STOCK WARS Learning Studio Fundamental Concepts in Investing.

STOCK WARSLearning Studio

Fundamental Concepts in Investing

PREVIEW

Developing investment goals

Investment alternatives

The risk-return tradeoff

Diversification and asset allocation

Investment Strategies

APPLING TO THE PLANNING PROCESS

Step 1: Analyze your current finances

Step 2: Develop goals.

Step 3: Identify and evaluate investment

alternatives.

Step 4: Select appropriate investments, given your risk tolerance,

time horizon, and investment objectives.

Step 5: Reevaluate and revise your plan as

needed.

HOW DOES THIS FIT IN YOUR FINANCIAL PLAN

Establish a firm foundation: Evaluate your finances, acquire tools and skills, set goals, develop a budget

Secure basic needs: Liquidity, consumer purchases and credit decisions, insurance, employee benefits.

Build Wealth: Save and invest to meet short-term and long-term goals

Protection: Plan for death and incapacity

WEEK 1: CHOOSE YOUR PORTFOLIO

Download the iPad app Stock Wars

Start choosing a starting portfolio

Monitor over the week make adjustments if necessary

WEEK 2: STOCK INVESTING

Make the most of your money and your choices

Educate yourself to make stock investments confidently and intelligently

Familiarize yourself with internet resources to evaluate stocks and protect the money you earn

Do your homework about the companies you choose.

WEEK 2: MOST IMPORTANT POINTS ABOUT STOCK INVESTING

You're not buying a stock; you're buying a company.

The primary reason you invest in a stock is because the company is making a profit and you want to participate in its long-term success.

If you buy a stock when the company isn't making a profit, you're not investing — you're speculating.

A stock (or stocks in general) should never be 100 percent of your assets.

In some cases (such as a severe bear market), stocks aren't a good investment at all.

WEEK 2: MOST IMPORTANT POINTS ABOUT STOCK INVESTING

A stock's price is dependent on the company, which in turn is dependent on its environment, which includes its customer base, its industry, the general economy, and the political climate.

Your common sense and logic can be just as important in choosing a good stock as the advice of any investment expert.

Always have well-reasoned answers to questions such as "Why are you investing in stocks?" and "Why are you investing in a particular stock?"

If you have no idea about the prospects of a company (and sometimes even if you think you do), use stop-loss orders.

Even if your philosophy is to buy and hold for the long term, continue to monitor your stocks and consider selling them if they're not appreciating or if general economic conditions have changed.

WEEK 3: INVESTING AND YOUR FINANCIAL PLAN

Should first take care of the foundation and security elements of you plan.

Set goals and a budget

Establish an emergency fund

Reduce high interest credit

Buy adequate insurance

Buy a home


Investing to Achieve a Goal What is the purpose of the investment plan?

How much do you need in the future to meet your financial goal?

How much can you currently allocate to your investment plan?

How much time until you need the money?

How much risk, and what types of risk, can you afford to take?


Getting the Money to Invest Pay yourself first

Save your raise.

Set aside windfalls (bonuses, tax refunds).

Continue a payment plan.

Participate in your employer’s retirement plan.

Stop up a cash leak.

Go on a financial diet.

Take a second job.


Return on Investment Investors expect to get a return on their investment

through some combination of: Current cash flow-regular payment of interest or dividends

during the period of ownership.

Capital gain-growth in the value of the asset over the period of ownership.


Using online assessment tools to test your portfolio Using portfoliomonkey.com https://

www.portfoliomonkey.com

Create an account to enter in your portfolio and test your portfolio

Be sure to look up items you don’t understand. A good resource for investment vocabulary is investopedia.

https://www.portfoliomonkey.com/

https://www.portfoliomonkey.com/

WEEK 4: TIME VALUE CALCULATIONS

Manually - Compound Interest Formula

FV=PV(1+r/m)mt

FV is the Future Value

PV is the Present Value (the principal you start with, your first deposit).

r is the annual rate of interest as a decimal (5% is expressed as the decimal .05)

m is the number of times per year the interest is compounded (monthly, annually, etc.)

t is the number of years you leave it invested (use 40)

for this exercise, interest will be compounded once a year


Ex: Compute Manually

PV = $250, r=5% or .05, m=1, t=40

250(1+.05/1)(1)(40)

