8 Powerpoint Guided Notes

Business and Personal Finance
Chapter 8
The Fundamentals of Investing

Section 8.1
Preparing for an Investment Program

In This Section . . .
Investing is part a well-rounded financial plan, but investing well requires planning.

This section discusses:
Establishing Your Investment Goals Performing a Financial Checkup Obtaining the Money You Need to Get Started The Value of Long-Term Investment Programs
Factors That Affect Your Choice of Investments

What Youll Learn
How to explain the way to prepare for and establish an investment program
How to assess the factors that affect your investment choices

Why Its Important
Laying a good foundation for your investment program will help ensure that you meet your future financial goals.

Establishing Your Investment Goals (1 of 3)
As you outline your financial goals, ask these questions:
What will you use the money for? How much money do you need to satisfy your goals? How will you get the money?

How long will it take you to get the money? How much risk are you willing to take when you invest? What conditions, either in the economy or in your own life, could change your investment goals?

Considering your circumstances, or what you think they will be in the next few years, are your goals reasonable? Are you willing to make sacrifices to save? What will happen if you dont meet your goals?

Performing a Financial Checkup (1 of 3)
Knowing that your personal finances are in order is an important step in meeting your long-term financial goals.
Balance your budget: spend less money than you make, stay out of debt, and limit your credit card use. Eventually, the amount of cash remaining after your pay your bills will increase. Youll be able to use that money to start a savings program.

When youre on your own, you should have enough insurance to cover financial losses from events, such as a car accident, a medical emergency, or a theft. Start an emergency fund (money that you can access quickly for an immediate need) to help you pay for unexpected events, such as not being able to work. You should have enough saved to cover living expenses for three to nine months.

Have access to other sources of cash, such as a line of credit with a financial institution or cash advance capability from a credit card company. Use it only for serious emergencies, because paying off the loan will delay you in reaching your investment goals.

Risks Involved in Typical Investments

Obtaining the Money You Need to Get Started (1 of 2)
Here are a few suggestions about how to get the money to get started:
Pay yourself first. Take advantage of employer-sponsored retirement plans.

Obtaining the Money You Need to Get Started (2 of 2)
Participate in an elective savings program. Make a special savings effort one or two months each year. Take advantage of gifts, inheritances, and windfalls.

The Value of LongTerm Investment Programs (1 of 3)
Many people dont start investing because they have only a small amount of money, but even small amounts add up because of the time value of money. The next figure shows the growth of $2,000 for different time periods and at different rates of return.


Keep in mind, though, you must continue to add money to your investments to see the kind of growth that is illustrated in the figure.

Factors that Affect your Choice of Investments
Next you have to think about where to invest your money. To make that decision, for each type of investment look at:
Safety and risk factors
Potential for income and growth

Liquidity
Risk Factor
Inflation Risk
Interest Rate Risk
Business Failure Risk

Financial Market Risk
Global Investment Risk

Go Figure. . . Inflation Rate and Investments

Go Figure. . . A Bonds Market Price When Interest Rates Go Up

Go Figure. . . A Bonds Market Price When Interest Rates Go Down

Check Your Understanding
1) What steps should you take when preparing to establish an investment program? 2) How can you obtain the money you need to start investing? 3) What factors might affect your investment choices?

Think Critically
How might you advise a friend about what do with a $500 bonus she just received for accepting a job at a software design firm?
End of Section 8.1
Chapter 8

Section 8.2
An Overview of Investment Alternatives

The next step in investment planning is learning about different kinds of investments. This section discusses:
Types of Investments Evaluating Investment Alternatives Developing a Personal Investment Plan

What Youll Learn
How to identify the main types of investment alternatives
How to recognize the steps involved in developing a personal investment plan

Why Its Important
The more you know about the available investment opportunities and the planning process, the better able you will be to select an investment program that meets your needs.

Types of Investments
Stock or Equity Financing Corporate and Government Bonds Mutual Funds Real Estate

Stock or Equity Financing
Common stock is stock that provides the most basic form of corporate ownership, and it entitles you to voting privileges. Common stock can provide you with a source of income if the company pays dividends. You also gain growth potential if the dollar value of the stock increases.

