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B. Why Invest?
A few people may stumble into financial security. But for most people, the only way to attain
financial security is to save and invest over a long period of time. You just need to have your
money work for you. Thats investing.
There are two ways your money can work for you:
Your money earns money. Someone pays you to use your money for a period of time.
You then get your money back plus interest. Or, if you buy stock in a company that pays
dividends to shareholders, the company pays you a portion of its earnings on a regular
basis. Now your money is making an income.
You buy something with your money that could increase in value. You become an
owner of something that you hope increases in value over time. When you need your money
back, you sell it, hoping someone else will pay you more for it.
Compound interest is a key aspect of investing. With compound interest, you earn interest
on the money you save and on the interest that money earns. Over time, even a small
amount of savings can add up to big money and help you achieve your financial goals.
Sweet: If you buy a $1 candy bar every day, it adds up to $365 a year. Put that $365 into an
investment that earns 5% a year, and it would grow to $465.84 by the end of five years. By
the end of 30 years, you would have $1,577.50. Thats the power of compounding.
All investments involve some degree of risk. If you intend to purchase securities such
as stocks, bonds, or mutual funds, it's important that you understand before you invest that
you could lose some or all of your money.
Unlike deposits at FDIC-insured banks and NCUA-insured credit unions, the money you invest
in securities is not federally insured. You could lose your principal, which is the amount you've
invested. Thats true even if you purchase the securities through a bank.
The reward for taking on risk is the potential for a greater investment return. If you have a
financial goal with a long-term horizon, you may make more money by carefully investing in
higher-risk assets, such as stocks or bonds. On the other hand, investing solely in cash
investments may be appropriate for short-term financial goals. The principal concern for
individuals investing in cash equivalents is inflation risk, which is the risk that inflation will
outpace and erode returns.
C. Types of Investments
Stocks --- Perhaps the most common misperception among new investors is that stocks are
simply pieces of paper to be traded. This is simply not the case. In stock investing, trading is
a means, not an end.
A stock is an ownership interest in a company. A business is started by a person or small
group of people who put their money in. How much of the business each founder owns is a
function of how much money each invested. At this point, the company is considered
"private." Once a business reaches a certain size, the company may decide to "go public" and
sell a chunk of itself to the investing public. This is how stocks are created.
When you buy a stock, you become a business owner. Period. Over the long term, the value of
that ownership stake will rise and fall according to the success of the underlying business.
The better the business does, the more your ownership stake will be worth
Stocks are but one of many possible ways to invest your hard-earned money. Why choose
stocks instead of other options, such as bonds, rare coins, or antique sports cars? Quite
simply, the reason that savvy investors invest in stocks is that they provide the highest
potential returns. And over the long term, no other type of investment tends to perform
better.
On the downside, stocks tend to be the most volatile investments. This means that the value
of stocks can drop in the short term. Sometimes stock prices may even fall for a protracted
period. For instance, the 10-year return for the S&P 500 was slightly negative as recently as
late 2010, largely due to the 2008 financial crisis and the early 2000s tech bubble bursting.
Bad luck or bad timing can easily sink your returns, but you can minimize this by taking a
long-term investing approach.
There's also no guarantee you will actually realize any sort of positive return. If you have the
misfortune of consistently picking stocks that decline in value, you can lose money, even over
the long term!
Bonds --- A bond is an agreement on a loan between the issuer and the person buying the
bond (bondholder). The bondholder has lent a certain amount of money to a government
agency, municipality, or corporation and is given interest on the loan.
The term of a bond is given a fixed-rate at the time of issue and expires on the specified
maturity date. At that time, the issuer is responsible to pay the bondholder the face value of
the bond. Throughout the term of the loan, the issuer also pays interest to the bondholder.
The interest amount is set when the bond is issued.
Bonds can vary in term length. The can be a short as one year or as long as 30 years. Usually,
the longer the term on the bond, the better interest rate the bondholder receives.
If you choose to sell your bond before the term is up, you can, but you lose money. Its always
best to keep bonds for their full term.
