fundamentals of investing dr. john p. abraham professor utpa
TRANSCRIPT
Fundamentals of Investing
Dr. John P. Abraham
Professor
UTPA
Investing goals
• Preserve capital
• Increase in value
• Agents:– financial institutions (banks, insurance
companies) and financial markets (forums where suppliers and buyers are brought together).
– Agents can be: government, business or individuals.
Government
• Federal, state and local all require vast sums of money.
• Borrow money to finance projects: war, buildings, schools, housing, bridges, etc.
• They may loan surplus money for short term.
Business & Individuals
• Borrow and loan funds
Security
• Easy to buy and sell• Investments
– Evidence of ownership in a business– Legal right to acquire or sell an ownership interest in a
business– Bonds, stocks, and options
• Direct investment or indirect investment– Direct – buy security– Indirect – own a share in a company that buys
securities.
Property
• Difficult to buy and sell
• Real estate– Land, building
• Tangible personal property– Gold, collectibles
• Usually long term (longer than one year)
Steps in Investing
• Carefully developed plan to achieve specific financial goal.
• Must have living expenses, savings for emergency before investing.
• Goal of investing:– Example in 3 years accumulate down
payment for a house.
• Selecting investments
Portfolio
• Collection of investments assembled to meet goals.
• Diversification– Limit risk and maximize returns
• Managing portfolio– Selling, buying, rebalancing– Short tem CDs, money market, T-bills– Fixed income securities such as bonds and
preferred stocks.
Stocks
• Common stock– Represents ownership in a corporation– May yield dividends– Capital gain
• Preferred stock– Ownership in a corporation with a stated dividend
rate. (preference over common stock).– Convertible securities. Bond or preferred stock that
may be converted to a specified number of shares of common stock.
Options
• Provide investor with an opportunity to sell or buy an underlying security at a specified price within a given period of time.
• Good in a volatile market.
• Call is an option to buy
• Put is an option to sell.
Mutual Funds
• Professionally managed diversified portfolio of securities.
Real Estate
• Commercial
• Residential
IRA, SEP-IRA, ROTH-IRA & 401/403K
• Tax sheltered
• Pay tax up front and let it earn taxfree
• Don’t pay tax up front, let earn, pay taxes when your income is low.
Investment Markets
• IPO – initial public offering– sell directly as in case of Google– Sell through an investment banker (Goldman
Sachs or Solomon brothers)• Buy stocks at a fixed price (discount price) and
take risk of selling it (this is called underwriting).
• Secondary market– After the initial offering, stock may be traded
at secondary markets.
Secondary markets
• Organized Securities and Exchanges– New York Stock Exchange NYSE – American Stock Exchange AMEX– Nasdaq (National association of securities dealers
automated quotation) used to be main OTC.– Options exchanges– Futures Exchanges
• Over the counter market– Sold over telecommunication network. Unlisted
securities.• Foreign Securities Markets (ADR – american
depositary receipts)
Things to Know
• Insider trading• Bull market• Bear market• Market crash• Types of account
– Single or joint, cash or margin
• Types of orders– Market or limit– Stop loss order
In declining market
• Short selling
• Investors sell stocks they don’t have (borrowed selling) – borrowed from broker.
• Must be purchased eventually
Practical Investment guide
• Making a budget
• Savings
• Real Estate– Home– Rentals
• Stocks
• Bonds
Making a budget(live within your means)
• Budget is a plan• Must be realistic• Must be mutually agreed upon (if married)• Must adhere to it as much as possible
– Goal is to remain under budget in spending– And over budget in income
• My advice: borrowing money is bad.– Using credit card is even worse – if you do not
pay off entire amount each month.
Savings
• The best time to save is when you get your first real job. Do not raise your standard of living immediately; instead save.
• Minimum savings:– Enough to live for 3 to 6 months if you lost
your job.– Enough to pay for a down payment on a
house and a car.
Savings in buying
• Don’t buy anything unless you have daily or periodic use for it.
• Don’t be an impulsive buyer. Buy items on your buy list.
• Find different devices that will do the same job, you may be able to save as much as 80% or more.
• As much as possible, buy things that are on sale without sacrificing quality (moldy bread at deep discount is useless!)
Real estate
• First investment should be a place to live.
• Renting vs. buying (show calculation)
• Only time borrowing is allowed (my opinion)– You are paying with cheaper money while
your home is appreciating.– Government is subsidizing your interest.
Real Estate Investments
• Positives– Appreciation– Tenants pay your loans
• Negatives– May have negative cash flow– May be vacant– Not liquid
Land vs. income producing
• Land in the right location will bring profits many fold.
• Must pay (in my opinion) cash – no loans.
• Income producing – you can borrow.
• You need to do most of the repair & maintenance work.
Stocks
Bonds