1 Chapter 13 Investments. 2 Section 13.1 Investment Strategies Objectives Explain factors to consider when evaluating investments; Describe principles.

1

Chapter 13

Investments

2

Section 13.1Investment Strategies

• Objectives• Explain factors to consider when evaluating investments;• Describe principles for investing wisely; and• Identify ways to learn more about investing.

3

 Investing - means putting money to work so that it makes even

more money for you over time Basic Characteristics to Evaluate Investments

•Return - income that an investment producesPay returns at regular intervals Sell an investment for a profitTax advantage

4

Basic Characteristics to Evaluate Investments Continued

•Liquidity - ease of which assets can be converted to cash

•Volatility - degree to which an investment’s return or value may change (Figure 13-1)

•Risk - possibility of variation in the return on your investment; investments do not come with guarantees

Conservative – lower risk, lower returnsRelated to Volatility and LiquidityInflation

5

Principles of Investing Continued

 1. Identify Your Objectives

• Amount you can afford to invest

• Timeline Shorter – less risk; lower returns Longer – more volatile; higher risk; potential for

better returns

• More than one goal

6

Principles of Investing Continued

 2. Focus on a Strategy

• Income – pay relatively dependable returns at regular intervals

• Growth – put money into investment that may not pay now, but will grow in value in time

• Tax reduction

7

Principles of Investing Continued

 3. Diversify your Investments – invest in a variety of

investments to reduce your risk

• Portfolio – collection of investments that is diversified and well balanced

• Asset Allocation – percentage of your portfolio for each type of investment

8

Learning About Investing

• Reliable media sources – books, magazines, newspapers, radio, TV shows, websites

• Courses in financial planning – credit and noncredit courses

• Investment clubs – group of people who meet regularly to learn about investing and to make

investments together Pool money, share risks and rewards, split task of

researching investments, vote, experience investors help new investors NAIC

9

• Professional advisors – banks, brokerage firms, and independent financial planners

Check credentials Evaluate the advice Decide how you want to invest your money

10

Section 13.2Retirement Planning

Objectives• Compare and contrast investment options designed for retirement planning; and

• Explain the need to take an active role in retirement planning.

11

 Social Security Retirement Benefits

• Administered by the federal government• Funded through a tax paid by citizens who are currently

working

Benefits are influenced by:• How long you work• Earned income• Age at which you apply

Earliest you can apply is 67, applying early will reduce benefits

12

Pension Plans – retirement plan offered to a company’s employees

• Both contribute, not taxed until employee draws on the account Defined-benefit plan: (Not Common) employer

assumes all risk; employer pays retiring employee a specific amount each month based on salary history and years of employment

Defined-contribution plan: employee assumes all risk; employee chooses to contribute into a retirement fund that is invested on their behalf. Employers may contribute.

13

401 (K) Plans – type of defined-contribution pension plan to which employee contributes on a pretax basis. • By having a percentage of your pay put into the plan, you

reduce the amount of income that is subject to tax

• Some employers will match up to a certain percentage• 59 ½• If you leave, you can transfer benefits into another

retirement plan• Vested - entitled to keep plan benefits; must work with

company for a certain number of years to become fully vested

14

Other Defined-Contribution Plans

• Profit-sharing plan – employer allocates a portion of the company’s annual profits to each

participating employee; added - incentive to work toward achieving company’s goal

• Employee Stock Ownership Plan (ESOP) – give participants shares of stock in the company; may not sell until you leave company or retire; disadvantage – not diversified

15

Personal Investments

• Individual Retirement Accounts (IRA) – personal savings plan that enables workers to set aside money for retirement; limited by law to specific dollar amount Traditional – Tax-deductible; taxed when

withdrawn; made up to 70 1/2 & withdrawals must begin; prior to 59 ½ subject to penalties

Roth – not tax-deductible, but earnings are tax-free; can make tax free withdrawals after 5 yrs, if 59 ½ or can use the money to become first time home owner

16

Personal Investments Continued

• Keogh Plans – is a federally approved, defined-contribution, tax-deferred retirement plan designed specifically for self-employed people. Early withdrawals are subject to penalties.

17

Taking Charge of Retirement Planning

• Start Early Final balance in your retirement account is

determined not so much by the total amount invested, but by the number of years the investment is allowed to grow.

• Review Your Plan Regularly Set your goals

When to retire? How much of your income? How long this income will need to last?

