MEANINGFINANCE an amount of money that is invested in something by a person, rather than by a company or organization, or these investments as a whole:

Investment: any vehicle into which funds can be placed with the expectation that it will generate positive income and/or that its value will be preserved or increased

Return: the reward for owning an investment◦ Current income

◦ Increase in value

What is an investment?

Securities or Property◦ Securities: stocks, bonds, options◦ Real Property: land, buildings◦ Tangible Personal Property: gold,

artwork, antiques

Direct or Indirect◦ Direct: investor directly acquires a claim◦ Indirect: investor owns part of a portfolio

Debt, Equity or Derivative Securities◦ Debt: investor lends funds in exchange for interest income and repayment of

loan in future (bonds)◦ Equity: represents ongoing ownership in a business or property (common

stocks)◦ Derivative Securities: neither debt nor equity; derive value from an

underlying asset (options) Low Risk or High Risk Risk: chance that actual investment returns will differ from those expected

Domestic or Foreign◦ Domestic: U.S.-based companies◦ Foreign: overseas-based companies

Short-Term or Long-Term◦ Short-Term: mature within one year◦ Long-Term: maturities of longer than a year

Types of investment

Government◦ Federal, state and local projects & operations◦ Typically net demanders of funds

Business◦ Investments in production of goods and services◦ Typically net demanders of funds

Individuals◦ Some need for loans (house, auto)◦ Typically net suppliers of funds

KEY PARTICIPANTS IN INVESTMENT PROCESS

The Investment Process

Individual Investors◦ Invest for personal financial goals

(retirement, house)

Institutional Investors◦ Paid to manager other people’s money◦ Typically manage large amounts of money◦ Include: banks, life insurance companies, mutual

funds and pension funds

Types of Investors

Step 1: Meeting Investment Prerequisitesa. Make certain necessities of life are provided forb. Adequate protection against losses from death,

illness and disability

Step 2: Establishing Investment GoalsExamples include:a. Accumulating retirement fundsb. Enhancing current incomec. Saving for major expenditures

Sheltering income from taxes Step 3: Adopting an Investment Plan

a. Develop a written investment planb. Specify target date and risk tolerance for each goal

Step 4: Evaluating Investment Vehiclesa. Assess potential return and riskb. Chapter 4 will cover risk in detail

Step 5: Selecting Suitable Investmentsa. Research and gather information on

specific investments Make investment selections Step 6: Constructing a Diversified Portfolio

a. Use portfolio comprised of different investmentsb. Diversification can increase returns or decrease risks (Chapter 5 will cover

diversification in detail)

Step 7: Managing the Portfolioa. Compare actual behavior with expected performanceb. Take corrective action when needed

Steps in Investing

Market Timing: process of identifying the current state of the economy/market and assessing the likelihood of its continuing on its present course

Three Conditions of the U.S. Economy◦ Recovery or expansion

Corporate profits are up, which helps stock prices Growth-oriented and speculative stocks do well

◦ Decline or recession Values and returns on common stocks tend to fall

◦ Uncertainty

Different Stages of an Economic/Market Cycle

Investors tend to follow different investment philosophies as they move through different stages of the life cycle.

Youth Stage◦ Twenties and thirties◦ Growth-oriented investments◦ Higher potential growth; higher potential risk◦ Stress capital gains over current income

What are some examples of age-appropriate investments?◦ Common stocks, options or futures

Middle-Aged Consolidation Stage◦ Ages 45 to 60◦ Family demands & responsibilities become important (education expenses, retirement

savings)◦ Move toward less risky investments to preserve capital◦ Transition to higher-quality securities with lower risk

What are some examples of age-appropriate investments?◦ Low-risk growth and income stocks, preferred stocks, convertible stocks, high-grade

bonds Retirement Stage

◦ Ages 60 and older◦ Preservation of capital becomes primary goal◦ Highly conservative investment portfolio◦ Current income needed to supplement

retirement income

What are some examples of age-appropriate investments?◦ Low-risk income stocks, government bonds, quality corporate bonds, bank certificates of

deposit

I n ve s t in g D e c i s i o n s Ove r I n ve s to r L i f e C yc l e

The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit. 

It's actually pretty simple: investing means putting your money to work for you. Essentially, it's a different way to think about how to make money. Growing up, most of us were taught that you can earn an income only by getting a job and working. And that's exactly what most of us do. There's one big problem with this: if you want more money, you have to work more hours. However, there is a limit to how many hours a day we can work, not to mention the fact that having a bunch of money is no fun if we don't have the leisure time to enjoy it There are many different ways you can go about making an investment. This includes putting money into stocks, bonds, mutual funds, or real estate (among many other things), or starting your own business. Sometimes people refer to these options as "investment vehicles," which is just another way of saying "a way to invest."

Where to invest?

Short-Term Vehicles are used for:◦ Savings

Emphasis on safety and security instead of high yield

◦ Investment Yield is often as important as safety Used as component of diversified portfolio Used as temporary outlet waiting for attractive

permanent investments

Investment suitability of short term vehicles

 Obviously, everybody wants more money. It's pretty easy to understand that people invest because they want to increase their personal freedom, sense of security and ability to afford the things they want in life. However, investing is becoming more of a necessity. The days when everyone worked the same job for 30 years and then retired to a nice fat pension are gone. For average people, investing is not so much a helpful tool as the only way they can retire and maintain their present lifestyle

Why bother investing?

Investing is about making your money work for you. Reinvesting your earnings allows you to take advantage of

compounding. Each investor is different in his or her objectives and risk

tolerance. There isn't just one strategy that can be used to invest

successfully. Each investment vehicle has its own unique characteristics. Diversifying investments in a portfolio helps to manage risk. Together, all these points make up a foundation of

knowledge with which any investor should be comfortable. However, these concepts mean nothing unless you can put them into practice. It's great to know that compounding accelerates your investment earnings,

conclusion

THE FUNDAMENTAL CORNER STONES OF SUCCESSFUL INVESTING ARE :SAVE REGULARLY, INVEST REGULARLYSTART EARLYUSE TAX SHELTERSINVESTMENT RETURNS SHOULD EXCEED THE INFLATION

YOU ARE NOT WORTH WHAT YOU EARNED. YOU ARE WORTH WHAT YOU SAVED.