Student investment notes


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  • Personal saving rate was 10% in 1980 while in 2005 less than 1 % 1. People save & put in a bank 2. Businesses borrow savings 3. New plants & equipment are produced 4.New jobs available (get income!) 5. New goods & service are created What do we do with our savings? Invest it! So that we can pay for education, house, car, retirement, rainy days or hard times
  • Bond is like an IOU that pays interest (called a debt-related security because you are borrowing money) Buying and issuing bonds occurs in the bond markets
  • U.S. gov’t bonds (Treasury bonds usually issued to borrow money for spending) – when federal gov’t needs money they issue bonds (they are always safe b/c gov’t can just print more money or raise taxes if needed to pay back the loan at maturity) CONSIDERED RISK FREE BUT ALSO HAVE LOW YIELDS (low interest rates) Savings – low-denomination ($50 – 10,000) and used for public works projects Other gov’t bonds – differ by lengths of maturity & investment amount Municipal Bonds – raise funds for public projects like building of schools, bridges, & highways Considered a little more riskier but are attractive b/c interest earned is exempt from federal income taxes & state taxes Corporate – higher risk but higher possible return on bond because of bankruptcy threat Risk of buying corporate bond varies according to financial health of the corporation Interest earned on municipal bonds is tax free at federal, state, and local level Savings Bonds are usually lower value investments ($50 to $10,000) Treasury Bonds are more expensive investments and are exempt from state/local taxes ONLY
  • Standard & Poor’s & Moody’s publish bond issuers’ credit ratings Financial strength – ability to make future interest payments and its ability to repay the principal when the bond matures THE HIGHER (SAFER) THE RATING THE LOWER THE INTEREST RATE! Junk bonds – may give 12% interest compared to 8% of gov’t bond
  • Usually you can choose amount (low amount of $) and set the maturity date (this is great for a person who needs $ at certain time) Fixed interest rate & usually higher than a normal savings account
  • Stocks are shares of ownership, not debt security like a bond IN THIS CASE, WHEN CORP. ISSUE SHARES OF STOCKS THEY ARE NOT BORROWING MONEY, RATHER THEY ARE SELLING OWNERSHIP RIGHTS People sometimes invest in non-dividend paying stocks so they expect the price of the stock to rise as the company grows, therefore making their shares worth more over time RISKIER INVESTMENT THAN BONDS USUALLY BUT DEPENDS ON THE CORPORATIONS! Dividends are in the form of a dollar amount for each share owned (the more shares the higher the dividend) – usually holders reinvest dividends to buy more shares of stock then get more dividends over time! Also, the higher the profits, the higher the dividend! Not all companies issue dividends. Many use profits to reinvest in business, so people who invest in the non-dividend paying stocks are looking for capital gains
  • A lot of times have minimum # of shares to buy, and sell at a Net Asset Value (NAV) - The Net Asset Value (NAV) is the current price of a mutual fund, which is calculated at the end of each business day. It is the total value of the fund's assets minus its liabilities and divided by the total number of shares outstanding. It is similar to a stock's closing price for the day. Stock or bond (debt-related) mutual funds where there is a collection of securities chosen & managed by a group of professional fund managers Shares are bought & sold just like a stock Diversification – investing in wide variety of financial assets so as to reduce the risk of poor performance of one Each mutual fund has different goals – stock funds for growth & income from dividends & value appreciation while bond funds offer lower risks & money market funds are short term with higher interest rates than savings accounts but no FDIC insurance Compare funds to market index like S&P or Dow, if not getting same returns then may be not managed well enough
  • Capital vs. Money Market – capital is money lent for periods longer than a year and money market is less than a year Primary vs. Secondary Market – primary is not transferrable (can’t be sold off if needing money like savings bond) and secondary can be traded
  • Young person saving for retirement can lose more than someone who is already retired (has more time to recover)
  • “ Don’t put all of your eggs in one basket” = too great of a risk to only get one type of investment or put all money in one company with same maturity The goal is to reduce the risk of investing while still earning good retunrs
  • A brokerage is a company that buys & sells stocks & bonds for investors (brokers help investors to make & carry out their investment decisions)
  • lists the shares of more than 3,000 large companies, and has 1,400 seats or memberships with access to the trading floor. What is a Blue Chip stock? It is the stock of a large company that has a long history of stable operation and solid stock performance. A great example is General Electric.