18

Taking Charge of Retirement Planning Continued

• Make estimates and calculations. Using calculations will allow you to determine if you

need other sources of income to live after retirement

• Adjust your plan if needed Set aside more if needed for a higher return on your

investment

19

Objectives• Explain basic concept of stock ownership and the stock market;• Evaluate the risks involved in stock ownership; and• Describe how to research stocks.

Section 13.3The Stock Market

20

 Stock Market BasicsCompany sells stock instead of borrowing money from a bank.

Stock – ownership interest in the corporationShares – individual units of ownership, available for purchaseShareholders – investors who purchase shares, part owners

21

How Stocks are Traded

• Initial public offering – when first put on market to sell, it’s offered by company

• Stock market – organized trading of stocks, like an auction

• Stock exchange – central location where stocks are sold on a trading floor; Wall Street – New

York Stock Exchange (NYSE); American Stock Exchange (AMEX)

• Listed - meet requirements for being traded on a particular stock exchange

• Over the Counter Stocks – not listed; NASDAQ (list stocks) not sold on trading floor, traded

over phone or Internet

22

Regulating the Stock Market – Securities and Exchange Commission (SEC) federal agency that protects interests of investors by regulating stock exchanges, OTC stocks, investment advisors, any companies financial records

  Returns on Stocks

• Dividends – payment to shareholders that represents a part of the company’s net profits; usually

paid 4 times a year in a check or more stock shares

• Capital gains or losses – buy low sell high = gain; buy high sell low = loss

23

Working with a Stockbroker (individual or firm that will buy & sell stock for clients according to their instructions)• Full service – provide investment advice in addition to

handling stock transactions• Discount brokers – offer basic service and less expensive• Internet – make trades; research materials

Other Ways to Buy Stock• 401 K – partially or fully invest in stocks• ESOP • Mutual Funds• Direct stock plan – buy directly from company; fee less

than broker

24

The Risks of Owning Stocks - volatility

Why Stock Prices Change - number of people who want to own stock, supply and demand

• The company’s health – well managed and business thriving

• Industry trends – new federal regulations that impose on business

• Economic factors – low interest, during recession stocks fall

• National and world events – election of new leaders, trade legislation, war

25

Tracking the Stock Market

• NASDAQ Composite Index – 5,000 domestic stocks• Dow Jones Industrial Average – 30 industries: financial

services, technology, retail, entertainment, and consumer goods

• Standard & Poor’s 500 – 500 prominent industrial, transportation, financial, and utility stocks

26

Types of Stock and Their Risks

• Common stock – entitles shareholders to vote on any matter affecting the company; dividends

vary, increasing risk and potential return• Preferred stock – no voting rights; has less risk because

dividend rate is fixed• Blue chip – low in risk because company has proven

track record of reliable earnings and dividends

• Growth stocks – new and innovative companies that are growing – risky

• Penny stocks - less than a dollar a share, high risk-should be avoided

27

Minimizing the Risks

• Long term investment – don’t invest money that you’ll need in five years, over ten year period-

stocks offer higher return than any other form of investment

• Diversify portfolio – not just companies, but industries• Research • Don’t worry about day-to-day up and downs – ride out

short-term volatility

28

Researching Stocks

• First hand experience - Have you used their product? Did you like it?

• Company’s annual report – look on website; shows goal and results plus financial data

• Stock quotes – ticker symbol uniquely identifies each stock

• Read business magazines and newspapers

29

Section 13.4Other Investments

Objectives• Distinguish between different types of bonds;• Explain the advantages of mutual funds;• Describe insurance investment products; and• Evaluate the risks of investing in real estate, commodities, and

collectibles.

30

 Bonds - corporation and government can obtain funds by issuing

certificates of debts

• Issue bond – borrow money• Buy bond – invest money and receives original

investment plus additional amount by a certain date = maturity date

31

Types of Bonds

1. Savings bonds – very safe; thought of as a form of savings instead of investment

2. Treasury securities – Guaranteed by U.S. government, not taxed; auctioned like stocks (Figure

13-16)