250(1.05)40

250(7.04)

$1760.00


Use Excel spreadsheets to calculate future value


Use internet sources to calculate future value

http://www.daveramsey.com/article/investing-calculator/lifeandmoney_investing/#/

entry_form

http://www.daveramsey.com/article/investing-calculator/lifeandmoney_investing/#/entry_form



WEEK 5: POLITICAL AND ECONOMIC FACTORS DISCUSSION

Observation discussion on current economic and political factors and the correlation with the stock market

Two key political and economic issues that are driving how the market performs

Current government shut down

Threat of reaching the debt ceiling

Students need to find current articles regarding these factors and the market and lead a discussion and debate with their class

WEEK 6: RISK AND RETURN

Two sources of return Current cash flow

Increase in value of investment over time

Two sources of risk Risk won’t get you the promised cash flows

Risk your asset will decline in value over time

WEEK 6: MEASURING RETURN

Riskier investment-greater return because you get a risk premium for bearing risk.

Inflation Risk

Interest Rate Risk

Reinvestment Risk

Default Risk

Liquidity Risk

Market Risk

For today’s discussion get into groups to research and prepare for discussion on the different types of risk.


Inflation Risk

A dollar today is worth more than a dollar tomorrow

Inflation erodes the value of your investment principal to be received in the future.


Interest Rate Risk/Maturity Risk Value of an investment is the present value of future cash

flows If interest rates go up, the present value goes down

The longer the time until you will receive the cash flow, the bigger this effect

Often called “maturity risk” for this reason

Most important to debt investments


Reinvestment Risk If you hold short term debt securities, you must reinvest

your principal when it matures If rates are falling, you will have to reinvest at lower rates

Reinvestment rate risk greater for short-term debt investments

Interest rate risk greater for long-term debt.

WEEK6: RISK AND RETURN

Default and Liquidity Risk Default Risk: Risk that you will not receive promised or

expected cash flows. Example: You buys stocks and company goes bankrupt.

Liquidity Risk: Risk that you will not be able to convert your investment to cash without loss of value

Depends on how active a market there is for this type of asset.


Market Risk The risk associated with general market movements and

economic conditions. Bull Market – Prices Rising

Bear Market – Prices Falling

Returns on similar investments tend to be correlated Can be specific effects by asset class, industry, sector,

geographic region, or country


Prices fall + PessimismEconomic Slowdown

Bear Market Bull Market

Prices Rise + Optimism

Economic Growth

WEEK 7: BROKER/TRADING SITES

Investigate broker sites: E*trade, Scottrade, Fidelity, TradeKing, TD Ameritrade

List the pros and cons of the top 5 broker/online trading sites for 2013

http://www.marketconsensus.com/news/5-best-online-trading-sites-2013-investors-%E2%80%93-best-online-brokers



WEEK 8: EVALUATE STOCK HOLDINGS

Halfway through the course we need to re-evaluate portfolios

What is doing well? Why?

What is not doing well? Why?

What will optimize my portfolio?

WEEK 9: INVESTMENTS COMPARED

INVESTMENT RISK RETURN HOW IT WORKS ADVANTAGE DISADVANTAGE

Money Market Low Low

An open-end mutual fund which invests only in money markets. These funds invest in short-term debt obligations, such as Treasury Bills, Certificates of Deposit and commercial paper. The goal is to maintain principal with modest dividends.

Check-writing proveledges; good for emergeny funds.

Doesn't earn much money.

Single Stocks High Avg. 7%

Buy a small piece of ownershi[ in a company. As the value of the company goes up, it pays dividends (profit) to investors.

Easy to track only one company. High risk; you do all the research.


BondsLess than stocks, more than mutual funds.

Avg. 8%

Debt instrument where a company owes you money; they make regular interest payments and repay the face value at a future date.

U.S. Treasury Bonds are seen as patriotic; better rates than a Certificate of Deposit.

Interest rates jump around and are unpredicatable.

Mutual Funds Low Avg. 10-12%

Investors pool their money and fund managers invest their money into 90-200 individual companies.

Diversification=less risk; professional portfolio manager does lots of research; good long term investment.

