Chapter Thirteen

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CHAPTER 13

Personal Finance

Investing Fundamentals

Kapoor Dlabay Hughes

6e

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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?

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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.

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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

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Value of Long-Term Investing Programs Many people don’t start investing because

they only have a small amount to invest

but....

Small amounts invested regularly become large amounts over time.

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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

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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

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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.

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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

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Investment Alternatives

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.

(continued)

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Investment Alternatives

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.

(continued)

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Investment Alternatives 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?

(continued)

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Investment Alternatives

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.

(continued)

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Investment Pyramid

CommoditiesJunk bonds

Options

Rentalproperty

Utility stocks

GovernmentSecurities

Corporatebonds

CDsMoneyMarket

Savings Accounts Cash

High QualityStocks

Mutual funds

High risk

Lowrisk

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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.

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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.

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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

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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.

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