Stock or Equity Financing
Preferred stock is stock that gives the owner the advantage of receiving cash dividends before common stockholders receive any. A corporate bond is a corporations written pledge to repay a specified amount of money along with interest.

A government bond is the written pledge of a government or a municipality to repay a specified sum of money with interest. A mutual fund is an investment alternative in which investors pool their money to buy stocks, bonds, and other securities based on the selections of professional managers who work for an investment company.

Real estate is an investment in property or land with an expectation that the property will increase in value so you can sell it at a profit or receive rental income.

How Long to Hold on to Stock?
If you hold stocks for one year, you have a 20% chance of losing money; two years, a 10% chance of losing; five years, a 4% chance; ten years, virtually no chance of losing.
Sheldon Jacobs, editor of No-Load Fund Investor

Evaluating Investment Alternatives (1 of 2)
When you consider the different investment alternatives, remember that its wise to diversify, which means to spread your assets among several different types of investments to lessen risk.

Evaluating Investment Alternatives (2 of 2)
The pyramid in the next figure represents a way of distributing your investments in order to provide you with both financial growth and protection.

Possible Investments

Developing a Personal Investment Plan (1 of 4)
To be a successful investor, consider following these steps.
Establish investment goals. Decide how much money you will need in order to reach those goals by a particular date. Determine the amount of money you have to invest.

List all the investments you want to evaluate.
Evaluate the risks and potential return for each investment on your list. You can do this on your own, but it is also a good idea to get some advice from a financial expert.
Reduce the list of possible investments to a reasonable number.

Choose at least two investments to give you some diversity. You may want to add to this number as the value of your investments grows. That way you can spread your risk among different investments.

Because your investment goals may change as you go through life, recheck your investment program periodically. Remember that changes in the economy could cause you to reevaluate where to invest your money. For example, if rates on certificates of deposit are high, you may want to put some of your money there.

An Example of a Personal Investment Plan

Savvy Saver Giving Is Fun, Too
How can giving be part of a healthy financial plan?

1) What are the main types of investment alternatives? 2) When choosing investment alternatives, why is it wise to diversify? 3) What are the steps in developing a personal investment plan?

Think Critically
Why do financial advisers suggest that your investment program be set up like a pyramid?
End of Section 8.2
Chapter 8

Section 8.3
Reducing Investment Risk and Obtaining Investment Information
Professional financial advice can be found in many places. This section discusses:
The Role of the Financial Planner Your Role in the Investment Process Sources of Investment Information
What Youll Learn

How to identify your role and the role of a financial planner in a personal investment program How to select sources of financial information that can reduce risk and increase investment returns.
Why Its Important

By becoming an informed investor, with the help of professionals and your own efforts, you will be able to reach your investment goals.
The Role of the Financial Planner

A financial planner is a specialist who is trained to offer specific financial help and advice.
Types of Financial Planners (1 of 4)

There are four main types of financial planners.
1. Fee-only planners may charge an hourly rate from $75 to $200 or a flat fee ranging from about $500 to several thousand dollars. They may also charge an annual fee ranging from 0.04 percent to 1 percent of the value of the investments they manage.

2. Fee-offset planners charge an hourly or annual fee, but they reduce, or offset, it with the commissions, or earnings, they make by buying or selling investments. 3. Fee-and-commission planners charge a fixed fee for a financial plan and earn commissions from the financial products they sell.

4. Commission-only planners earn all their money through the commissions they make on sales of insurance, mutual funds, and other investments.

Be very careful to understand clearly what the fees are and how and when they will be collected from you. Be especially careful of hidden commission charges when the financial planner has said that the service is fee only.
Do You Need a Financial Planner?

Probably not if you make less than $40,000 a year and are willing to make your own financial decisions.
Basic Services of a Financial Planner?

