Transcript GITMAN/ JOEHNK/ BILLINGSLEY PFIN Investment Planning Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a.

GITMAN/ JOEHNK/ BILLINGSLEY
PFIN
4
11
Investment
Planning
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
LEARNING OUTCOMES
1 Discuss the role investing plays in financial
planning process and identify several
different investment objectives
2 Distinguish between primary and secondary
markets as well as between broker and dealer
markets
3 Explain the process of buying and selling
securities and recognize different types of
orders
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LEARNING OUTCOMES (continued)
4 Develop an appreciation of how various
forms of investment information can lead to
better investing skills and returns
5 Gain a basic understanding of the growing
impact of the computer and Internet on the
field of investments
6 Describe an investment portfolio and how
you’d go about developing, monitoring, and
managing a portfolio of securities
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Investing
• Process of placing money in some medium
in the expectation of receiving future
benefit
• Speculating: Future value and expected
returns are highly uncertain
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Investment Objectives
•
•
•
•
Enhance current income
Save for major purchase
Accumulate funds for retirement
Seek shelter from taxes
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Ways to Invest
•
•
•
•
Common stock
Bonds
Preferred and convertible securities
Mutual funds, exchange traded funds (ETFs),
and exchange traded notes (ETNs)
• Real estate
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Securities Markets
• Marketplace in which stocks, bonds, and
financial instruments are traded
• Primary market - New securities are sold to the
public by an issuer
• Secondary market - Old securities are traded
between investors
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Exhibit 11.1 U.S. Broker and Dealer Markets
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Regulating the Securities Markets
Securities Act of 1933
• To ensure full disclosure of information with respect to new
securities
• Securities and Exchange Commission (SEC): Regulates the
disclosure of information about securities and oversees the
operation of the securities exchanges and markets
Securities Exchange Act of 1934
• To provide SEC power to regulate organized securities
exchanges and the OTC market
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Regulating the Securities Markets
Investment Company Act of 1940
• To establish rules and regulations for
investment companies
Sarbanes-Oxley Act of 2002
• To eliminate corporate fraud as related to
accounting practices and information released
to investors
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Dodd–Frank Wall Street Reform and
Consumer Protection Act of 2010
• To improve accountability and transparency
in the U.S. financial system
• To discontinue the “too big to fail” regulatory
approach
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Dodd–Frank Wall Street Reform and
Consumer Protection Act of 2010
• To protect American taxpayers from costly
government bailouts
• To protect consumers from exploitative
financial services practices
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Significant Federal Legislation
Maloney Act of 1938
• Provided for the establishment of trade associations
• National Association of Securities Dealers (NASD):
Regulates OTC market operations
Securities Investor Protection Act of 1970
• Protects investors against the financial failure of
brokerage firms
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Bull Market and Bear Market
Bull market
• Associated with investor optimism, economic recovery,
and expansion
• Characterized by rising securities prices
Bear market
• Associated with investor pessimism and economic
slowdown
• Characterized by falling securities prices
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Stockbroker (Account Executives)
• Person who:
• Buys and sells securities on behalf of clients
• Gives clients investment advice and information
• Required to understand the client’s
investment objectives
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Types of Broker
Full-service broker
• Executes clients’ transactions and offers a full array of
brokerage services
Discount broker
• Charges low commissions and offers little or no services to
investors
Online broker
• Discount broker through which investors can execute
trades electronically/online through a commercial service
or on the Internet
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Brokerage Fees
• Commissions received by brokerage firms for
executing buy and sell orders for their clients
• Odd lot: Quantity of fewer than 100 shares of a
stock
• Round lot: Quantity of 100 shares of stock or
multiples thereof
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Securities Investor Protection Corporation
(SIPC)
• Nonprofit corporation subject to SEC and
congressional oversight
• Insures customer accounts against financial
failure of a brokerage firm
• Arbitration: Used to settle disputes between
a brokerage firm and its clients
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Types of Order
Market order
• To buy or sell a security at the best price available at the time it
is placed
Limit order
• To either buy a security at a specified or lower price or to sell a
security at or above a specified price
Stop-loss (stop order)
• To sell a stock when the market price reaches or drops below a
specified level
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Annual Stockholders’ Reports
• Made available to stockholders and
interested parties that includes:
• Financial and descriptive information about a
firm’s operations in the recent past
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Financial Press
Market data
• Describe the general behavior of the securities
markets
Dow Jones Industrial Average (DJIA)
• Followed measure of stock market performance
• Consists of 30 blue-chip stocks listed mostly on
the NYSE
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Financial Press
Standard & Poor’s (S&P) indexes
• Similar to the DJIA but employ different computational methods and
consist of more stocks
NYSE index
• Consists performance of all stocks listed on the New York Stock
Exchange
Dow Jones Wilshire 5000 index
• Consists the total market value of the approximately 6,000–7,000
actively traded stocks in the United States
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Asset Allocation
• Plan to preserve capital by protecting the
portfolio against negative market
developments
• By dividing a portfolio among different classes of
securities
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Reasons to Re-evaluate Asset Allocations
• Change in personal circumstances that
changes investment goals
• Proportion of an asset rises or falls that
changes target allocation
• Close to reaching certain goal
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Exhibit 11.6 Four Model Portfolios
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KEY TERMS
•
•
•
•
•
•
•
Investing
Speculating
Investment plan
Prospectus
Bid price
Ask price
Securities and
Exchange Commission
• National Association of
Securities Dealers
• Bull market
•
•
•
•
•
•
•
Bear market
Full-service broker
Discount broker
Online broker
Odd lot
Round lot
Securities Investor
Protection Corporation
• Market order
• Limit order
• Stop-loss
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KEY TERMS
• Dow Jones Industrial
Average
• Standard & Poor’s
(S&P) indexes
• NYSE index
• Dow Jones Wilshire
5000 index
• Portfolio
• Diversification
• Asset allocation
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SUMMARY
• Investing is viewed as a process of
purchasing securities wherein stability of
value and level of return are somewhat
predictable
• Each market under the securities market
provides a mechanism for bringing the
buyers and sellers of securities together
• There are different types of market under
the securities market and making
transactions in each market is simple
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