Investing

(Or…how to build wealth since I can’t hit a golf ball like Tiger)

I. Understanding Your Objectives

• WHY are you investing? What future needs are you planning for?

• Examples:

- college tuition

- retirement

- down payment for a house

Objectives (con’t.)

• WHAT is your time frame?

• WHEN do you need the money?

• HOW long do you have to reach your goal

(all 3 essentially ask the same Q.)

Risk and Reward

• Understand the relationship between risk and reward:

Higher returns = higher risk

• Assess your tolerance for risk

Many Kinds of Risk !

• The value of your investments is exposed to a variety of risks:– Inflation risk (is it possible to play it TOO

safe?)– Interest rate risk– Political risk– Many, many more to consider

Know what you are investing in

• Do you understand HOW your money will grow?

• Are you able to judge for yourself HOW your investment is doing?

Investment Choices

• There are lots of things that you can invest in….for instance:

Real Estate

Examples:

•Buy “raw land”

•Buy a “fixer-upper” home to rent

•Buy an apartment building

Precious Metals

• Gold

• Silver

• Platinum

Art or “Collectables”

• Buy a painting, photo, sculpture, etc.

• Collectables:

- trading cards

- autographs

- memorabilia

- others

Commodities

• Generally, most are agricultural products…you make money by correctly deciding if the price by a certain future date will be higher or lower than today’s

• Examples:

- orange juice - coffee

-wheat - pork bellies

http://video.google.com/videoplay?docid=529647372100644969&ei=M-xgS_WaGaDKqQKC9dG0CA&q=trading+places+-site%3Ayoutube.com&hl=en#docid=-2701937519505157898

The 2 most common investments:

Stocks & Bonds

BONDS• Are debts…like an I.O.U.

The issuer must repay the bond PLUS interest• Gov’ts sell bonds to raise money for various

reasons: for example,– to pay for the cost of war (WWII war bonds)

– to build schools, hospitals, libraries, courthouses, and other public buildings

– to build roads, bridges, etc.

– in general, to pay for construction projects that benefit the general public

Who issues bonds?

1. Gov’ts: federal, state, local A. U.S. Gov’t Treasury Bonds Treasury Notes Treasury BillsB. States and local gov’t “municipal bonds” Tax advantages

2. Corporations Corporate Bonds

Why do Govt’s & Corps. Sell Bonds?

• Financing (paying for) large projects:

1. Gov’t needs to pay for…?

2. Corporations need to pay for…?

Bonds have 3 “parts”

• Principal – the amount borrowed

• Interest – the amount paid by the borrower for using the money

• Maturity – the date by which the borrower must pay off the loan

Who invests in bonds?

• People who want to generate an “income stream”

(Investors collect the interest and then get their principal back when the bond matures)

• Those looking for lower-risk investments

• Popular with senior citizens…why?

Stocks

• A common method for companies to raise large sums of cash is to sell stock in the company…if you own a share of stock, you own a piece of the companyWhen a company sells stock for the 1st time: “Initial Public Offering” (an “IPO”)

• Selling stock means giving up a degree of ownership

How do I make money in stocks?

• Capital Appreciation: buy low….sell high

• Dividends : cash payment to shareholders by the company from its profits

dividends are not automatic…the Board of Directors decides IF and HOW

MUCH the dividend will be

Where do shares of stock “trade”?(where are they bought / sold?)

• The New York Stock Exchange (NYSE)

- generally, well-established companies

• The American Stock Exchange

• Nat’l Assoc. of Securities Dealers Automated Quote System…or just

NASDAQ

Stock symbols

• EVERY stock has its own unique symbol

• Those traded on the NYSE have 1 to 3 letters: for example

- F = Ford Motor Co.

- HD = Home Depot

- IBM = Int’l Business Machines

Symbols (cont.)

• Stocks traded on NASDAQ have 4 letters:

• DELL = Dell Computer

• SIRI = Sirius Satellite Radio

• INTC = Intel Corp.

