investing: taking risks with your savings. stocks are also known as securities as proof of...

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Investing: Taking Risks With Your Investing: Taking Risks With Your Savings Savings

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Investing: Taking Risks With Your SavingsInvesting: Taking Risks With Your Savings

Stocks are also known as Stocks are also known as securitiessecuritiesAs proof of ownership, you get a stock As proof of ownership, you get a stock

certificatecertificate

StocksStocks

What are they?What are they?What does the What does the company get?company get?

What does the What does the investor get?investor get?

Each share Each share gives part gives part ownership in ownership in the company the company

Funds for use Funds for use is expanding is expanding its businessits business

Entitled to a Entitled to a part of the part of the future profits future profits & assets.& assets.

Stock ReturnsStock Returns

Stockholders-People who have Stockholders-People who have invested in a corporation and own invested in a corporation and own some if its shares of stock.some if its shares of stock.

Stockholders benefit in 2 ways:Stockholders benefit in 2 ways:– Dividend ~ return on each share when Dividend ~ return on each share when

company has a profitcompany has a profit– Selling the stock for more than they paid Selling the stock for more than they paid

for itfor it

Capital Gains and LossesCapital Gains and Losses

Capital Capital gaingain: : increaseincrease in value of an in value of an asset from the time it was bought to asset from the time it was bought to the time it was sold.the time it was sold.

Capital Capital lossloss: : decreasedecrease in value of an in value of an asset from the time it was bought to asset from the time it was bought to the time it was soldthe time it was sold

Capital Gain & Loss Capital Gain & Loss ExamplesExamples You buy a stock for $20 and sell it for You buy a stock for $20 and sell it for

$30, you make a profit of $ $30, you make a profit of $ which is called a _______________.which is called a _______________.

You buy 10 stocks for $15 and sell You buy 10 stocks for $15 and sell them for $7, you lose $ which is them for $7, you lose $ which is called a _______________.called a _______________.

10

80

Capital gain

Capital loss

BondsBonds A certificate issued by a company or A certificate issued by a company or

the government in exchange for the government in exchange for borrowed funds.borrowed funds.

It promises to pay a stated rate of It promises to pay a stated rate of interest over a specific period of time interest over a specific period of time plus the original amountplus the original amount

This date is called maturityThis date is called maturity Bondholder is NOT part owner in Bondholder is NOT part owner in

company (or government)company (or government)– Bondholder is sometimes called creditor Bondholder is sometimes called creditor

b/c the company or govt is in debt to b/c the company or govt is in debt to themthem

Tax Exempt BondsTax Exempt Bonds

Bonds sold by local and state Bonds sold by local and state governmentsgovernments

Interest is NOT taxed by federal gov’t.Interest is NOT taxed by federal gov’t.

Good investment for wealthier people Good investment for wealthier people who would otherwise pay taxes on who would otherwise pay taxes on investmentsinvestments

Savings BondsSavings Bonds

Bonds issued by the Federal Gov’t as Bonds issued by the Federal Gov’t as a way of borrowing money; they are a way of borrowing money; they are purchased at half the face value and purchased at half the face value and increase every 6 months until full increase every 6 months until full face value is reached.face value is reached.

Example:Example: Buying a $50 savings bond Buying a $50 savings bond for $25. It increases in value every 6 for $25. It increases in value every 6 months until maturity.months until maturity.

T-Bills, T-Notes, and T-T-Bills, T-Notes, and T-BondsBonds SimilaritiesSimilarities

– All are certificates issue by the Treasury All are certificates issue by the Treasury Dept. of the Federal GovernmentDept. of the Federal Government

– Minimum amount is $1000Minimum amount is $1000 Differences:Differences:

– T-Bills mature in a few days up to T-Bills mature in a few days up to 26 26 weeksweeks

– T-Notes mature in T-Notes mature in 2 – 10 years2 – 10 years– T-Bonds mature in T-Bonds mature in 30 years30 years

Stocks SummaryStocks Summary

1.1. All corporations issue or offer to sell All corporations issue or offer to sell stock. That act is what makes them stock. That act is what makes them corporationscorporations

2.2. Stocks represent ownershipStocks represent ownership

3.3. Most stocks do not have a fixed Most stocks do not have a fixed dividend ratedividend rate

4.4. Dividends on stock are paid only if Dividends on stock are paid only if the corporation makes a profit.the corporation makes a profit.

Stock Summary Continued…Stock Summary Continued…

5.5. Stocks do not have a maturity date. Stocks do not have a maturity date. The corporation issuing the stock The corporation issuing the stock does not repay the stockholder.does not repay the stockholder.

6.6. Stockholders usually elect a board of Stockholders usually elect a board of directors who control the corporation.directors who control the corporation.

