Chapter 1: Investment Fundamentals

Objectives

Summarize reasons why people invest, what is required before beginning, how returns are earned, and some ways to obtain funds to invest.

Determine your own investment philosophy. Recognize the variety of investments available. Identify the major factors that affect the return on

investment. Specify some strategies of portfolio management for

long-term investors. List three guidelines to use when deciding the best

time to sell investments.

Establishing Investment Goals Financial goals should be specific and

measurable. Why are you accumulating these funds? How much do you need? How will you get it? How long will it take you to reach your goal? How much risk are you willing to assume? Are you willing to sacrifice current consumption

to invest for the future? Is it realistic to try and save this amount?

Investment Fundamentals

Difference in return is a major distinction between savings and investing.

Successful investors begin to live off earnings, without spending wealth itself.

ATTENTION!

Preparations for Investing

Achieve financial goals

Increase current income

Gain wealth and financial security

Have funds available for retirement

WHY PEOPLE INVEST:

Preparations for Investing

Live within means

Continue savings program

Establish lines of credit

Carry adequate insurance

Establish investment goals

PREREQUISITES TO INVESTING:

Interest

Dividends

Rent

Capital gain/loss

Rate of return or yield

Preparations for Investing

INVESTMENT RETURNS:

Factors That Affect Investment Decisions

Safety - minimal risk of loss Risk - uncertainty about the outcome

inflation risk interest rate risk business failure risk market risk

Income From Investments Safest

CDs savings bonds T-bills

Higher potential income municipal bonds corporate bonds preferred stocks mutual funds real estate

INVESTMENT PROESS

INVESTMENT POLICY

ANALYSIS

VALUATION

VALUATION HELPS THE INVESTOR TO DETERMINE THE RETURN AND RISK EXPECTED FROM AN INVESTMENT IN THE COMMON STOCK.

CONSRUCTION OF PORTFOLIO

A PORTFOLIO IS A COMBINATION OF SECURITIES. IT IS CONSTUCTED IN SUCH A MANNER TO MEET THE INVESTOR’S GOALS AND OBJETIVES.

IT INCLUDES THE FOLLOWING

EVALUATION

SPECULATION

IT MEANS TAKING UP THE BUSINESS RISK IN THE HOPE OF GETTING SHORT TERM GAIN.A SPECULATOR IS MORE INTERESTED IN THE MARKET ACTIONS AND ITS PRICE MOVEMENT.

DIFFERENCE BETWEEN SPECULATOR AND INVESTOR

BASIS OF DIFFERENCE

INVESTOR SPECULATOR

TIME HORIZON PLANS FOR LONGER TIME(1 YR. TO FEW YEARS)

PLANS FOR SHORT TIME (FEW DAYS TO MONTHS)

RISK ASSUMES MODERATE RISK

WILLING TO UNDERTAKE HIGH RISK

RETURN MODERATE RETURNS

HIGH RETURNS

FUNDS OWN FUNDS USES BORROWED FUNDS

GAMBLING

A GAMBLE IS USUALLY A VERY SHORT TERM INVESTMENT IN A GAME OR CHANCE.TIME IS SHORTER THAN SPECULATION AND INVESTMENT.PEOPLE GAMBLE AS A WAY TO ENTERTAIN THEMSELVES, EARNING INCOMES WOULD BE SECONDARY FACTOR.

Investment Alternatives

SECURITIES:A.T. SECURITIES REGULATION ACT 1956,”SECURITIES INCLUDE SHARES,STOCKS,BONDS,DEB OR OTHER MARKETABLE SECURITIES.

Investment Alternatives

What is a bond? a loan to a corporation, the

federal government, or a municipality

The interest is paid twice a year, and the principal isrepaid at maturity (1-30 years)

You can keep the bond until maturity or sell it to another investor

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Investment Alternatives

What is a mutual fund? investors’ money is pooled and invested by a

professional fund manager you buy shares in the fund provides diversification to reduce risk funds range from conservative

to extremely speculative match your needs with

a fund’s objective

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Sources of Investment Information

Newspapers Business Periodicals Government Publications Corporate Reports Statistical Averages Investor Services and newsletters

Standard and Poor’s stock reports Value Line Moody’s investment service