  • National Association of Securities Dealers Automated Quotation (many new high tech companies that usually do not pay dividends) Nasdaq is still today sometimes called an OTC market, but has become more of an organized exchange over time Investors buy directly from dealer/broker who searches for other dealers/brokers on the OTC market for the best price
  • Federal agency created during Great Depression Makes sure firms release info in legal document, known as prospectus, that help investors to make informed decisions about whether to buy or sell What is the SEC? The Securities and Exchange Commission (SEC) is the government agency responsible for protecting investors by monitoring and regulating brokers, dealers, and the stock and bond markets in the U.S. They also make sure publicly-traded companies disclose the required business details to the public.
  • Sometimes trade after seconds or minutes!
  • What determines a stock's price? There are many factors that play into a stock's price. Overall, though, the price is determined by investors' perceptions of what the stock is worth. Important factors – how many shares are there? (small amount but profitable then worth more, if small & less profitable then shares are worth less) also expectations (if two companies are = but one has better future prospects then price is higher) Some of the biggest factors include:     How big and successful the company is (especially its earnings)     Recent company news     The state of the U.S. and world economies     Whether there is a bull or bear market     World events, whether good or bad
  • When people say “The stock market rose today”…. A market index measures the change in value of a group of stocks, bonds, or other investments compared to a specific starting point What is the Dow Jones or the DJIA? The Dow Jones Industrial Average (often referred to as the "Dow") is an averaged number representing the values of 30 U.S. "blue-chip" stocks. The DJIA is the most well-known market indicator in the world and was created in 1896 by Dow Jones & Company, which is actually a publicly-traded company (DJ) on the New York Stock Exchange (NYSE). They produce many important business publications including The Wall Street Journal, Barron's, and several stock indexes. Started with only closing price of 11-12 stocks What is the S&P 500? The S&P 500 is a stock index published by Standard & Poor's. It measures 500 U.S. stocks that are supposed to be representative of the overall stock market (choose stocks that represent certain industries as components of the economy). It was created in 1957. uses NYSE, AMEX, & OTC
  • Bull markets are good & have been most prevalent over bear market
  • Student investment notes

    1. 1. INVESTMENT <ul><li>Now…The good stuff! </li></ul><ul><li>But first…. </li></ul><ul><li>Why do people invest? </li></ul><ul><li>In what ways will you invest now or in your future? </li></ul><ul><li>What are the risks of investing? </li></ul>
    2. 2. <ul><li>1. People invest to make money off of their savings ! </li></ul><ul><li>2. This investment allows for… </li></ul><ul><ul><li>Consumers get loans to demand more things </li></ul></ul><ul><ul><li>Businesses to get loans to expand </li></ul></ul><ul><li>3. Eventually, our economy experiences ECONOMIC GROWTH </li></ul>Importance of Savings & Investment
    3. 3. <ul><li>Risk vs. Return </li></ul><ul><ul><li>= higher the risk, the higher possible return </li></ul></ul><ul><ul><li>= lower the risk, the lower the possible return </li></ul></ul>Risk & Return Relationship
    4. 4. Investment Everyone Has! <ul><li>Statement Savings Account </li></ul><ul><ul><li>deposit money in a bank and receive a monthly statement detailing your transactions </li></ul></ul><ul><ul><li>Easy access to funds </li></ul></ul><ul><ul><li>Low risk so low interest rates! </li></ul></ul>
    5. 5. What are my investment options?
