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#11 Investment Planning © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Objectives & Rewards Of Investing Investing • usually long-term • expect future value and return to increase over time Speculating • usually short-term • future value and return highly uncertain Adequate insurance coverage and cash/savings are investment prerequisites How Do I Get Started? PAY YOURSELF FIRST! • Regularly allocate a portion of earnings for investing • Take advantage of automatic investment and dividend reinvestment programs • Learn about investments and "play" trading • Determine financial objectives What Are Your Investment Objectives? • Current Income – appropriate for retired persons • Retirement – live comfortably in "golden years" • Major Expenditures – college education, down payment on a home, or starting a business • Shelter from Taxes – preserve more of your earnings Coming Up With the Capital • How much money will it take? • Do you have a lump sum to invest now, or will you systematically save toward your goal? Investment plan provides direction to help attain goal Different Ways to Invest 1. Common Stock 2. Bonds 3. Preferreds and Convertibles 4. Mutual Funds and Exchange Traded Funds 5. Real Estate Different Ways to Invest 1. Common Stock • Represents a share of ownership in a corporation • Greater potential returns with a higher level of risk Different Ways to Invest 2. Bonds • Represent debt – IOU’s of the issuer • Provide interest income • Bond values inversely related to changes in interest rates Different Ways to Invest 3. Preferred Stock • Equity security that behaves like debt • Fixed dividend paid before dividend to common stockholders Convertible Bonds • Special type of fixed income security • Allows conversion into common stock • Provides income and possible price appreciation Different Ways to Invest 4. Mutual Funds • Professionally managed portfolio by an investment company • Returns and risk depend on portfolio Exchange Traded Funds • Track a basket or index of securities Different Ways to Invest 5. Real Estate • Invest directly or through shares in a REIT • Difficult to estimate risk and return • Investors must be aware of economic cycles Securities Markets “Arenas” where financial instruments trade • Capital Market - long-term securities • maturities >1 year • Money Market - low-risk, short-term securities • maturities l< 1 year Securities Markets Primary market new issues available for first time • Investment bank underwrites • Issuing company gets proceeds • Prospectus Secondary market trading previously issued securities • Securities exchanges • NASDAQ • OTC Market Broker and Dealer Markets Broker Market • buyer and seller come together, direct trade takes place between them • Party A sells securities directly to Party B Dealer Market • buyer and seller never meet • buy/sell orders are executed separately through securities dealers acting as market makers Broker and Dealer Markets Dealer Markets Bid Price Ask Price • price at which investor can sell a security • price at which investor can buy a security Foreign Securities Markets • Organized securities exchanges exist in over 100 countries • Found in major industrialized nations and in emerging economies around the globe Manila Tokyo Regulating the Securities Markets • Federal and state laws regulate securities sales • Provides for adequate and accurate disclosure of financial information • Securities and Exchange Commission (SEC) administers federal securities laws Regulating the Securities Markets • Securities Act of 1933 – ensure full disclosure • Securities Exchange Act of 1934 – created SEC • Investment Company Act of 1940 – protect mutual fund shares • Sarbanes-Oxley Act of 2002 – eliminate corporate fraud • Maloney Act of 1938 - created NASD • Securities Investor Protection Act of 1970 - SIPC Market Trends Bull Market Bear Market • Rising securities prices for extended time period • Falling securities prices for extended time period – Investor optimism – Favorable economy – Investor pessimism – Economic downturn Making Transactions in the Securities Markets • Stockbrokers buy and sell securities for customers • Full-service, discount, or online brokers • Brokerage fees • Investor protection Types of Brokers Brokerage Fees Odd or Round Lots • Odd Lot - fewer than 100 shares – Odd-lot differential • Round Lot - 100 shares of stock or multiples thereof Investor Protection Securities Investor Protection Corp. (SIPC) • protects customers against financial failure of brokerage firm • insures accounts up to $500,000 • guarantees securities or cash held by broker – does not guarantee dollar value of securities Arbitration settles disputes between broker and client Executing Trades • Investor establishes account with broker • Trades can be executed by phone, at brokerage firm, or online Types of Orders • Market order - trade now at best available price • Limit order - trade when a specified price or better is reached • Stop-loss order - sell if stock drops to certain price – use to limit losses Becoming an Informed Investor • • • • • Annual Reports Financial Press Industry Data Stock Quotes Advisory Services Annual Stockholder Reports Here’s what to read…. • Highlights or selected financial data sections • CEO’s letter • Operations in management’s discussion and analysis section • Financial statements and notes • Auditor’s report Online Investing • Online services • Educational material • Investment tools – Investment planning Research and screening – Portfolio tracking Managing Your Investment Holdings • Build a diversified portfolio based on goals and personal situation • Allocate assets according to objectives • Track investments, rebalance portfolio as needed Investor Objectives Trade-off between high current income capital appreciation Asset Allocation and Portfolio Management • Dividing a portfolio among different types of securities • Total return is influenced more by asset allocation than by specific security selections Asset Allocation and Portfolio Management Keeping Track of Investments