PFM Ch. 11-12

investing

the use of long-term savings to earn a financial return

inflation

a rise in the general level of prices

Rule of 72

a technique for estimating the number of years required to double your money at a given rate of return. Divide the % rate of return into 72.

stages of investing

1. Put-and-take Account

2. Initial Investing

3. Systematic Investing

4. Strategic Investing

5. Speculative Investing

put-and-take account

emergency fund. an account you put money into and take out as you need to pay your bills, to cover short-term needs and unexpected expenses. 3-6 months' net pay in it.

initial investing

begins when you have excess savings. should be conservative with low risk.

systematic investing

making investments on a regular and planned basis. for the purpose of a financially secure future

strategic investing

the careful management of investment alternatives to maximize growth of your portfolio over the next five to ten years

portfolio

collection of investments

securities

stocks and bonds

speculative investing

you make bold and high-risk investment choices

investing risk

the chance that an investment's value will decrease

risk-takers

investors who like to take on a great deal of risk

diversification

the spreading of risk among many types of investments

interest-rate risk

the chance that inflation will rise faster than the return on your investments

political risk

actions the government might take that would reduce the value of your investment, e.g. increased taxes, costly environmental controls

market risk

caused by the business cycle; periods of economic growth or decline

nonmarket risk

unrelated to market trends. entirely unpredictable and uncontrollable. e.g. terrorism

company risk

associated with owning one company's stock. if that company fails, you lose your investment

industry risk

affects groups of businesses. if less people buy products of that industry, the value of your investment will depreciate

criteria for choosing an investment

degree of safety, degree of liquidity, expected dividends or interest, expected growth in value exceeding the inflation rate, reasonable purchase price and fees, tax benefits

temporary investments

investment choices that will be reevaluated within a year or less. if they aren't performing as expected, they will be sold and other choices selected

permanent investments

investment choices that will be held for the long run; 5 or 10 years or longer. "critical mass" of your investment portfolio

The Wall Street Journal

daily paper that provides detailed coverage of the business and financial world

Barron's

a weekly paper that also provides charts of trends, financial news, and technical analysis of financial data

full-service brokers

provide clients with analysis and opinions based on their judgments and the opinions of experts at the company they represent, e.g. Merrill Lynch, Fidelity Investments, American Express

discount brokers

buy and sell securities for clients (who are well informed and know what they want to buy and sell) at a reduced commission. provides little or no investment advice, e.g. Charles Schwab, TD Ameritrade, E*TRADE

financial advisers or certified financial planners (CFPs)

professional investment planners who are trained to give investment advice based on your goals, age, lifestyle, and other factors

annual report

a summary of a corporation's financial results for the year and its prospects for the future. SEC requires all public corporations to prepare this.

bonds

debt obligations

corporate bonds

debt obligations of corporations

municipal bonds

debt obligations of state or local governments

maturity date

date on which the borrowed money of a bond must be repaid

stock

a unit of ownership in a corporation

stockholder or shareholder

person who owns shares of stock

mutual fund

the pooling of money from many investors to buy a large selection of securities, in a professionally managed group of investments

futures

contracts to buy and sell commodities or stocks for a specified price on a specified date in the future

commodities

products that are mined or grown

option

the right, but not the obligation, to buy or sell a commodity or stock for a specified price within a specified time period

penny stocks

low-priced stocks of small companies that have no track record

dividends

money paid to stockholders from the corporation's earnings or profits

capital gains

an increase in the value of the stock over time

capital loss

when the value of a stock goes down

round lot

100 shares or multiples of 100 shares of a particular stock

odd lot

fewer than 100 shares of a particular stock. usually higher per-share fees for these.

common stock

a type of stock that pays a variable dividend and gives the holder voting rights (on the board of directors and major policy decisions)

preferred stock

a type of stock that pays a fixed dividend but has no voting rights

income stocks

stocks that have a consistent history of paying high dividends

growth stocks

stocks in corporations that reinvest their profits into the business so that it can grow. may pay little or no dividends, but instead provide future capital gains.

emerging stocks

stocks in young, often small corporations that have higher overall risk than stocks of companies that have been successful for many years

blue chip stocks

stocks of large, well-established corporations with a solid record of profitability, e.g. IBM, Coca-Cola

defensive or non-cyclical stock

a stock that remains stable and pays dividends during an economic decline, e.g. utilities, pharmaceuticals, food, health care

cyclical stocks

stocks that do well when the economy is stable or growing but often do poorly during recessions, when the economy slows down, e.g. travel-related companies, manufacturing companies, housing/construction companies

market value

the price for which the stock is bought and sold in the marketplace

ROI

return on investment. the difference between what you paid for the stock and what you sold it for, plus any dividends you earned. current profit on stock/(purchase price + commission)

stock index

benchmark that investors use to judge the performance of their investments, e.g. Dow Jones Industrial Average, Standard & Poor's 500, NASDAQ Composite Index

OTC (over the counter) market

a network of brokers who buy and sell the securities of corporations that are not listed on a securities exchange

bull market

a prolonged period of rising stock prices and a general feeling of investor optimism

bear market

a prolonged period of falling stock prices and a general feeling of investor pessimism

speculator or day trader

someone who buys and sells stock within a short period of time

leverage

the use of borrowed money to buy securities

buying on margin

when you borrow money from your broker to buy a stock by opening a margin account and signing a contract called a margin agreement

short selling

selling stock borrowed from a broker that must be replaced at a later time

stock split

an increase in the number of outstanding shares of a company's stock

dollar-cost averaging technique

involves the systematic purchase of an equal dollar amount of the same stock at regular intervals, which results in a lower average cost per share

direct investment

buying stock directly from a corporation

dividend reinvestment

using dividends previously earned on the stock to buy more shares

ticker symbol

the abbreviated name for stocks

price/earnings (P/E) ratio

the price of a share stock divided by the corporation's earnings per share over the 12 months