Mutual Funds --- When investors decide to invest in a mutual fund, then money is put in a
pool of money from other investors to create a large portfolio so everyone benefits from
bigger profits. Most funds buy a variety of investments like stocks, bonds, or other securities.
Because there is such a variety of different investments in one mutual fund, there is not as
much of a risk. Usually if one investment has a bad return, another will make up for that loss.
To invest in a mutual fund, an investor buys shares of the fund and becomes a shareholder.
That fund makes money two ways: by earning dividends or interest on its investments and by
selling investments that have grown in price. The fund then pays out its profits to the
shareholders.
Note: This is better if you are investing for long term profits
Part I Assessment
True/False: Indicate whether the statement is True or False. If the statement is false, explain
why.
Objective
Advantages
Disadvantages
Main Uses
Collectible
s
It is any object
that may raise
in value over
time because it
is rare
Depends on
person and
collectible
Most
collectibles
increase in
value along
with
inflation
ADRs
American
Depository
Receipt, a
stock that
trades in the
USA
demonstrating
the number of
shares in
foreign
corporation
Save
investors
money by
lowering
administrati
on costs
and
avoiding
duty on
each
transaction
Real
Estate &
Property
Mutual
Funds
Investing on
purchased
property such
as a house,
vacation
homes and
land
Real Estate is
affected by
condition of the
location
surrounding
property and
other factors
Interested
investor that
doesnt want a
company to
determine if
stock is good
or bad to buy
Allows
investors to
aim for their
own
objectives in
life
A long term
investment
Objectives
change from
fund to fund
Exceptional
way to
purchase
shares in
foreign
company
and
increase
growth on
potential
outside the
USA
Good
opportunity
for capital
appreciation
and income
if company
pays
dividend
Objective is
income or
capital
appreciation
helps to
achieve goal
Mortgages
allow you to
borrow the
property up
to three
times the
cost
You get to
own several
companies,
instant
diversificati
on
Easily make
May take a
long time to
increase in
value
Dont offer
any
assurances of
value in the
future
offer no
income
More risks
(political
factors,
exchange
rates)
Language
barriers and a
lack of
standards on
financial
disclosure
making it
difficult to
research
foreign
companies
Selling
property can
be difficult
Significant
holding costsex: property
taxes,
maintenance
, insurance
Income
Leverage
Capital
apprecia
tion
Most fund
companies
dont come
close to
beating
market
averages
Capital
apprecia
tion
Provides
income
Tax
deferred
o
o
Selffulfilmen
t
Capital
apprecia
tion
Inflation
protectio
n
Income
Capital
apprecia
tion
Diversific
ation
Common
Stock
1.
2.
3.
4.
5.
Which
Which
Which
Which
Which
It is referred to
as shares,
equity, or
securities. A
stock is the
ownership in
part of a
company and
get a portion of
profits.
type
type
type
type
type
of
of
of
of
of
investment
investment
investment
investment
investment
Investment
provides
better
returns at a
reasonable
risk.
monthly
contribution
s
Your money
is managed
by a
specialized
manger
Easy to buy
or sell
stocks
Easy to find
reliable
information
on public
companies
Over
11,000
public
companies
in USA
Fund
managers
take part of
your profits
for their work
You pay
management
fees whether
or not you
make profits
Original
investment
is not
guarantee.
Always a risk
that
investment
will decline
in value and
may lose
your
principal
Stock is good
as the
company
you invest in,
poor
company
you would
have poor
stock
performance
s
savings
CapitalA
ppreciat
ion
Income
Liquidity
I believe ADRs are the least likely to pursue in the future because it is an investment in
other countries. It is difficult to invest in other countries because of the language barriers
and risks such as exchange rates. In the end, you would lose a lot of money because of
exchange rates and other expenses.
6. Which type of investment do you feel most likely to pursue in the future? Why?
Real Estate is the investment I believe is most likely to pursue in the future because
everyone needs property or a house since it is an investment for their future. People can
have their own objective to invest in real estate and can do anything they want on their
property.
7. Why is it a good idea to invest in several different forms?
It is a good idea to invest in several different forms because of our future because you
never know what may happen in the future. There may be an event in which you need
money or a house because your family is expanding. Investments help us to build
financial security for our future.