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Fundamentals of Investing. Dr. John P. Abraham Professor UTPA. Investing goals. Preserve capital Increase in value Agents: financial institutions (banks, insurance companies) and financial markets (forums where suppliers and buyers are brought together).
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Fundamentals of Investing Dr. John P. Abraham Professor UTPA
Investing goals • Preserve capital • Increase in value • Agents: • financial institutions (banks, insurance companies) and financial markets (forums where suppliers and buyers are brought together). • Agents can be: government, business or individuals.
Government • Federal, state and local all require vast sums of money. • Borrow money to finance projects: war, buildings, schools, housing, bridges, etc. • They may loan surplus money for short term.
Business & Individuals • Borrow and loan funds
Security • Easy to buy and sell • Investments • Evidence of ownership in a business • Legal right to acquire or sell an ownership interest in a business • Bonds, stocks, and options • Direct investment or indirect investment • Direct – buy security • Indirect – own a share in a company that buys securities.
Property • Difficult to buy and sell • Real estate • Land, building • Tangible personal property • Gold, collectibles • Usually long term (longer than one year)
Steps in Investing • Carefully developed plan to achieve specific financial goal. • Must have living expenses, savings for emergency before investing. • Goal of investing: • Example in 3 years accumulate down payment for a house. • Selecting investments
Portfolio • Collection of investments assembled to meet goals. • Diversification • Limit risk and maximize returns • Managing portfolio • Selling, buying, rebalancing • Short tem CDs, money market, T-bills • Fixed income securities such as bonds and preferred stocks.
Stocks • Common stock • Represents ownership in a corporation • May yield dividends • Capital gain • Preferred stock • Ownership in a corporation with a stated dividend rate. (preference over common stock). • Convertible securities. Bond or preferred stock that may be converted to a specified number of shares of common stock.
Options • Provide investor with an opportunity to sell or buy an underlying security at a specified price within a given period of time. • Good in a volatile market. • Call is an option to buy • Put is an option to sell.
Mutual Funds • Professionally managed diversified portfolio of securities.
Real Estate • Commercial • Residential
IRA, SEP-IRA, ROTH-IRA & 401/403K • Tax sheltered • Pay tax up front and let it earn taxfree • Don’t pay tax up front, let earn, pay taxes when your income is low.
Investment Markets • IPO – initial public offering • sell directly as in case of Google • Sell through an investment banker (Goldman Sachs or Solomon brothers) • Buy stocks at a fixed price (discount price) and take risk of selling it (this is called underwriting). • Secondary market • After the initial offering, stock may be traded at secondary markets.
Secondary markets • Organized Securities and Exchanges • New York Stock Exchange NYSE • American Stock Exchange AMEX • Nasdaq (National association of securities dealers automated quotation) used to be main OTC. • Options exchanges • Futures Exchanges • Over the counter market • Sold over telecommunication network. Unlisted securities. • Foreign Securities Markets (ADR – american depositary receipts)
Things to Know • Insider trading • Bull market • Bear market • Market crash • Types of account • Single or joint, cash or margin • Types of orders • Market or limit • Stop loss order
In declining market • Short selling • Investors sell stocks they don’t have (borrowed selling) – borrowed from broker. • Must be purchased eventually
Practical Investment guide • Making a budget • Savings • Real Estate • Home • Rentals • Stocks • Bonds
Making a budget(live within your means) • Budget is a plan • Must be realistic • Must be mutually agreed upon (if married) • Must adhere to it as much as possible • Goal is to remain under budget in spending • And over budget in income • My advice: borrowing money is bad. • Using credit card is even worse – if you do not pay off entire amount each month.
Savings • The best time to save is when you get your first real job. Do not raise your standard of living immediately; instead save. • Minimum savings: • Enough to live for 3 to 6 months if you lost your job. • Enough to pay for a down payment on a house and a car.
Savings in buying • Don’t buy anything unless you have daily or periodic use for it. • Don’t be an impulsive buyer. Buy items on your buy list. • Find different devices that will do the same job, you may be able to save as much as 80% or more. • As much as possible, buy things that are on sale without sacrificing quality (moldy bread at deep discount is useless!)
Real estate • First investment should be a place to live. • Renting vs. buying (show calculation) • Only time borrowing is allowed (my opinion) • You are paying with cheaper money while your home is appreciating. • Government is subsidizing your interest.
Real Estate Investments • Positives • Appreciation • Tenants pay your loans • Negatives • May have negative cash flow • May be vacant • Not liquid
Land vs. income producing • Land in the right location will bring profits many fold. • Must pay (in my opinion) cash – no loans. • Income producing – you can borrow. • You need to do most of the repair & maintenance work.