Long term investment-need to leave the money alone for minimum of 5 years.


Rental Real Estate HighDepends on the Market

Buy a piece or property and another person lives in it and pays you the rent.

Good long-term investment.Need a lot of cash; have to find good renters; least liquid type of investment.

Annuities Low

Low return if fixed. Higher return if variable

Savings accounts with insurance companies.

Variable annuities are invested in mutual funds growing tax-deferred; some guarantee your principal.

Fixed annuities are bad long term investments.

WEEK 10: COMPARE 401K AND ROTH IRA

Similar Different

Both are retirement plans 401K funded through employer and may receive company match

Both use mutual funds Roth IRA grows tax free

Diversification and long-term growth Roth IRA more flexible, withdraw at 59.5 years old or older, death and disability, first time house ($10,000 max)

Rate of return matters Roth IRA, non income spouse can contribute

Plans depend upon your contributions to the plan.

Any loans taken off 401K needs to be paid within 60 days of leaving the company, otherwise there is a penalty and taxes.

Maximum annual contribution amounts for 2014- 401K: $17,500, Roth IRA:$5,500

401K can be rolled over to another company if you change jobs, Roth IRA you don’t have to worry about it.

WEEK 11: STOCK ANALYSIS

Stock Price Charts Choose a stock from your portfolio

Go to Yahoo Finance or another finance website

You will need a years worth of stock price data to create a spreadsheet with a column for date and price for that date.

You will have 52 weeks of data, with the Friday close information.

You will create a graph in excel with this data The title should be the Stock Price of ……

Price alongside the left and date along the bottom of graph

WEEK 12 AND 13: STOCK ANALYSIS

Using your chosen stock from last week Investigate their competition

Compare and contrast financial information


Measuring Liquidity: Liquidity is concerned with the company’s ability to meet its day-to-day operations and take care of their short-term obligations as they come due. When choosing stocks you will want to be sure that the company has adequate cash and other liquid assets it needs to take care of their debt on time.

Current ratio = current assets/ current liabilities

Example NetFlix: Numbers taken from the 2012 balance sheet totals.

Current assets $2,240,791,000, current liabilities $1,675,926,000

2,240,791,000/1,675,926,000=$1.34

$1.34 means that they have a $1.34 in cash reserves to take care of every dollar of debt.


Net working capital = current assets – current liabilities

Example: Numbers taken from the 2012 balance sheet totals

$2,240,791,000-$1,675,926,000=$564,865,000

The liquidity of the company seems good. You want to be sure that the company you choose is being profitable and does not have any slow-moving inventories or past due account receivable.


Measuring Profitability: This measures a company’s success. Net profit margin or the “bottom line” indicates the rate of profit being earned from sales and other revenues.

Net profit margin = Net profit after taxes/total revenues

Example: These numbers were taken from NetFlix’s Income Statement

$17,152,000/$3,609,282,000=.5%

.5% this company’s return on sales is 50 cents on the dollar.

Return on assets looks at the amount of resources needed to support operations.


Return on assets (ROA) = Net profit after taxes/total assets

Example: These numbers are taken from the Income Statement and the balance sheet.

$17,152,000/$3,967,890,000=.4%

.4% This company earned almost .4% on its assets investments.

Return on equity is closely watched by investors because it is a direct link to profits, growth, dividends of the company.


Return on Equity = Net profit after taxes/ stockholder’s equity

Examples: Numbers taken from the balance sheet and income statement

$17,152,000/$744,673,000=2.3%

NetFlix’s annual payoff to investors is over 2 cents for every dollar of equity.

These are just a sampling of the calculations used by investors to analyze stocks.

CONCLUDE: SIMPLE RULES

Start Early

Keep good records

Do your homework

Stick to a plan

Sources of Investment Information Company financial statements

Periodicals – Wall Street Journal – Financial Magazines

Internet Resources – Yahoo Finance – Portfolio Monkey-Invetopedia

Rating Agencies and Service Organizations-Moody’s, Standards and Poor’s

Brokers and Financial Advisors

STOCK WARS Learning Studio Fundamental Concepts in Investing.

Documents

investing slide

stock investing youre

investment plan

stock youre

good stock

stock investments

particular stock

financial plan