
      • If one choice does not do well, the others will likely make up some or all of the loss.
      SLIDE Chapter 11
    • 14. Types of Risk
      • Short-Term and Long-Term Risk
        • Short-term are less risky than long-term
      • Inflation and Interest Rate Risk
        • Inflation makes your fixed-rate investments worth less because they are “locked in” at lower rates of interest
      SLIDE Chapter 11
    • 15. Types of Risk
      • Political Risk
        • Government actions that affect business conditions.
        • Examples: increased taxes; environmental regulations
      • Market Risk
        • Caused by business declines, sudden national or world events or interest rate fluctuations
      SLIDE Chapter 11
    • 16. Investment Strategies
      • Many individuals never start an investment program because they think they don’t have enough money.
      • But even small sums of money grow over time.
      • To achieve financial security, start investing as soon as you can and continue to invest over your lifetime.
      SLIDE Chapter 11
    • 17. Criteria for Choosing an Investment
      • Degree of safety (minimal risk of loss)
      • Degree of liquidity
      • High return (investment income)
      • Expected growth in value that exceeds the inflation rate
      • Reasonable purchase price and fees
      • Tax benefits
      SLIDE Chapter 11
    • 18. Wise Investment Practices
      • Define your financial goals.
      • Go slowly.
      • Follow through.
      • Keep good records.
      • Seek good investment advice.
      • Keep investment knowledge current.
      SLIDE Chapter 11
    • 19. Sources of Financial Information
      • Newspapers
      • Investor services and newsletters
      • Financial magazines
      • Brokers
      • Financial advisers
      • Annual reports
      • Online investor education
      SLIDE Chapter 11
    • 20. Annual Reports
      • An annual report is a summary of a corporation’s financial results for the year and its prospects for the future.
      • The Securities and Exchange Commission (SEC) requires all public corporations to prepare this report each year and send it to their stockholders.
      • Investors can use the information contained in the report to evaluate the corporation as an investment prospect.
      • Where to get annual reports
        • Online at the SEC web site
        • Company web sites
        • Libraries
      SLIDE Chapter 11
    • 21. Stocks
      • Stock represents ownership in a corporation.
      • A share of stock is a unit of ownership.
      • The owner of stock is called a stockholder.
        • Receive a stock certificate which is evidence of ownership
      SLIDE Chapter 11
    • 22. Bonds
      • Bonds are debt obligations of corporations (corporate bonds) or governments (municipal bonds).
      • Owners are paid a fixed amount of money, called interest, at a fixed interval.
      • The principal , or amount borrowed, must be repaid at maturity
      • The maturity date of a bond is the date on which the borrowed money must be repaid.
      SLIDE Chapter 11
    • 23.
      • U.S. Government Savings Bonds
        • When you buy a savings bond, you are lending money to the U. S. government.
        • A discount bond is purchased for less than the maturity value.
          • A $50 bond is purchased for $25.
          • At maturity, you receive the full value of the bond.
          • The difference between the purchase price and maturity value is the amount of interest earned.
      SLIDE Chapter 11
    • 24.
      • Treasury Securities
        • U.S. Treasury bills (called T-bills) are available in denominations of $10,000, then in increments of $5,000.
        • A Treasury bill is for one year or less
      • Mutual funds
        • A mutual fund is the pooling of money from many investors to buy a large selection of securities.
      • Real Estate
        • Investment in houses and/or land
        • Good protection against inflation
      SLIDE Chapter 11
    • 25.
      • Annuities
        • An annuity is a contract that provides the investor with a series of regular payments, usually after retirement.
        • You receive income monthly, with payments to continue as long as you live.
        • You usually purchase an annuity contract from a life insurance company.
        • Taxes are deferred until a person receives payments
        • Payments are used to supplement income
        • Opposite of life insurance—you collect while you are alive.
      SLIDE Chapter 11
    • 26.
      • IRA
        • Individual Retirement Account
        • A savings plan where you set aside a certain amount of money each year for retirement.
        • The advantage is that the money invested in an IRA is deductible from gross income on your federal income tax return.
        • You will pay taxes when you start withdrawing funds at age 59 ½ or older.
          • You will then be in a lower tax bracket.
      • Keogh
        • An IRA for the self-employed.
      SLIDE Chapter 11
    • 27. Collectibles
      • Collectibles include:
        • Coins
        • Art
        • Memorabilia
        • Ceramics
      • The market for collectibles fluctuates.
        • If you collect an item that goes up in value, you can reap large rewards by selling.
        • Collectibles gain value when interest is high and lose value when interest is low.
      SLIDE Chapter 11

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