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C HAPTER 13. Investing Fundamentals. Personal Finance. 6e. Kapoor Dlabay Hughes. 13-1. Establishing Investment Goals. Financial goals should be specific and measurable so you know what you want to accomplish. Ask yourself.. What will you use the money for?
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CHAPTER13 Investing Fundamentals Personal Finance 6e Kapoor Dlabay Hughes 13-1
Establishing Investment Goals • Financial goals should be specific and measurable so you know what you want to accomplish. Ask yourself.. • What will you use the money for? • How much will you need? • How will you obtain it? • How long will it take you to obtain the money? • How much risk are you willing to assume? • Are goals reasonable and are you willing to sacrifice current consumption to invest? • What will happen if you don’t reach your goals? 13-2
Performing a Financial Checkup • Work to balance your budget. • Pay off high interest credit card debt first. • Provide adequate insurance protection. • Start an emergency fund you can access quickly. • Three to nine months of living expenses. • Have access to other sources of cash for emergencies. • Line of credit is a short-term loan approved before the money is needed. • Cash advance on your credit card. 13-3
Getting the Money Needed to Start an Investing Program • Prioritize your investment goals. How badly do you want to achieve them? • Pay yourself first. • Take advantage of employer-sponsored retirement programs. • Participate in elective savings programs. • Payroll deduction or electronic transfer. • Make extra effort to save one - two months/year. • Take advantage of gifts, inheritances, and windfalls. 13-4
Value of Long-Term Investing Programs • Many people don’t start investing because they only have a small amount to investbut.... • Small amounts invested regularly become large amounts over time. 13-5
Factors Affect the Choice of Investments • Safety and risk. • Safety in any investment means minimal risk of loss. • Speculative investments are high risk, and made to make a large profit in a short time. • Risk is uncertainty about an outcome. • Inflation risk. • Interest rate risk. • Business failure risk. • Market risk. 13-6
Investment Income • Safest investments include... • CDs. • Savings bonds. • T-bills. • Higher potential income investments include… • Municipal bonds. • Corporate bonds. • Preferred stocks. • Mutual funds. • Real estate rental property. 13-7
Investment Growth and Liquidity • Growth means in increase in value. • Common stock. • Growth stocks reinvest retained earnings. • Bonds, mutual funds and real estate. • Liquidity. • Ability to buy or sell an investment quickly without substantially affecting the investment’s value. 13-8
Investment Alternatives • Stock or equity financing. • Equity capital is provided by stockholders, who buy shares of a company’s stock. • Stockholders are owners and share in the success of the company. • A corporation is not required to repay the money obtained from the sale of stock. • They are under no legal obligation to pay dividends to stockholders. They may instead retain all or part of earnings. 13-9
Investment Alternatives (continued) • Corporate and government bonds. • A bond is a loan to a corporation, the federal government, or a municipality. • Bondholders receive periodic interest payments, and the principal they lent is repaid at maturity (1-30 years). • Bondholders can keep the bond until maturity or sell it to another investor. 13-10
Investment Alternatives (continued) • Mutual funds. • Investors’ money is pooled and invested by a professional fund manager. • You buy shares in the fund. • Provides diversification to reduce risk . • Funds range from conservative to extremely speculative. • Match your needs with a fund’s objective. 13-11
Investment Alternatives (continued) • Real Estate. • Buy property and sell it when it increases in value. • Location, location, location is important. • Before you buy property, consider… • Is the property priced competitively? • Why type of financing is available, if any? • How much are the taxes? • What is the condition of nearby buildings/houses? • Why are the present owners selling? • Could the property decrease in value? 13-12
Investment Alternatives (continued) • Other investment alternatives. • A speculative investment is a high-risk investment made in the cope of earning a relatively large profit in a short time. Typical speculative investments include: • Antiques and collectibles. • Options. • Derivatives. • Commodities. • Coins and stamps. • Precious metals and gemstones. 13-13
Investment Pyramid High risk CommoditiesJunk bondsOptions High Quality Rentalproperty Stocks Mutual funds Government Corporatebonds Utility stocks Securities Lowrisk MoneyMarket Savings Accounts CDs Cash 13-14
Factors That Reduce Investment Risk • Develop and implement a personal investment plan. • Establish realistic goals. • Determine the amount of money you need to obtain your goals. • Specify the amount of money you currently have available to fund your investments. • List investments you want to evaluate. • Evaluate risk and potential return. • Reduce possible investments to a reasonable number. • Choose at least two different investments. • Continue to evaluate your investment program. 13-15
The Role of a Financial Planer • A planner should have at least two years of training and pass a rigorous examination. • CFP and ChFC designations. • Ask how they are paid. • An hourly fee. • A sales commission. • Choose a planner carefully. • Ask about their training and experience. • Do they understand your goals and objectives? • Do they explain investment benefits and risks. 13-16
Your Role in the Investment Process • Evaluate potential investments. • Monitor the value of your investments. • Keep accurate and current records. • Be aware of tax considerations, including tax deferred and tax exempt investments. • Keep track of capital gains and losses, interest income, rental income, and dividends. • Cash dividends must be reported as income. • Dividends in the form of additional shares are generally not taxable. 13-17
Sources of Investment Information • The internet and online computer services. • Use a search engine such as Yahoo or Alta Vista to find information. • View sites such as finance.yahoo.com, quicken.com, and personalwealth.com. • Newspapers and news programs. • Business periodicals and government publications. • Corporate Reports. • Statistical Averages. • Investor Services and newsletters. 13-18