Investing Rule No. 1: Don't lose money. Rule No. 2: Don't forget Rule No. 1. Investing- putting money to work to earn more money (1) 3 basic investment categories 1. Stocks – ownership shares in a corporation 2. Bonds – loans investors make to corporations or govt 3. Mutual Funds – pools investors money together (2) Investment Opportunities Thousands of US stocks, mutual funds Millions of corporate and govt bonds World markets – in developed or developing economies …..so…how do you……. Invest directly through a company ….or…. Invest using a financial advisor or investment company Invest online….. …Etrade, etc ……can I play?.......... Practice sites – investopedia.com Stock market games online Investment clubs – real investing with others : better-investing.org …….things to know……… (3) Balance – liquidity, safety & return Liquidity – how easily an investment can be converted to cash - high liquidity – savings account - low liquidity – bonds, stocks, real estate Safety – what is the risk of losing money? - volatility – sudden swings in value Return – the amount of $ made on an investment - safe = lower return - riskier = opportunity to make or lose! more money ……..be………..careful………. (4) Risk vs Reward High Risk : new stocks, new companies Moderate Risk: growth stocks Limited Risk: Blue Chip stocks – large, well-established companies – ex GE, Microsoft Low Risk : bonds ......which brings us to…….. (5) Diversification – variety in investment portfolio (an individual’s investment package) ** include stocks, bonds, mutual funds, & lower risk investments such as savings accts, gov’t bonds, etc *** include stocks & bonds with varying degrees of risk, and vary types of companies ……are you publically traded?........ (6) Stocks Stocks = ownership shares of a corporation IPO = Initial Public Offering - the first sale of stock by a private company to the public Stock exchanges: NYSE = New York stock exchange AMEX = American stock exchange NASDAQ = National Association of Securities Dealers Quotation System Do Now!! Answer the following & hand in for CW grade! 1. What are stocks? 2. What are bonds? 3. What is an example of an investment with low liquidity? 4. What is the relationship between risk and return? 5. How do you diversify an investment portfolio? 6. Give an example of each: high risk, moderate risk, limited risk, low risk. 7. Why are bonds less risky than stocks? (7) Market Capitalization The total dollar market value of all of a company’s shares …last trade x number of shares = market cap Small Cap = companies with market cap of less than $1 Billion Mid Cap = between $1-10 Billion Large Cap = over $10 Billion (8) Market Cycles Bull Market = a growing market -- stock prices are rising Bear Market = a sluggish market --- stock prices have dropped ….zzzzzz… When is a good time to buy stock?? When is a good time to sell?? Where are we in the cycle in right now?? …..fun facts……… Overall, the market has risen more than fallen Between 1960 & 1999, there were only 6 bear markets Danger! – Avoid selling stocks during a bear market! ….wait……there’s more…….. Investors who have held a portfolio through any 15 year period since 1926 have always come out ahead ….and some other stock stuff…… (9) Terms Dividend – money earned on stock while you own it - quarterly, taxed as income Capital Gain - profit made when you sell stock (also taxed) Capital loss – when you lose money by selling stock for less than you paid for it Stock split - If the price of shares get too high - A corporation may “split” the shares to reduce the price to make shares more affordable - Typically 2 for 1 Example: 10 shares @ $10 each worth $100 becomes 20 shares @ $5 each worth $100 (10) Bonds (also known as “securities”) A loan made by an investor to a corporation or govt for a specified amount of time Investor buys a bond & gets paid back principal and interest Bonds earn full interest at maturity date Generally low-risk investment -- except “junk bond” – higher risk with potential higher yield (11) Mutual Funds Pools investors money together into a variety of investments (stocks & bonds) Growth fund – investing in growing companies for stock market value – value of stock increases over time Value fund – companies that are undervalued in the market – price is low relative to potential earning …..more mutual funds fun…… Blended fund = combines growth & value Life-cycle fund – - adjusts investments over time - more aggressive early, more conservative later (12) Investing Strategies Investing for income - in stocks or mutual fund to make money from dividends Investing for growth - in stocks or mutual funds for growth in the market value & stock splits - dividends are re-invested – will sell eventually for capital gain The value of starting EARLY!!!! In this hypothetical example, 10-year old Tim starts putting aside $500 a year until the age of 25 and then stops making contributions. Over this time, he puts aside a total of $8,000. On the other hand, Sally doesn’t start making contributions until she is 46 and puts aside $4,000 a year until she reaches age 65. Over that time, her contributions total $80,000. In both cases, their account grows 8% a year. Despite the fact that Sally contributes 10 times as much as Tim, at age 65 her account is less than half the size of Tim’s account. This clearly illustrates the benefit of starting early and the power of compounding.