Understanding Personal Finances and Investments Appendix A

Topics  Investment Goals  Money Needed to Fund an Investment  Factors for Considerations in Investing  Investment Alternatives  Mutual Funds  Real Estate

Investment Goals

Goal must be:
 Specific and measurable
 Oriented toward the future
 Investing is usually a long-term undertaking.
 Stated in terms of money
 Example: “By January 1, 2028, I will have total assets of $ 80,000

Advantages of long-term investment programs:

By investing small amounts of money each year over a 20- to 40-year period, you can accumulate money for emergencies, an investment program, and your retirement.
 If you choose quality investments, the value of your investment
earnings will grow over a long period of time.

Example of investing small amounts

 Example: If you invest $2,000 each year for 40 years and
you earn 8 percent on your investments, your investment
portfolio at the end of 40 years will be worth $518,120.

Important Factors in Investing

• Safety and Risk

• Investment Incomes

• Investment Growth

• Investment Liquidity

Safety and Risk

Safety in an investment means minimal risk of loss; risk in an investment means a
measure of uncertainty about the outcome.
 In general, your potential return should be directly related to the risk you assume.

Investment Income

 CDs, corporate and government bonds, and certain stocks pay interest or dividends each year.

Investment Growth

To investors, growth means that their investments will increase in value.

Investment Liquidity

 Liquidity – the ease with which an investment can be converted into cash

What are the investments that are low risk??

CD- Certificate Deposits- longer period you deposit more interests- Guarantee interest back.

Which investments are high risk?

Stocks

Asset allocation

The process of spreading your money among
several different types of investments to lessen risk

How you allocate your assets is determined by:

-The time your investments have to work for you
 Your age
 Your investment objectives
 Your ability to tolerate risk
 How much you can save and invest each year
 The dollar value of your current investments
 The economic outlook for the economy
 Several other factors

Bank accounts that pay interest—and therefore are investments—
include:

passbook savings accounts
 CDs
 Interest-bearing accounts

What happens to the interest paid on bank accounts??

 The interest paid on bank accounts can be withdrawn to serve as
income, or it can be left on deposit and increase the value of the
bank account and provide for growth.

Which country in south America has a lot of debts??

Corporate Bonds

Because they are a form of long-term debt financing that must be repaid, bonds
generally are considered a more conservative investment.

Corporate bond Advantage

 One of the principal advantages of corporate bonds is that they are income-producing investments.
 Example: If you purchase a $1,000 bond that matures in 2023 issued by Bank of America
and the interest rate for this bond is 5 percent, you will receive interest of $50 ($1,000 ×
0.05 = $50) a year (or $25 every six months) from Bank of America.

Government Bonds

 The federal government sells bonds and securities to
finance both the national debt and the government’s ongoing activities.
 Interest paid on federal government securities is taxable
for federal income tax purposes, but is exempt from state and local taxation.

Treasury Bills

Treasury bills, sometimes called T-bills, are sold in minimum units
of $100, with additional increments of $100 above the minimum

Treasury Notes

Treasury notes are issued in $100 units with a maturity of more than one year but not
more than ten years.
 Typical maturities are two, three, five, seven, and ten years.
 Treasury notes pay interest every six months until maturity.
 The interest rate for notes is slightly higher than T-bills because of the longer maturity.

 Treasury bonds

• Treasury bonds are issued in minimum units of $100 and have a 30-year maturity.
• Treasury bonds pay interest every six months until maturity.
• The interest rate for bonds is slightly higher than T-bills or notes because of the longer
maturity.

Treasury inflation-protected securities (TIPS)

 TIPS are sold in $100 units and are sold with five-, ten-, or thirty-year
maturities.
 The principal of TIPS increases with inflation and decreases with deflation, as measured by the consumer price index.

What do corporations use to finance their business start- up?

Common stock which helps pay for expansion a business.

What are the two ways to make money by buying common stock?

Dividend payments and increase in the value of the stock.

Dividend Payments

Generally, dividends are paidevery quarters.
A corporation may pay stock dividends in place of—or in addition to—cash dividends.

Stock split –

the division of each outstanding share of a corporation’s stock
into a greater number of shares
– Example: In 2017, the board of directors of Comcast approved a two-for-one
stock split. After the split, a stockholder who originally owned 100 shares
owned 200 shares, and the value per share was reduced to one-half the
stock’s value before the two-for-one split.

Mutual fund –

a company that pools the money
of many investors—its shareholders—to invest in
a variety of different securities
 Advantages of a mutual fund:
– Professional management
– Diversification

What are the three types of mutual funds?

Closed-end fund

Exchange-traded fund

Open-end fund

Closed-end fund

Sells shares in the fund to investors only when the fund is
originally organized

Exchange-traded fund

• Invests in the stocks contained in a specific stock index, such as
the Standard & Poor’s 500 Stock Index, or some other securities
index

Open-end fund

Issues and sells new shares to any investor who requests them

Load fund

The purchaser pays a sales charge every time
he or she purchases shares.

 No-load fund

The purchaser pays no sales charges at all.

Real Estate Advantage

Represents on of the best hedges against inflitaion

Disadvantage of investing in real estate

Potential difficulty in finding a
buyer
 The heavy burden of taxes,
interest, and installment
payments if you are forced to
hold your investment longer
than you originally planned
 No guarantee of selling at a
profit

Account executive –

an individual sometimes called a stockbroker or registered representative, who buys and sells securities for clients

Market order –.

a request that a security be purchased or sold at the current market price

Limit order –

a request that a security be bought or sold at a price that is equal to or better than some specified price

Securities Act of 1933

Provides for full disclosure and requires that corporations publish a prospectus

Prospectus –

a detailed, written description of a new security, the issuing corporation, and the corporation’s top management

Insider trading – the practice of board members, managers, and employees buying and selling a corporation’s stock

A regulatory pyramid consisting of four different levels exists to
make sure that investors are protected.

-Level 1: the U.S. Congress
– Level 2: the Securities and Exchange Commission (SEC)
– Level 3: individual states
– Level 4: securities exchanges and brokerage firms