    6. 6. <ul><li>Bonds – certificate issued in exchange for borrowed money plus interest </li></ul><ul><li>(essentially an IOU that pays interest) </li></ul><ul><li>Characteristics: </li></ul><ul><ul><li>Interest – money paid periodically in return for the use of borrowed funds </li></ul></ul><ul><ul><li>Maturity – the life of the bond or end of term of the investment </li></ul></ul><ul><ul><li>Principal – amount of borrowed money ( </li></ul></ul>#1: Bonds
    7. 7. <ul><li>Government Bonds </li></ul><ul><ul><li>Issued by the Federal Government </li></ul></ul><ul><ul><li>Savings bonds - they are purchased at half the face value and increase every 6 months until face value is reached </li></ul></ul><ul><ul><li>Treasury Bonds – certificates issued by U.S. Treasury in exchange for at least $1,000 and mature in 10+ years </li></ul></ul><ul><ul><li>All of these investments are the safest & most attractive because have no risk of default </li></ul></ul><ul><ul><li>These bonds usually have low interest rates = low returns </li></ul></ul><ul><li>Corporate Bonds </li></ul><ul><ul><li>Issued by corporations and are usually used for long-term investment </li></ul></ul><ul><ul><li>This is a riskier bond to invest in = businesses go bankrupt! </li></ul></ul><ul><li>Municipal Bonds </li></ul><ul><ul><li>Issued by state and local governments and are regarded as a safe, tax-exempt investment. </li></ul></ul>Types of Bonds
    8. 8. <ul><li>Bonds are rated on how “safe” the investment is </li></ul><ul><ul><li>Rating examines the issuer’s financial strength </li></ul></ul><ul><ul><li>Kind of like a credit check for those providing investments! </li></ul></ul><ul><li>Ratings range from… </li></ul><ul><ul><li>AAA to BBB are safest bonds </li></ul></ul><ul><ul><li>BB to D are riskiest bonds (called junk bonds) </li></ul></ul><ul><ul><li>Which will give you a better return? </li></ul></ul>Investors Need to Examine BOND RATINGS
    9. 9. #2: CDs <ul><li>Certificates of Deposit (CDs) </li></ul><ul><li>Deposits (also called time deposits) of money in bank that you earn interest on for a set period of time </li></ul><ul><li>You can take out your money earlier than maturity date, but you have to pay a PENALTY </li></ul><ul><li>Advantages- FDIC insured, choice of maturity date, & low cost! </li></ul>
    10. 10. #3: Stocks <ul><li>What are they? </li></ul><ul><ul><li>Stocks represent shares of ownership in a corporation </li></ul></ul><ul><li>Why issue stock? </li></ul><ul><ul><li>Corporations use stock to raise funds to expand their business </li></ul></ul><ul><li>How do investors make money by buying stocks? </li></ul><ul><ul><li>Two major ways of making money </li></ul></ul><ul><ul><ul><li>1. Capital gains – buy low, sell high (stock value appreciates) </li></ul></ul></ul><ul><ul><ul><li>2. Dividends - payments of portions of corporate profits to its stockholders </li></ul></ul></ul>
    11. 11. #4: Mutual Funds <ul><li>A mutual fund is a collection of investments chosen and managed by a group of professional fund managers </li></ul><ul><li>Advantages of Mutual Funds </li></ul><ul><ul><li>Your investment is diverse </li></ul></ul><ul><ul><li>A fund manager (so called expert) manages the investments so they do all of the research! </li></ul></ul><ul><ul><li>Your money is more safe because losses in the value of one stock can be made up by gains in the value of another stock </li></ul></ul>
    12. 12. Comparison of Different Investments <ul><li>You should understand the security’s… </li></ul><ul><ul><li>Risk Level : chance of losing money </li></ul></ul><ul><ul><li>Return Level : amount of money an investor receives above and beyond the sum of money that has been invested </li></ul></ul><ul><ul><li>Liquidity Level : ease and ability of investment to be used as or converted into cash </li></ul></ul>
    13. 13. Investment Decisions are Personal! <ul><li>Decisions should be based on… </li></ul><ul><ul><li>Investor’s Age </li></ul></ul><ul><ul><li>Risk Tolerance </li></ul></ul><ul><ul><li>Financial Goals </li></ul></ul>
    14. 14. Most Important Investment Advice <ul><li>“ Don’t put all your eggs in one basket!” </li></ul><ul><li>DQ: What does this quote mean? </li></ul><ul><li>Diversification – investing in a wide variety of investment so that your risk is diluted </li></ul><ul><li>Your goal should be to reduce the risk of investing while still earning good returns! </li></ul>
