unit 4

What are the 3 reasons that people invest?  (purple headings)

beats inflation

increases wealth

fun and challenging

Define the following terms from section 11.1

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 

Portfolio

A collection of investments

Investing Risk

The chance that an investment’s value will decrease

Diversification

spreading of risk among many types of investments 

Temporary Investments

investment choices that will be reevaluated within a year or less

Permanent Investments

investment choices that will be held for the long run

Stage 1

put-and-take account

when a paycheck is received, you will put in money and take it out as needed to pay your bills 

Stage 2

initial investing

when you start to have “excess” savings

Stage 3

systematic investing

making investments on a regular and planned basis

Stage 4

strategic investing

The careful management of investment alternatives to maximize the  growth of your portfolio

Stage 5

speculative investing

when you make bold and high-risk investment choices 

Types of Risk

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

Market Risk

caused by economic growth or decline 

Nonmarket Risk

unrelated to market trends; unpredictable and uncontrollable 

Company and Industry Risk

owning one company’s stock; if that company fails you lose your investment 

According to the textbook, what are the 6 factors used to evaluate your investment choices: 

degree of safety (risk of loss)

degree of liquidity (ability to get your money quickly)

expected dividends or interest

expected growth in value, preferably exceeding the inflation rate

reasonable purchase price and fees 

tax benefits (savings or postponing tax liability)

According to the textbook, what are the 7 investment practices used to avoid mistakes: 

Define your financial goals 

go slowly

follow through

Keep good records

Seek good investment advice

Keep investment knowledge current 

know your limits

Define the following terms from 11.2

Annual Report

a summary of a corporation’s financial results for the year and its prospects for the future 

bonds

debt obligations of corporations/state/local governments 

discount bond

purchased for less than the maturity rate 

Where can you obtain Investor Information?

newspapers

investor services and newsletters

financial magazines

brokers

financial advisers

annual reports

online investor education 

Low-Risk/Low Return                 (list the investment choices below and define them to the right)

Corporate and Municipal Bonds

When a corporation or government body sells a bond, it is borrowing from an investor

US Government Savings Bonds

When you buy a savings bond, you are lending money to the United States government 

Treasury Securities

to invest with cash

Medium Risk/Medium Return     (list the investment choices below and define them to the right)

stocks

a unit of ownership in a corporation

mutual funds

the pooling of money from many investors to buy a large selection of securities 

Annuities

a contract that provides the investor with a series of regular payments, usually after retirement 

Real estate

Investment in houses and land

High Risk/High Return      (list the investment choices below and define them to the right)

futures

contract to buy and sell commodities (products that are mined or grown) or stocks for a specified price on a specified date in the future. 

Option

the right 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. 

collectibles

collectable items whose value can grow or decline 

Common Stock

A type of stock that pays a variable dividend and gives the holder voting rights 

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

Stock in corporations that reinvest their profit into the business so that it can grow

Emerging Stocks

Stock in young, often small corporations that have higher overall risks than stock of companies that have been successful for many years 

Blue Chip Stocks

Stocks of large, well-established corporations with a solid record of profitability 

Defensive Stocks

Remains stable and pays dividends during an economic decline 

Cyclical Stocks

Does well when the economy is stable or growing, but often does poorly during recessions

Stock Price

The price you will pay for a share of stock

Return on Investment 

Your profit is the difference between what you paid for the stock and what you sold it for, plus any dividends you earned 

Short-Term Techniques

Buy on Margin

Betting that the stock will increase in value. If it does, you sell the stock, repay the load with interest and commission, and take your short-term profit 

Sell Short

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

Long-Term Techniques

Dollar-Cost Averaging

Involves the systematic purchase of an equal dollar amount of the same stock at regular intervals 

Reinvesting Dividends

Using dividends previously earned on the stock to buy more shares

Mutual fund

A professionally managed group of investments bought using a pool of money from many investors 

Family of funds

A variety of funds covering a whole range of investment objectives

Growth fund

A mutual fund whose investment goal is to buy stocks that will increase in value over time

Income fund

A mutual fund whose investment goal is to produce current income in the form of interest or dividends

Growth and income fund

A mutual fund whose investment goal is to earn returns from both dividends and capital gains

Balanced fund

A mutual fund that seeks both growth and income but attempts to minimize risk by investing in a mixture of stocks and bonds rather than stocks alone

Money market fund

A mutual fund that invests in safe, liquid securities, such as Treasury Bills and bonds that mature in less than a year

Global fund

A mutual fund that purchases international stocks and bonds as well as US securities

Index fund

A mutual fund that tries to match the performance of a particular index by investing in the companies included in that index

Net asset value

The market price for a share of a mutual fund

prospectus

A legal document that offers securities or mutual fund shares for sale 

Advantages of Mutual Funds

Professional Management

Liquidity

Diversification

Small Initial and Ongoing Purchases 

How To Calculate Net Asset Value (NAV)?

Value of Portfolio - LiabilitiesNumber of shares

Load

A sales fee for buying a mutual fund through a broker

Front-end load

Sales charge paid when you buy an investment 

Back-end load

A sales charge is paid when you sell an investment

no-load

Buying mutual funds directly from the investment company 

Expense ratio

A percentage of assets is deducted each year for fund expenses

Real estate

Buying land and any buildings on it

Types of Real estate to buy (describe orange headings)

Vacant land

Unimproved land

Single-family houses

Purchasing a house like this allows you to rent it to others

Rental properties

Real estate designed for owners to rent to tenants

Recreation and Retirement Property

Second homes for vacations or for their retirement years 

Real Estate Syndicates

Limited partnership; a group of investors who pool their money to buy high-priced real estate 

Real Estate Investment Trusts (REITs)

A corporation that pools the money of many individuals to invest in real estate 

What do you need to consider when buying and owning RENTAL PROPERTY?  (orange headings)

Monthly payments

Monthly management

Tax advantages

Selling rental property

Risks of owning rentals

What are the OTHER investing choices?

Precious metals

Financial instruments 

Gems and Jewelry

Collectibles 

Reverse mortgage

A loan against the equity in the borrower’s home

Heir

A person who will inherit property from someone who dies

Estate

All that a person owns, less debts owed, at the time of the person’s death 

Will

Testament; a legal document that tells how an estate is to be distributed when a person dies 

Codicil

A legal document that modifies parts of a will and reaffirms the rest

Trust

A legal document in which an individual (the trustor) gives someone else (the trustee) control of property, for ultimate distribution to another person (the beneficiary) 

Power of Attorney

A legal document authorizes someone to act on your behalf 

Estate Tax

A tax on property transferred from an estate to its heirs 

Inheritance Tax

A tax imposed on an heir who inherits property from an estate

Gift Tax

Tax applied to a gift of money or property 

Keogh plan

A tax-deferred retirement savings plan is available to self-employed individuals and their employees

Simplified Employee Pension (SEP)

A tax-deferred retirement plan is available to small businesses

Annuity

Income from an investment is paid in a series of regular payments made for a set number of years 

Individual Retirement Account (IRA)

A retirement savings plan that allows individuals to set aside up to a specified amount each year and delay paying tax on the earnings until they begin withdrawing them at age 59.5 or later. 

Traditional IRA

You can deduct your contribution each year from your taxable income

Roth IRA

A type of IRA where contributions are taxed, but earnings are not 

Defined-benefit plan

A company-sponsored retirement plan in which retired employees receive a set monthly amount based on wages earned and the number of years of service

Defined-contribution plan

A company-sponsored retirement plan in which employees can receive a periodic or lump-sum payment based on their account balance and the performance of the investments in their account.