Help you assess your current financial situation Offer a clearly written plan, including investment recommendations Help you keep track of your progress Guide you to other financial experts and services as needed
How Should You Select a Financial Planner?
Certifications of Financial Planners

Financial advisors are monitored by SEC (Securities & Exchange Commision).
CFP Certified Financial Planner
ChFC Chartered Financial Consultant
Your Role in the Investment Process

There are the things you should do regardless of whether or not you have a financial planner.
Evaluate potential investments
Monitor the value of your investments Keep accurate and current records Consider your tax situation
Tax Considerations (1 of 2)
In general, investment income falls into three categories:
1. Tax-exempt income is income that is not taxed. For example, the interest you receive on most state and municipal bonds is exempt from federal income tax.
Tax Considerations (2 of 2)
2. Tax-deferred income is income that will be taxed at a later date. The most common type of taxdeferred income is that which is earned on a traditional individual retirement account (IRA).
3. Taxable income is the income from all other investments.
Common Cents A Dollar a Day

Where in your budget would you be able to save a dollar a day?
Sources of Investment Information (1 of 6)

The Internet and Online Computer Services
www.personalwealth.com Standard & Poors Web site for investor resources

Newspapers and News Programs
Wall Street Journal

Sound Money, Minnesota Public Radios call-in, personal finance, radio program

Business Periodicals
Barrons Forbes Fortune BusinessWeek
Investment Periodicals
Money Consumer Reports Smart Money Kiplingers Personal Finance Magazine
Harvard Business Review

Government Publications
Federal Reserve Bulletin
Survey of Current Business
Corporate Reports Statistical Averages

Investor Services
Free newsletters from stockbrokers and financial planners Subscription newsletters Standard & Poors Stock and Bond Guide

Investor Services
Value Line Investment Survey Handbook of Common Stocks
Morning Star Mutual Funds

Wiesenberger Investment Companies Yearbook
Statistical Averages (1 of 2)
You can gauge the value of your investments by following one or more recognized statistical averages, such as the Dow Jones Industrial Average or the Standard & Poors 500 Stock Index. The average indicates whether the category it measures is increasing or decreasing in value.
Statistical Averages (2 of 2)
Below are some of the most widely used averages.

1) What is a financial planners role in a personal financial program? 2) What is your role in a personal investment program? 3) Where can you find sources of financial information?
Think Critically
Why do you think some people dont keep track of their investments?
Give some reasons why they should.
End of Section 8.3

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Business and Personal Finance

The Fundamentals of Investing

Preparing for an Investment Program

Preparing for an Investment Program

Preparing for an Investment Program

Factors That Affect Your Choice of Investments

Preparing for an Investment Program

How to assess the factors that affect your investment choices

Preparing for an Investment Program

Preparing for an Investment Program

Preparing for an Investment Program

Preparing for an Investment Program

Preparing for an Investment Program

Preparing for an Investment Program

Preparing for an Investment Program

Preparing for an Investment Program

Preparing for an Investment Program

Preparing for an Investment Program

Preparing for an Investment Program

Preparing for an Investment Program

Preparing for an Investment Program

Preparing for an Investment Program

Potential for income and growth

Business Failure Risk

Global Investment Risk

Preparing for an Investment Program

Preparing for an Investment Program

Preparing for an Investment Program

Preparing for an Investment Program

Preparing for an Investment Program

Preparing for an Investment Program

End of Section 8.1

Business and Personal Finance

The Fundamentals of Investing

An Overview of Investment Alternatives

An Overview of Investment Alternatives

An Overview of Investment Alternatives

How to recognize the steps involved in developing a personal investment plan

An Overview of Investment Alternatives

An Overview of Investment Alternatives

An Overview of Investment Alternatives

An Overview of Investment Alternatives

An Overview of Investment Alternatives

An Overview of Investment Alternatives

An Overview of Investment Alternatives

An Overview of Investment Alternatives

An Overview of Investment Alternatives

An Overview of Investment Alternatives

An Overview of Investment Alternatives

An Overview of Investment Alternatives

An Overview of Investment Alternatives

An Overview of Investment Alternatives

An Overview of Investment Alternatives

An Overview of Investment Alternatives

An Overview of Investment Alternatives

An Overview of Investment Alternatives

An Overview of Investment Alternatives

End of Section 8.2

Business and Personal Finance

The Fundamentals of Investing

Reducing Investment Risk and Obtaining Investment Information

Reducing Investment Risk and Obtaining Investment Information

Reducing Investment Risk and Obtaining Investment Information