3. Municipal bonds - issued by local and state government; federal tax free and maybe state and local

taxes

4. Corporate bonds – minimum $1000; higher rate than government bond, but riskier

32

Bond Ratings – S & P’s Rating Service & Moody’s Investor Service • Rate the issuer’s ability to repay the debt with interest• Rate from AAA (highest) to Aaa (lowest) risk• Highest = investment-grade bonds• Lowest = high-yield bonds (return) or junk bonds (high

risk) Mutual Funds – group of investments that is held in common

by many individual investors

Advantages Diversification Professional management

33

Mutual Fund Styles

Money market funds – restricted to certain types of short-term investment; maintain value of investment amount

Bond funds – fixed-income funds; risk and return vary depending on type of bonds invested

Stock funds – Aggressive growth funds- highest risk; growth funds – expected to rise; equity

income – current income from their funds; index funds – included on an index, lower management fee

International funds – foreign companies or governments

34

Choosing a mutual fund

• Read the prospectus – legal document that provides potential investors with information about a mutual fund or other security

• Check out the fees Load – sales charge for fund transaction

35

Insurance as an investment

Endowment Insurance

• Education or retirement• Paying for so many years or reach a certain age, paid a

benefit equal to the face value• If you die, benefit is paid to the benefactors

36

Insurance as an investment Continued

Annuities – contract purchased from an insurance company

• After 59 ½, provide regular payments • If you die, benefit is paid to the benefactors• Not high return, but safe

Fixed – fixed rate of return

Variable – variable rate of return depending on how well insurance companies performed

Equity-indexed – guaranteed minimum with chance of higher returns based on the stock market index

37

More Investment Options

Real Estate – land and any structures on it

homes, apartment buildings, office and retail space, rentals

• Usually rises with inflation• Disadvantage – not liquid, time consuming and

expensive to maintain property, irresponsible renters, not diversified

38

More Investment Options Continued

Commodities – basic economic goods bought and sold in quantity

• Wheat, corn, iron ore, natural gas, precious metals• Future contract- agreement to deliver a particularly

commodity at a specific price at a certain date in the future

• Chicago Board of Trade – largest commodities exchange in U.S.

• Regulated by Commodities Futures Trading Commission (CFTC)

• Risky, but high return

39

More Investment Options Continued

Collectibles

• Examples• Might be sold for profit, but usually the value does not

go up often• Have to find a willing buyer• Enjoy collection more so than value of investment

40

Objectives• Explain the benefits of estate planning;• Describe the purpose of a will and other estate planning

documents; and• Compare ways to plan for funeral expenses.

Chapter 13.5Estate Planning

41

What is Estate Planning? Estate – The assets and liabilities left behind by a deceased

person Estate Planning – is the process of making legal and financial

arrangements for how one’s property should be administered before and after death• Helps people provide financially for loved ones,

favorite organization, or cause• Reduce the time and legal complications• Addresses what happens if a person becomes incapable

of making financial and health decisions

42

Steps in Estate Planning

1. Review your assets and liabilities by creating a balance sheet

2. Think about objectives and gather information3. Prepare the necessary legal and financial documents

(with an attorney)

Preparing a Will Will – a legal document in which a person directs how his or

her estate is to be distributed after death

43

Functions of a Will

• Identify an executor Executor – is the individual who is in charge of

handling the affairs of an estate

• Identify a guardian for children Younger than 18 years old

• Give instructions for liabilities Outstanding debts or obligations must be paid

• Give instructions for assets Beneficiary – a person or group designated to

receive some or all of a deceased person’s assets

44

If there is No Will

• Intestate – person who dies without a valid will • Time consuming and expensive • May not be deceased persons wishes

 After Preparing the Will

• Requirement: Must be typed, signed, and dated Witnesses (not beneficiaries) of signing Kept in a place accessible to your executor A copy in a safe place (deposit box) Codicil – legal amendment to a will (changes)

45

Prepared Other Documents

Living Trust – legal arrangement that can serve as an alternative to a will

• Trustee – someone who holds and manages assets for someone else

• Probate – legal process involved in filing a will

Durable Power of Attorney – a legal document assigning someone the right to act on a person’s behalf

Living Will – legal document that outlines a person’s wishes for medical treatment under

specific circumstances

46

Funeral Planning

Prepaid Funerals

Advantages• Consumers can pay today’s prices instead of inflated

future pricesDisadvantages• The money is tied up for years and earns no interest• May not be transferable if you relocate• Funerals may go out of business

Insurance Policies• Coverage for funeral cost

Letter of Final Instructions• Leave in a place for the people to find