Investing Fundamentals -arti pradhan
Learning Objectives <ul><li>Describe why you should establish an investment program </li></ul><ul><li>Assess how safety, r...
Preparing for an Investment Program   <ul><li>Objective 1:  Describe why you should establish an investment program </li><...
Preparing for an Investment Program <ul><li>Objective 1:  Describe why you should establish an investment program </li></u...
Preparing for an Investment Program   (continued) <ul><ul><li>What possible economic or personal conditions could alter yo...
Preparing for an Investment Program   (continued)   <ul><li>PERFORMING A FINANCIAL CHECKUP </li></ul><ul><li>Work to balan...
Preparing for an Investment Program   (continued)   <ul><li>GETTING THE MONEY NEEDED TO START AN INVESTMENT PROGRAM </li><...
Preparing for an Investment Program   (continued)   <ul><li>The value of long term investment program </li></ul><ul><li>Af...
Preparing for an Investment Program   (continued)   <ul><li>The value of long term investment program </li></ul><ul><li>Af...
Preparing for an Investment Program   (continued)   <ul><li>The value of long term investment program </li></ul><ul><li>Af...
Preparing for an Investment Program   (continued)   <ul><li>The value of long term investment program </li></ul><ul><li>Af...
Preparing for an Investment Program   (continued)   <ul><li>Comparison: </li></ul><ul><li>Rs. 200, 6%, 10 years    32,775...
Factors Affecting the  Choice of Investments <ul><li>Objective 2:  Assess how safety, risk, income, growth, and liquidity ...
Factors Affecting the  Choice of Investments Company A Company B
Factors Affecting the Choice of Investments <ul><li>To get a general idea of a stock’s price variability, we could look at...
Factors Affecting the Choice of Investments <ul><ul><li>Investments range from very safe to very risky </li></ul></ul><ul>...
Factors Affecting the  Choice of Investments <ul><ul><li>The potential return on any investment should be directly related...
Factors Affecting the  Choice of Investments (continued)
Factors Affecting the  Choice of Investments  (continued) <ul><li>Calculate return on an investment </li></ul><ul><li>Rate...
Factors Affecting the  Choice of Investments  (continued) <ul><li>COMPONENTS OF THE RISK FACTOR </li></ul><ul><li>Inflatio...
Factors Affecting the  Choice of Investments  (continued) <ul><li>INVESTMENT INCOME </li></ul><ul><li>Safest investments –...
Factors Affecting the  Choice of Investments  (continued) <ul><li>INVESTMENT GROWTH </li></ul><ul><li>Growth means investm...
Asset Allocation and Investment Alternatives   <ul><ul><li>Asset Allocation </li></ul></ul><ul><ul><ul><li>The process of ...
Asset Allocation and Investment Alternatives   (contined)
Asset Allocation and Investment Alternatives   (contined) <ul><ul><li>Time Factor </li></ul></ul><ul><ul><ul><li>The longe...
Asset Allocation and Investment Alternatives <ul><li>Investment alternatives </li></ul><ul><li>Stock or equity financing <...
Asset Allocation and Investment Alternatives   (continued) <ul><li>CORPORATE AND GOVERNMENT BONDS </li></ul><ul><li>A bond...
Asset Allocation and Investment Alternatives   (continued) <ul><li>Mutual funds </li></ul><ul><ul><li>Investors’ money is ...
Asset Allocation and Investment Alternatives   (continued) <ul><li>REAL ESTATE </li></ul><ul><li>The goal of a real estate...
Asset Allocation and Investment Alternatives   (continued) <ul><li>OTHER SPECULATIVE INVESTMENTS </li></ul><ul><li>Specula...
A Personal Plan for Investing   <ul><li>Establish realistic goals </li></ul><ul><li>Determine the amount of money needed t...
Factors that Reduce Investment Risk <ul><li>Objective 4:  Recognize the importance of your role in a personal investment p...
Sources of Investment Information <ul><li>Objective 5:  Use the various sources of financial information that can reduce r...
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Chapter ii extended

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

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