Reading a stock quote

http://finance.yahoo.com/marketupdate/overview

Stock Indexes

• What are they?

Quick way to measure how “the market” is doing:

The Dow-Jones Industrial Average

• AKA: ‘the Dow”• Group of 30 stocks representing the major sectors

of the US economy

* Ford and GM

* Microsoft

* General Electric

* Coca Cola

* 25 others

• The Dow is an average of the 30 stocks prices

• In theory, if the average goes up, “the Market” in general has moved higher

• Weakness of the DJIA: not a very large sample (can just 30 stocks really reflect accurately what the overall market is doing?)

The Standard & Poor’s 500 Index

• S+P 500 for short

• Same concept as the Dow, but uses 500 companies

• S + P 500 is generally the preferred index to assess the overall market

Other Indexes

• The Russell 2000

• The Wilshire 5000

• The NASDAQ 100

• Dozens of other “specialty” indexes

(e.g. transportation index

utilities index

energy index)

(don’t need to write the following)

• So…the 1st thing to do when checking your stocks is to get a sense of the overall performance of the market

Do this by checking the Dow and the S&P 500

http://finance.yahoo.com/

Why do stock prices go up or down?

• Basically….supply and demand! We want to own shares in companies that are increasing profits. Above all else: stock prices are tied to a company’s

future earnings

If investors believe that earnings will grow, demand for shares of stock in that company grows & it’s price will rise (opposite if investors think earnings will decline)

Be Advised!

• Despite any developments surrounding a company,

1. A company’s stock price is subject to many currents in the economy

• Political events

• Events of the overall economy

• Events in that company’s industry

Accounting 101

Revenues (“income from sales”)

- Expenses

“Gross Income”

- Taxes____

“Net Income” (aka “net earnings”)

Net Earnings is a dollar amount

• Company A: net earnings = $2,000,000

• Company B: net earnings = $1,000,000

• Company A would be the better investment, right? Not so fast…

• Company A has issued 4,000,000 shares

• Company B has issued 1,000,000 shares

• We need to do one simple math operation:

Net Earnings

# Shares

Comparison

• Company A:

$2,000,000

4,000,000 shares

= $0.50 / share…50¢ per share in net earnings

• Company B:

$1,000,000

1,000,000 shares

= $1.00 / share…$1.00 per share in

net earnings

Now, connect the dots…• Recall that above all else: a stock’s value tends to

mirror its earnings… If earnings go up, a stock’s price should go up

As investors, then, we look for:

1. Earnings growth year to year• Improving or deteriorating?• How do your company’s earnings

compare to its competition?

What could change a company’s earnings?

1. An event or news specific to that company:

• A new and exciting product

• A new contract

• A change of management

• Cost-cutting measures (like closing unprofitable stores or divisions)

What could change a company’s earnings (continued)

• The industry the company is in could be changing (are there solar companies out there that could be the next Microsoft?)

• Maybe the company & the industry are fine but the entire economy is struggling?

Types of Stock

• “Growth” stocks: grows in value faster than the overall market

• “Blue Chip” stocks: stock in companies that are well-established…often household names…leaders in their industry

• “Income” stocks: those that pay high dividends

• “Cyclical” stocks: move with the business cycle…tend to rise when the economy is strong….fall when the economy struggles

• “Defensive” stocks: tend to hold value in poor economic cycles, but do not rise as fast in up cycles

• “Speculative” stocks: high risk stocks that offer the promise of spectacular returns…usually doesn’t happen!

“Stock-picking” isn’t always easy

• You might have the right industry…but the wrong company

• Negative unforeseen events may occur AFTER you own it

• A “solution”? Spread your risk over many stocks…

Mutual Funds

• Pools investors’ monies

• Professionally managed

• Buys 100’s…1,000’s of different stocks and or bonds

• DIVERSIFIES your investment $

• Hundreds of “families of funds” to choose from