PFIN 4

Investment Planning

11

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.

GITMAN/ JOEHNK/ BILLINGSLEY

2Copyright ©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.

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

LEARNING OUTCOMES

PFIN4 | CH11

3Copyright ©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.

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

LEARNING OUTCOMES (continued)

PFIN4 | CH11

Investing

4Copyright ©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.

• Process of placing money in some medium in the expectation of receiving future benefit

• Speculating: Future value and expected returns are highly uncertain

PFIN4 | CH11

Investment Objectives

5Copyright ©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.

• Enhance current income• Save for major purchase• Accumulate funds for retirement• Seek shelter from taxes

PFIN4 | CH11

Ways to Invest

6Copyright ©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.

• Common stock• Bonds• Preferred and convertible securities• Mutual funds, exchange traded funds

(ETFs), and exchange traded notes (ETNs)• Real estate

PFIN4 | CH11

Securities Markets

7Copyright ©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.

• 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

PFIN4 | CH11

Exhibit 11.1

8Copyright ©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.

U.S. Broker and Dealer Markets

PFIN4 | CH11

Regulating the Securities Markets

9Copyright ©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. PFIN4 | CH11

• 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 Act of 1933

• To provide SEC power to regulate organized securities exchanges and the OTC market

Securities Exchange Act of 1934

Regulating the Securities Markets

10Copyright ©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. PFIN4 | CH11

Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010

11Copyright ©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.

• To improve accountability and transparency in the U.S. financial system

• To discontinue the “too big to fail” regulatory approach

PFIN4 | CH11

Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010

12Copyright ©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.

• To protect American taxpayers from costly government bailouts

• To protect consumers from exploitative financial services practices

PFIN4 | CH11

Significant Federal Legislation

13Copyright ©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. PFIN4 | CH11

Bull Market and Bear Market

14Copyright ©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. PFIN4 | CH11

Stockbroker (Account Executives)

15Copyright ©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.

• Person who:• Buys and sells securities on behalf of clients• Gives clients investment advice and

information• Required to understand the client’s

investment objectives

PFIN4 | CH11

Types of Broker

16Copyright ©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. PFIN4 | CH11

Brokerage Fees

17Copyright ©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.

• 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

PFIN4 | CH11

Securities Investor Protection Corporation (SIPC)

18Copyright ©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.

• 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

PFIN4 | CH11

Types of Order

19Copyright ©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. PFIN4 | CH11

Annual Stockholders’ Reports

20Copyright ©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.

• Made available to stockholders and interested parties that includes:• Financial and descriptive information about a

firm’s operations in the recent past

PFIN4 | CH11

Financial Press

21Copyright ©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. PFIN4 | CH11

Financial Press

22Copyright ©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. PFIN4 | CH11

Asset Allocation

23Copyright ©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.

• Plan to preserve capital by protecting the portfolio against negative market developments• By dividing a portfolio among different classes

of securities

PFIN4 | CH11

Reasons to Re-evaluate Asset Allocations

24Copyright ©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.

• Change in personal circumstances that changes investment goals

• Proportion of an asset rises or falls that changes target allocation

• Close to reaching certain goal

PFIN4 | CH11

Exhibit 11.6

25Copyright ©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.

Four Model Portfolios

PFIN4 | CH11

26Copyright ©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.

• Investing • Speculating• Investment plan• Prospectus• Bid price• Ask price• Securities and

Exchange Commission• National Association

of Securities Dealers• Bull market

KEY TERMS

• Bear market• Full-service broker• Discount broker• Online broker• Odd lot• Round lot• Securities Investor

Protection Corporation

• Market order• Limit order• Stop-loss

PFIN4 | CH11

27Copyright ©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.

• Dow Jones Industrial Average

• Standard & Poor’s (S&P) indexes

• NYSE index• Dow Jones Wilshire

5000 index• Portfolio• Diversification• Asset allocation

KEY TERMS

PFIN4 | CH11

28Copyright ©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.

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

PFIN4 | CH11