Chapter 13

Investing Fundamentals

McGraw-Hill/Irwin

Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

13-1

Chapter 13
Learning Objectives
1. Describe why you should establish an investment
program
2. Assess how safety, risk, income, growth and liquidity
affect your investment decisions
3. Explain how _____________________ and different
investments alternatives affect your investment plan
4. Recognize the importance of your role in a personal
investment program
5. Use various sources of financial information that can
reduce risks and increase investment returns

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Preparing for an Investment

Program
Objective 1: Describe why you should establish an
investment program
ESTABLISHING INVESTMENT GOALS
Financial goals should be s________ and m_______.
To develop your goals ask yourself. . .
How much will you need for your goals?
How will you obtain the money?
How long will it take you to obtain the money?
How much risk are you willing to assume in an
investment program?
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Preparing for an Investment

Program (continued)
ESTABLISHING INVESTMENT GOALS (continued)
What possible economic or personal conditions
could alter your investment goals?

Are you willing to make the sacrifices necessary to

meet your investment goals?

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Preparing for an Investment

Program (continued)
ESTABLISHING INVESTMENT GOALS (continued)
What will the _____________________ be if you
don t reach your investment goals?

Given your economic circumstances, are your

investment goals reasonable?

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Preparing for an Investment

Program (continued)
PERFORMING A FINANCIAL CHECKUP
Work to balance your budget
Do you regularly spend more than you make?
Pay off high interest __________________ debt first
Start an _____________ fund you can access quickly
_________ to _______ months of living expenses

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Preparing for an Investment

Program (continued)
PERFORMING A FINANCIAL CHECKUP
Have access to other sources of cash for
emergencies
___________________ is a short-term loan
approved before the money is needed
____________________ on your credit card

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Preparing for an Investment

Program (continued)
8 steps to managing a financial crisis
1. Establish a larger than usual emergency fund
2. Know what you owe
3. Reduce spending
4. Pay off credit cards
5. Apply for a line of credit
6. Notify credit companies and lenders if you are unable
to make a payments
7. Monitor the value of your investment and retirement
accounts
8. Consider converting investments to cash to preserve
value
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Preparing for an Investment

Program (continued)
GETTING THE MONEY NEEDED TO START AN
INVESTMENT PROGRAM
How badly do you want to achieve your investment
___________?
Are you willing to some purchases to provide
financing for your investments?
What do you value?
Participate in elective savings programs
Payroll deduction or electronic transfer
Make extra effort to save one or two months each
year
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Factors Affecting the

Choice of Investments
Objective 2: Assess how safety, risk, income,
growth, and liquidity affect your investment
decisions
Safety and risk
________ in any investment means minimal risk of
loss
_________ means a measure of uncertainty about
the outcome
Investments range from very safe to very risky
The potential return on any investment should be
directly related to the risk the investor assumes
_________________ investments are high risk
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Safety and Risk

The Risk-Return Trade-Off
Choosing higher risk investments, investors expect higher
returns

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Factors Affecting the

Choice of Investments
Risk Tolerance
Calculating Rate of Return
Subtract the investment s initial value from the investment s
ending value
Add the investment income to the amount calculated above
Divide the net investment income and change in value by the
investment s initial value

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Factors Affecting the

Choice of Investments (continued)
COMPONENTS OF THE RISK FACTOR
Inflation risk
- during periods of high _______________
- your investment return may not keep pace with the
inflation rate

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Factors Affecting the

Choice of Investments (continued)
COMPONENTS OF THE RISK FACTOR (continued)

-
-
-

Interest rate risk

you may invest in a bond at a 6%,
rates later go up to 8%;
your bond price _________

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Factors Affecting the

Choice of Investments (continued)
COMPONENTS OF THE RISK FACTOR (continued)
Business failure risk
- bad management or products affect stocks, municipal
or corporate bonds and mutual funds
- that invest in __________

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Factors Affecting the

Choice of Investments (continued)
COMPONENTS OF THE RISK FACTOR (continued)
Market risk
- prices ___________ because of behaviors of investors

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Factors Affecting the

Choice of Investments (continued)
COMPONENTS OF THE RISK FACTOR (continued)
Global investment risk
- changes in ______________ affect the return on your
investment

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Factors Affecting the

Choice of Investments (continued)

INVESTMENT INCOME

Safest investments predictable income

Savings accounts and certificates of deposit
U.S. savings bonds
United States treasury bills
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Factors Affecting the

Choice of Investments (continued)
INVESTMENT INCOME (continued)
Higher ____________ income investments include
________________ bonds (
)
Municipal bonds
Corporate bonds
Preferred stocks and income common stocks
Income mutual funds
Real estate rental property

