Unit 5 Investing Unit 5 Vocabulary

Unit 5 Investing

Unit 5 Vocabulary § § § § § Agency Bonds Annual Report Annuity Auction Market Back-end Load Bear Market Blue Chip Stocks Bond Bull Market Buy and Hold § § § § § Buying on Margin Collectables Common Stock Cyclical Stocks Defensive Stocks Direct Investing Discount Bond Discount Broker Diversification Dividend Reinvestment

Unit 5 Vocabulary § § § § § Dividends Dollar-cost Averaging Earnings per Share Family of Funds Financial Advisor Financial Pages Floorbrokers Front-end Load Full-service Broker Futures Contract § § § § § Gemstones General Obligation Bonds Government Bonds Growth Stocks Income Stocks Investor Services IRA Keogh Plan Market Value

Unit 5 Vocabulary § § § § § Municipal Bonds Mutual Funds No-Load Option Over-the-counter Market Par Value Penny Stocks Precious Metals Preferred Stocks Prospectus § § § § § Revenue Bond Risk Securities Exchange Selling Short SEP Plan Speculator Stock Treasury Securities (T-Bills) 401(k) plan 403(b) plan

Unit 5 Essential Question § What are the benefits and risks of investing and the vehicles used to invest with?

Essential Question 1 Investing § Why should you invest?

Reasons for Investing § To supplement earned income § To make a profit § To minimize tax burdens now and in the future § To provide income for retirement § To stay ahead of inflation: A rise in the general level of prices

Essential Question 2 Investing § What is risk?

Risk § Risk: A measure of the uncertainty about the outcome. § The greater the risk, the greater the return § Can be minimized through diversification: spreading risk among many types of investments

Risk § Types of risk: § Short-term vs Long-term: Short-term investments are generally less risky than longterm investments. § Inflation: During inflationary times, there is the risk that inflation will exceed interest or the rate of return. § Interest Rate: Fixed rate investments are not affected by changes in inflation rates.

Risk § Types of risk: § Political: Government actions such as increased taxes and regulations on targeted industries can make some investments less attractive. § Market: Affects many kinds of investments at one time. Business declines, sudden national or world events, or interest rate fluctuations will affect the market.

Risk § Types of risk: § Company or Industry: Factors or events that affect only one company or industry may adversely affect investments in that company or industry.

Essential Question 3 Investing § What are some wise investment practices?

Wise Investment Practices § Define Your Financial Goals – Must be specific and measurable. § Go Slowly – Provide adequate time to obtain and analyze the needed information to make a sound choice. DON’T go too slowly!

Wise Investment Practices § Follow Through § Don’t put off, act now § Don’t keep to much money in the “put-and-take accounts. Take advantage of the higher interest rate investments.

Wise Investment Practices § Keep Good Records – Unless you know where you have been and where you are, it is difficult to plan where you are going.

Wise Investment Practices § Seek Good Investment Advice – It is wise to seek competent advice from a trained professional before making any investment decision.

Wise Investment Practices § Keep Investment Knowledge Current – It is your responsibility to know when to ask questions and to make any final decisions. §Knowledge is Power!

Essential Question 4 Investing § Where can you find information on financial investing?

Sources of Financial Information § Financial Pages: Includes financial data and other investment information. TIMES

Sources of Financial Information § Investor Services: Provides extensive financial data to clients.

Sources of Financial Information Finance News § Financial Magazines: Business Week, Forbes, Money, Fortune, Kiplinger’s

Sources of Financial Information § Full-service Brokers: Provides analysis and opinions based on their judgment.

Sources of Financial Information § Discount Brokers: Provides little to no financial advice. Good for the well informed, do it yourselfer.

Sources of Financial Information § Financial Advisors: Trained to give intelligent overall investment advice based on your goals, age, net worth, occupation, investment experience, lifestyle, etc.

Sources of Financial Information § Annual Reports: A corporation provides the information needed to evaluate that corporation as an investment prospect.

Essential Question 5 Investing § What are the various investment options?

Investment Options § Stock: Represents ownership in a corporation. § A share of stock is a unit of ownership. § The owner of stock is called a stockholder. Dividends are paid to the stockholder from corporate profits.

Investment Options § Bonds: Represents debt obligations of corporations or governments. § The principal, amount borrowed, must be repaid on the maturity date.

Investment Options § Discount Bond: Bond issued by the U. S. government. § Series EE: Bond purchased for half its face value and generally matures in ten years. § Series HH: May be purchased only in exchange for Series EE and pays interest every six months.

Investment Options § Treasury Securities (T-bills): Issued by the U. S. government starting at $10, 000 increments of $5000 for three, six and twelve month maturities.

Investment Options § Mutual Funds: Pools the money of many investors and buys a large selection of securities that meet the fund’s stated investment goals. § Real Estate: Provides protection against inflation as well as providing tax benefits to the owner.

Investment Options § Retirement Plans § Annuity: A contract or agreement written by an insurance company to provide regular income. It pays while you are alive. § IRA (Individual Retirement Account): A tax sheltered retirement plan. § May contribute a maximum of $3000 per year § Contributions are tax deductible § Interest earned is tax deferred

Investment Options § Retirement Plans § Keogh Plans: Retirement plan available to self employed individuals. § SEP (Simplified Employee Pension) Plans: Allows small employers to provide retirement plans to their employees.

Investment Options § Retirement Plans § 401(k) Plans: An IRA type retirement plan provided to employees of companies that operate for a profit. § 403(b) Plans: An IRA type retirement plan provided to employees of government or not-forprofit businesses.

Essential Question 6 Investing § What are the various investment strategies?