7.7. Stockholders have a claim against Stockholders have a claim against the property and income of a the property and income of a corporation only after the claims of corporation only after the claims of all creditors (including bondholders all creditors (including bondholders and holders of preferred stock) have and holders of preferred stock) have been met.been met.

Bonds SummaryBonds Summary

1.1. Corporations are not required to Corporations are not required to issue bondsissue bonds

2.2. Bonds represent debtBonds represent debt

3.3. Bonds pay a fixed rate of interestBonds pay a fixed rate of interest

4.4. Interest on bonds normally must Interest on bonds normally must always be paid, whether or not the always be paid, whether or not the corporation earns a profit.corporation earns a profit.

Bonds Continued…Bonds Continued…

5.5. Bonds have a maturity date. The Bonds have a maturity date. The bondholder is to be repaid the value of the bondholder is to be repaid the value of the bond, although if the corporation goes out bond, although if the corporation goes out of business, it does not normally repay the of business, it does not normally repay the bondholder in full.bondholder in full.

6.6. Bondholders usually have no voice in or Bondholders usually have no voice in or control over how the corporation is run.control over how the corporation is run.

7.7. Bondholders have a claim against the Bondholders have a claim against the property and income of a corporation that property and income of a corporation that must be met before the claims of any must be met before the claims of any stockholders, including those holding stockholders, including those holding preferred stock.preferred stock.

STOCK & BOND MARKETSSTOCK & BOND MARKETS

Main Idea: Ownership of stocks and Main Idea: Ownership of stocks and bonds can be transferred on centralized bonds can be transferred on centralized exchanges or in decentralized markets.exchanges or in decentralized markets.

Broker: person who acts as a go-Broker: person who acts as a go-between for buyers and sellers of stocks between for buyers and sellers of stocks and bonds.and bonds.– Could be a firm (real person)Could be a firm (real person)– Could be online Internet brokerage firmCould be online Internet brokerage firm– Fees rangeFees range

Stock ExchangesStock Exchanges

Largest—New York Stock Exchange Largest—New York Stock Exchange (NYSE)(NYSE)– Company must prove they are in good Company must prove they are in good

financial conditionfinancial condition– Most are among the largest, most profitable Most are among the largest, most profitable

corps. in the country.corps. in the country. Over-the-Counter Markets – for stocks not Over-the-Counter Markets – for stocks not

listed on the organized exchangeslisted on the organized exchanges– Largest – NASDAQ (National Association of Largest – NASDAQ (National Association of

Securities Dealers Automated Quotations)Securities Dealers Automated Quotations)

Stock Market IndexesStock Market Indexes

Measures of what is happening to a Measures of what is happening to a given set of stock prices for a given set of stock prices for a specified list of companiesspecified list of companies

The most well known is the Dow The most well known is the Dow Jones Industrial Average – “The Dow”Jones Industrial Average – “The Dow”– Tracks 30 major industrial companiesTracks 30 major industrial companies

Standard & Poor’s 500 (S&P 500)Standard & Poor’s 500 (S&P 500)– Tracks stock prices of 500 companiesTracks stock prices of 500 companies

Bull & Bear MarketBull & Bear Market

Bull Market – refers to when stock Bull Market – refers to when stock prices prices move upmove up steadily steadily

Bear Market – refers to when stock Bear Market – refers to when stock prices have been prices have been droppingdropping for a for a period of time.period of time.

Mutual FundsMutual Funds

Investment company that pools the Investment company that pools the funds of many individuals to buy funds of many individuals to buy stocks, bonds, or other investments.stocks, bonds, or other investments.

Most hold a variety of stocks or Most hold a variety of stocks or bondsbonds

Losses in one area are likely made Losses in one area are likely made up for by gains in another areaup for by gains in another area

Medium Interest rates, Medium risk Medium Interest rates, Medium risk involvedinvolved

Not insured by Federal GovernmentNot insured by Federal Government

Money Market FundsMoney Market Funds

Type of Mutual fund that uses Type of Mutual fund that uses investors’ funds to make short-term investors’ funds to make short-term loans to businesses and banks.loans to businesses and banks.

Must be above $500Must be above $500 Not insured by Federal GovernmentNot insured by Federal Government

Government RegulationsGovernment Regulations

Regulated to protect investors at both state Regulated to protect investors at both state & federal levels& federal levels

Securities and Exchange Commission (SEC)Securities and Exchange Commission (SEC)– Administers all federal securities lawsAdministers all federal securities laws– Investigates and dealings among corporations, Investigates and dealings among corporations,

such as mergers (that could effect the value of such as mergers (that could effect the value of stocks)stocks)

States laws are designed to prevent States laws are designed to prevent schemes that would take advantage of schemes that would take advantage of small investorssmall investors