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Factors Affecting the

Choice of Investments (continued)
INVESTMENT GROWTH
Growth means investment will increase in _________
Common stock
Growth companies pay little or no dividends, but
reinvest in the company
Mutual funds, government and corporate bonds,
and real estate offer growth potential

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Factors Affecting the

Choice of Investments (continued)
INVESTMENT LIQUIDITY
Ability to buy or sell an investment quickly _________
substantially affecting the investment s value;
e.g. Real estate is not a very liquid investment

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Asset Allocation and Investment

Alternatives
Objective 3: Explain how asset allocation and
different investment alternatives affect your
investment plan
Asset Allocation

The process of _______________________ among several types of

investments which lessens your investment risk

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Asset Allocation and Investment

Alternatives
Objective 3: Explain how asset allocation and
different investment alternatives affect your
investment plan
(Continued)

Time Factor
The longer that you are invested
the better your opportunity for ___________________

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Asset Allocation and Investment

Alternatives
Objective 3: Explain how asset allocation and
different investment alternatives affect your
investment plan
(Continued)
Your Age
The ___________ and ___________ of your investments

should change with your age

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Asset Allocation and Investment

Alternatives (contined)
Stock or equity financing
Equity capital is provided by stockholders who

buy shares of a company s stock.

Stockholders are ______________ and share in
the _________ of the company.
A corporation is not required to repay the money
obtained from the sale of stock.

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Asset Allocation and Investment

Alternatives (contined)
Stock or equity financing (continued)
The corporation is under no legal obligation to

pay dividends to stockholders:

they may instead retain all or part of earnings.
Two basic types of stock
Common stock
the ____________ stake of its owners
represents the ______________ of the company
Preferred stock
pays a fixed ____________
less ____________ than common stock.
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Common Stock Certificate

27

Preferred Stock Certificate

28

Asset Allocation and Investment

Alternatives (continued)
CORPORATE AND GOVERNMENT BONDS
A bond is a __________ to a corporation, the federal
government, or a municipality
Bondholders receive _______ interest payments, and
the principal is repaid at maturity (1-30 years)
Bondholders can keep the bond until maturity or sell it
to another investor before maturity

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Asset Allocation and Investment

Alternatives (continued)
Mutual funds
Investors money is pooled and invested by a

professional fund manager

You buy shares in the fund
Provides ____________________ to reduce risk
Funds range from _______________ to extremely

______________
Match your needs with a fund s objective
Be aware of fees depending upon different fund

chosen
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Asset Allocation and Investment

Alternatives (continued)
REAL ESTATE
The goal of a real estate investment is to buy a
property and sell it at a profit.
Nationally, 3% ______________ in price a year is
average.
However, decreases in value are also possible.
_________, _________, __________ is important.

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Asset Allocation and Investment

Alternatives (continued)

Before you buy real estate...

1. Is the property priced competitively?
2. What type, if any, of _____________ is available?
3. How much are the taxes?
4. What is the condition of the buildings and houses
in the immediate area?
5. Why are the present owners selling?
6. Could the property decrease in ____________?
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Asset Allocation and Investment

Alternatives (continued)
OTHER SPECULATIVE INVESTMENTS
Speculative investments
A speculative investment is a _________investment
made in the hope of earning a relatively __________
in a short time
Typical speculative investments include:
Antiques and collectibles
Call and put options
Derivatives
Commodities
Coins and stamps
Precious metals and gemstones
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A Personal Plan for Investing

1. Establish realistic goals
2. Determine the amount of money needed to meet
your goals
3. Specify the amount of money available to fund
your investments
4. List different investments you want to evaluate
5. Evaluate risk and potential return for each
6. Reduce possible investments to a reasonable
number
7. Choose at least two different investments
8. Continue to evaluate your investment program
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Factors that Reduce Investment Risk

Objective 4: Recognize the importance of
your role in a personal investment program
YOUR ROLE IN THE INVESTMENT PROCESS
Evaluate ___________ investments
Monitor the _____ of your investments
Keep accurate and current records
Seek the assistance of a financial planner
(see Appendix at the back of the text)

Consider the tax consequences of selling your

investments
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Sources of Investment Information

Objective 5: Use the various sources of financial
information that can reduce risks and increase
the investment returns
The Internet
A wealth of investment information is available
View sites such as www.yahoo.com, www.fool.com,
and www.money.cnn.com
Hong Kong: www.aastocks.com, www.hkex.com.hk,
and www.etnet.com.hk
Newspapers and news programs

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Sources of Investment Information

Objective 5: Use the various sources of financial
information that can reduce risks and increase
the investment returns (continued)
Business periodicals such as Smart Money and
government publications
____________________________
Investor services and newsletters,
such as ValueLine or Morningstar and financial
calculators

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End of Lecture

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