Investment Strategies § Short-Term Techniques: Buy and sell stocks for quick profits. Commonly referred to as “playing the market. ” § These people are referred to as speculators. § Buying on Margin: Borrowing money from your broker to buy stock. § Selling Short: Borrowing stock from your broker to sell.

Investment Strategies § Long-Term Techniques: History has shown that long term stock investments have beat savings and CDs consistently. § These people are referred to as investors.

Investment Strategies § Long-Term Techniques: § Buy and Hold: Buy stock and hold it for a long period of time in anticipation that the value will eventually increase as well as collecting dividends. § Dollar-Cost averaging: Systematic purchase of the same stock at regular intervals.

Investment Strategies § Long-Term Techniques: § Direct Investment : Stock is purchased directly from the corporation at a greatly reduced or eliminated broker fee. § Dividend Reinvestment: Dividends are rolled over and used to purchase additional shares of stock.

Essential Question 7 Investing § What are stocks and how are they bought and sold?

The Securities Market § Bull Market: Characterized by rising stock prices and a general feeling of investor optimism. § Bear Market: Characterized by falling stock prices and a general feeling of investor pessimism.

The Securities Market § Securities Exchange: A marketplace where brokers who represent investors meet to buy and sell securities. § Auction Market: Stock trading happens auction style. Stock is sold to the highest bidder and bought from the lowest offer. § Floorbrokers: Members of the exchange do their actual business on the floor of the exchange.

The Securities Market § Over-the-Counter (OTC) Market: Network of brokers who buy and sell securities that are not listed on a securities exchange.

Types of Stock § Common Stock: The owner of the stock shares directly in the success or failure of the business. § Owner has voting rights. One share equals one vote. § Pays dividends: A portion of the corporate profits paid to each shareholder.

Types of Stock § Preferred Stock: Dividends are fixed, regardless of corporate profits. § Owner has no voting rights. § Less risky than common stock. § If the company fails, the preferred stock holders get paid first.

Stock Classifications § Income Stocks: Chosen to supplement income in the form of dividends. § Growth Stocks: Companies reinvest their profits into the company so it can grow and expand. They pay little to no dividends.

Stock Classifications § Penny Stocks: Stocks that sell for less than $5 per share. § Blue Chip Stocks: Stocks of large, well-established, and usually profitable businesses.

Stock Classifications § Defensive Stocks: Stock that remains stable and pays dividends during economic declines. § Cyclical Stocks: Stocks that do well when the economy is stable or growing but poorly during economic slowdowns or recessions.

Stock Terminology § Par Value: An assigned dollar value printed on the stock certificate. § Market Value: Price investors are willing to pay for a share of stock.

Stock Terminology § Market value is determined by: § The Company: Investors consider a company’s earning power, ability to make a profit, and debt obligations. § Interest Rates: If interest rates are high, people put money into savings. When interest rates are low people put money into the market. § The Marketplace: How well the company can sell its products to consumers.

Stock Terminology § Market value is determined by: § Earnings Per Share: A corporations after-tax earnings divided by the number of common stock shares outstanding. § Return on Investment: How much money you make from your investment.

Return Calculations

Essential Question 8 Investing § What are bonds and how are they bought and sold?

Government Bonds § Government Bonds: Issued by the federal, state, or local governments. § Agency Bonds: Bonds issued by federal agencies and have a slightly higher interest rate than treasury bonds.

Government Bonds § Municipal Bonds: Bonds issued by state or local governments with a minimum investment of $5000. § Generally pay a lower interest rate than corporate bonds § The interest is tax exempt

Government Bonds § Municipal Bonds § Revenue bond: A special municipal bond repaid from revenue generated from special projects. § General obligation bond: A special municipal bond backed by the credit of a tax levying government body.

Essential Question 9 Investing § What are mutual funds and how are they bought and sold?

Mutual Funds § Family of Funds: Grouping of several different funds offered by the same company. § Why invest in mutual funds: § They are convenient § You don’t have to follow the market § Have professionals doing all the work

Mutual Funds § Why invest in mutual funds: § § Diversification Transfers can be made by phone Liquidity Regular monthly payments give the benefit of dollar-cost averaging

Mutual Funds § When evaluating mutual funds: § Responsibility for choosing the right mutual fund rests with individual investor. § Prospectus: Contains information about how a fund operates, a summary of its investments, and its goals and objectives. § Earnings in the form of dividends, capital gains distributions and sales of shares are taxable.

Mutual Funds § When evaluating mutual funds: § Costs and Fees: § Front-end Load: Pay commissions on your initial purchases. § Back-end Load: Pay commissions when you sell your shares. § No-load Fund: Do not charge commissions when you buy or sell because they have no salespeople. § Management, administrative, and maintenance fees usually average 1% of the funds assets.

Essential Question 10 Investing § What are futures and options and how are they bought and sold?

Futures and Options § Futures Contract: An agreement to buy and sell a commodity at a guaranteed price on some future date.

Futures and Options § Option: Gives the investor the right, for a fee, to buy or sell lots of 100 shares of stock at a predetermined price within a specified period of time. § Call Option: Is the right to buy stock by a certain date. § Put Option: Is the right to sell stock by a certain date.

Essential Question 11 Investing § What are other methods of saving and investing?

Metals, Gems, Collectibles § Precious Metals: Expensive and rare metals such as gold, silver and platinum. § Are the best hedge against inflation. § Precious metals are world based and are thus effected by world economic conditions. § Usually purchased in the form of a certificate stating how much bullion is being held in storage.

Metals, Gems, Collectibles § Gemstones: Natural precious stones, such as diamonds, rubies, sapphires, and emeralds. § Have their greatest value in jewelry. § Collectibles: Collections of rare items, from antiques to comic books.