    15. 15. Financial Advisor Activity <ul><li>Consider… </li></ul><ul><ul><li>Risk level </li></ul></ul><ul><ul><li>Return level </li></ul></ul><ul><ul><li>Age </li></ul></ul><ul><ul><li>Liquidity level </li></ul></ul><ul><ul><li>Financial Goals </li></ul></ul><ul><ul><li>Type of return </li></ul></ul><ul><ul><li>Diversity of investments </li></ul></ul>
    16. 16. Wait…don’t corporations already raise money by issuing bonds? <ul><li>Yes, you’re right! Corporations use both bonds & stocks to raise money. But here are some differences between the two: </li></ul><ul><ul><li>Stocks represent ownership - Bonds represent debt </li></ul></ul><ul><ul><li>Stocks don’t have a fixed return rate – Bonds have a fixed return rate </li></ul></ul><ul><ul><li>Stocks do not have a maturity date – Bonds do have a maturity date </li></ul></ul>
    17. 17. The Stock Market
    18. 18. Investing in the Stock Market <ul><li>Who are stockholders/shareholders ? </li></ul><ul><ul><li>Investors who buy a company’s stock </li></ul></ul><ul><li>Who are stockbrokers ? </li></ul><ul><ul><li>People who help investors carry out their investment decisions </li></ul></ul><ul><li>Where can you invest? </li></ul><ul><ul><li>Most people enlist the help of a brokerage , a company that buys and sells securities for investors </li></ul></ul>
    19. 19. Stock Exchange – a market for buying and selling stock <ul><li>The New York Stock Exchange (NYSE) </li></ul><ul><ul><li>Physical Exchange located on Wall Street in NYC </li></ul></ul><ul><ul><li>Handles the exchange of over 2 billions shares of stock per day </li></ul></ul><ul><ul><li>One of the largest and most prestigious Stock Exchanges </li></ul></ul><ul><ul><li>Began in 1792 as outdoor exchange </li></ul></ul><ul><ul><li>Trades “ blue-chip” companies – those companies that have been the most profitable over time </li></ul></ul>
    20. 20. Stock Exchange <ul><li>NASDAQ </li></ul><ul><li>Stands for National Association of Securities Dealers Automated Quotation </li></ul><ul><li>Created in 1971 </li></ul><ul><li>largest American electronic exchange where trading is done through network of computers </li></ul><ul><li>Lists stock prices for about 3,800 companies </li></ul><ul><li>Many of these companies are high-tech </li></ul>
    21. 21. SEC <ul><li>The Securities and Exchange Commission regulates the stock market </li></ul><ul><ul><li>Goal: make sure all investors have access to the same financial information about firms issuing stock </li></ul></ul>
    22. 22. How Stock is Traded – DAY TRADING <ul><li>Buying and selling a particular stock in the same day! </li></ul><ul><li>Trader hopes to ride a rising stock’s momentum for a short time and sell the stock for a quick profit </li></ul><ul><li>Very risky practice </li></ul><ul><li>Traders usually move high volumes of stock </li></ul>
    23. 23. How Stock is Traded – INSIDER TRADING <ul><li>Occurs when an insider (person who owns a large portion of company or is employed there) trades on NON-PUBLIC information </li></ul><ul><li>This gives them an advantage over normal investors!!! </li></ul>
    24. 24. Stock Price Changes <ul><li>Stocks prices move because of investors’ perceptions of what a stock is worth </li></ul><ul><li>Perceptions influenced by: </li></ul><ul><ul><li>Company earnings </li></ul></ul><ul><ul><li>Expectations </li></ul></ul><ul><ul><li>Recent company news </li></ul></ul><ul><ul><li>State of the U.S. and world economy </li></ul></ul><ul><ul><li>Trends or World Events </li></ul></ul>
    25. 25. Measuring the Performance of the Market <ul><li>We use a market index </li></ul><ul><ul><li>Index measures changes in the value of a group of stocks, bonds, or other investments from a specific starting point </li></ul></ul><ul><li>So the index will tell us how well the market is doing as a whole! </li></ul>
    26. 26. Market Indices <ul><li>Dow-Jones Industrial Average (DJIA) </li></ul><ul><ul><li>Began in 1896 </li></ul></ul><ul><ul><li>Tracks the stock prices of 30 large U.S. corporations on NYSE in a variety of industries </li></ul></ul><ul><ul><li>Companies can be dropped & added </li></ul></ul><ul><li>Standard & Poor’s 500 (S&P 500) </li></ul><ul><ul><li>Began in 1957 </li></ul></ul><ul><ul><li>Tracks stock prices of 500 corporations in multiple exchanges </li></ul></ul><ul><li>Nasdaq Composite Index </li></ul><ul><ul><ul><li>Stock performance index that uses price changes of over 3,000 representative stocks from Nasdaq ONLY </li></ul></ul></ul>
    27. 27. <ul><li>BULL MARKET </li></ul><ul><ul><li>Market in which prices are rising </li></ul></ul><ul><li>BEAR MARKET </li></ul><ul><ul><li>Market in which prices are falling </li></ul></ul>Good vs. Bad Markets What type of market are we in now?