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Basic Investing Concepts

Basic Investing Concepts. Stages of Investing. Stages of Investing. In Stage 4: Strategic Investing you carefully manage investment alternatives to maximize growth of your portfolio Collection of investments . Risk and Return. Investing risk- chance that an investment’s value will decrease

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Basic Investing Concepts

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  1. Basic Investing Concepts

  2. Stages of Investing

  3. Stages of Investing • In Stage 4: Strategic Investing you carefully manage investment alternatives to maximize growth of your portfolio • Collection of investments

  4. Risk and Return • Investing risk- chance that an investment’s value will decrease • The greater the risk the greater the potential return

  5. Diversification • Spreading of risk among many types of investments • Stocks, bonds, real estate • Low risk stocks to balance high risk • Minimizes risk

  6. Types of Risk • Interest-Rate risk- chance that inflation will rise faster than the return on your investments • Inflation makes your fixed-rate investments worth less because they are “locked in” at lower rates • Political risk- actions the government might take that would reduce the value of your investment

  7. Types of Risk • Market risk- caused by the business cycle– periods of economic growth or decline • Nonmarket risk- unrelated to market trends; unpredictable and uncontrollable • Terrorism threats, people change their behavior and want to protect themselves

  8. Types of Risk • Company risk- associated with owning one company’s stock, if the company fails you lose investment • Industry risk- affects groups of businesses • If you invest in the candy industry, a nationwide trend toward dieting or avoidance of sugar would negatively affect the value

  9. Criteria for Choosing an Investment • Degree of safety • Degree of liquidity • Expected dividends or interest • Expected growth in value • Reasonable purchase price and fees • Tax benefits

  10. Wise Investment Practices • Define your financial goals • Go slowly • Temporary investments • Follow through • Permanent investments • Keep good records • Seek good investment advice • Keep investment knowledge current • Know your limits

  11. Making Investment choices

  12. Sources of Financial Information • Newspapers • Financial pages of your local newspaper • Wall Street Journal • Investor Services and Newsletters • Financial Magazines • Business Week, Forbes, Money, Fortune, Kiplinger’s Personal Finance, The Economist • Brokers • Financial Advisers • Annual Reports • Online Investor Education

  13. Broker vs Financial Advisers • Full service- provide clients with analysis and opinions based on their judgments • Merrill Lynch, Fidelity Investments, American Express • Discount- buy and sell securities at a reduced commission • For people who are well informed and know what they want to buy and sell • E*Trade, Charles Schwab • Certified Financial Planner (CFP) • Trained to give investment advice based on your goals, age, lifestyle, and other factors.

  14. Investment Choices • Low Risk/Low Return • Medium Risk/Medium Return • High Risk/High Return

  15. Investment Choices

  16. Low Risk/ Low Return • Good for first investments • Safe • Low return • Include in diversified portfolio

  17. Low Risk/ Low Return • Bonds • Debt obligations of corporations (corporate bonds) or state or local governments (municipal bonds) • IOU • Earn interest • Repay amount borrowed at maturity • U.S. Government Savings Bonds • Series EE- discount bond, purchased for less than the maturity value (half) • Series I- sold at face value and earn interest for up to 30 years, designed for investors wanting to protect against inflation

  18. Low Risk/ Low Return • Treasury Securities • U.S. Treasury Bills- short term • U.S. Treasury Notes- matures in 2,5, or 10 years • U.S. Treasury Bonds- interest paid every 6 months and matures in 30 years

  19. Medium Risk/ Medium Return • Once you have additional money to invest • Increase return • Investing with companies that manage the investment

  20. Medium Risk/ Medium Return • Stocks • Unit of ownership in a corporation • Stock certificate is evidence of ownership • Stockholders share in corporation’s profits called dividends • Riskier than savings bonds, earnings go up or down depending on company’s profits • Investing in well-established companies are safe • Less-stable company= risky investment

  21. Medium Risk/ Medium Return • Mutual Funds • Pooling of money from many investors to buy a large selection of securities • Professionally managed • Allows for portfolio diversification • Annuities • Contract that provides the investor with a series of regular payments, after retirement • Opposite of life insurance • Real Estate • Large, non-liquid investment of cash • Houses and land

  22. High Risk/ High Return • Futures- contracts to buy and sell commodities or stocks for a specified price on a specified date in the future • Options- right, not obligation, to buy or sell a commodity or stock for a specified price within a specified period of time • Penny stocks- are low-priced stocks of small companies that no track record • Collectibles- coins, art, memorabilia, ceramics, or other items popular at the time

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