Investments Assignment

Part I: Investing Basics

A. What Are Investments?
Investing is how you make your money grow, or appreciate for long term financial goals. It is a
way of saving your money for something further ahead in the future.
Saving is a plan to set aside a certain amount of your earned income over a short period of time
in order to be able to accomplish a short term goal. It is a plan of action where you plan on
acquiring a certain amount of money by redirecting some of the money you have received from
your various sources of income.
Investing, on the other hand, is a much longer term activity. We consider investing as an action
that is based on long term goals and is primarily accomplished by having your money make more
money for you.
There are three main reasons to invest. You can beat inflation, achieve financial goals like buying
a car or paying for college, and retirement. Yes, you should start thinking about retirement now.
You can choose from many investing options. You can invest in stocks, mutual funds, or bonds!

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.
1. F

Savings accounts are ideal for long-term investments.

a.

Savings accounts are meant to meet a short-term goal. Your savings are not growing
as fast as it can/should if you are planning on keeping money in there for a long while.

2. T

Investments become your income when you retire.

3. F

Dividends are given to shareholders on savings accounts.

a. Savings accounts are not Held by shareholders. Only you manage the account, its
personal.

4. F

Stocks always increase in value over time.

a. Nope they can go down people often lose money when they buy a stock that crashes.

5. T

Investments earn compound interest.

6. F

Investments are insured by the FDIC.

a. Investments are risks that are not insured by FDIC, if they were it would not be
considered risky.

7. F

Bonds are ownership interest in a company.

a. Bond are from the government, they get cash immediately you get your back in 20 but
it is most likely doubled.

8. T

Stocks have the highest potential return on investment.

9. F

The shorter the term on the bond, the higher the interest earned.
a. False, the interest on a bond increases as time goes on not in the short term though,
its like 20 years

10.T

Mutual funds spread out the risk of investments among many participants.

Short Answer: Respond to each prompt in your own words. Write in complete sentences!
11.Why do people invest in stocks, bonds, and mutual funds?
a. People invest in stocks, bonds, and mutual funds in order to make money in hopes that
if they bought stocks they go up, bonds are a safer long term investment, and you
hope mutual funds continue to invest well.

12. Why investments are considered riskier than traditional savings accounts?
a. Investments are considered riskier than traditional savings accounts because the
money put in can be lost even if you dont spend it, therefore for the most part the
money is no longer growing under your control.

Part II: Investments Research

Use the following website to conduct research about more types of investments. Record your
notes in the chart provided and then answer the questions that follow.
http://www.investopedia.com/university/20_investments/4.asp

Description

Objective

Collectible
s

Any physical
asset that
appreciates in
value over
time because
it is rare or it is
desired by
many.

The objectives
behind
investing in
collectibles
vary
depending on
the person and
the collectible.
Collectibles
can take very
long to
increase in
value, and
they offer no
assurances as
to their value
in the future.
Furthermore,
unlike other
investments,
collectibles
offer no
income. The
one advantage
is that most
collectibles
increase in
value along
with inflation.

ADRs

Stock that
trades in the
United States
but represents
a specified
number of
shares in a
foreign
corporation.

Save individual
investors
money by
reducing
administration
costs and
avoiding duty
on each
transaction.

Advantages
Many
collectibles
offer
reasonable
protection
from inflation.

ADRs allow
you to invest
in companies
outside North
America with
greater ease.
By investing in
different
countries, you
have the
potential to
capitalize on
emerging
economies.

Disadvantages

Main Uses

Not very liquid,

they can often
be hard to sell
at a desirable
price.
They do not
provide any
tax protection.
Collectibles do
not offer any
income to the
investor.
The true value
can often be
difficult to
determine.
Because there
are so many
uncertainties
don\'t count on
any collectible
for your
retirement.

Capital
Appreciation
Inflation
Protection
Self-Fulfillment

ADRs come
with more
risks, involving
political
factors,
exchange rates
and so on.
Language
barriers and a
lack of
standards
regarding
financial
disclosure can
make it
difficult to
research
foreign
companies.

Capital
Appreciation
Income
Diversification

Real Estate
& Property

Buying
property to
rent or sell
later for more
money than
what you
bought it for

Real estate
investing
allows the
investor to
target his or
her objectives.

Whether your
objective is
income or
capital
appreciation,
real estate
investing can
help you
achieve your
goal.
Mortgages
allow you to
borrow against
the property
up to three
times the
value. This can
dramatically
increase an
investor\'s
leverage.
Remember
that you
typically need
a 5% down
payment first.

Selling
property
quickly can be
difficult.
There are
significant
holding costs,
especially if
you are not
residing in the
property.
Examples
include
property taxes,
insurance,
maintenance,
etc.

Provides
Income
Capital
Appreciation
Leverage

Mutual
Funds

A large group
of people who
lump their
money
together and
give it to a
management
company to
invest it on
their behalf.

The nice thing

about mutual
funds is that
the objectives
change from
fund to fund.

No matter how
much you
invest, you get
to own several
companies. In
other words,
you get instant
diversification.
You can easily
make monthly
contributions.
Your money is
being
managed by a
professional
manager.
Because of
his/her
experience
and
knowledge,
you should
receive above
average
returns, at
least in theory.

The majority of
mutual fund
companies
don\'t come
close to
beating market
averages like
the S&P 500
and the DJIA.
(Notice we said
you will
receive above
average
returns "in
theory". This
will be
discussed in
detail in future
pages.)
Fund
managers take
a slice of the
profits for their
work. This slice
varies, but it

Capital
Appreciation
Provides
Income
Tax-Deferred
Savings

can be quite
high.
You pay
management
fees whether
the fund
actually makes
you money or
not.
Common
Stock

Ownership in
part of a
company

The objective
is to gain the
most money in
the least
amount of
time

Common stock
is very easy to
buy and sell.
Thanks in
large part to
the growth of
the Internet, it
is very easy to
find reliable
information on
public
companies,
making
analysis
possible.
There are over
11,000 public
companies in
North America
to choose
from.

Your original
investment is
not
guaranteed.
There is always
the risk that
the stock you
invest in will
decline in
value, and you
may lose your
entire
principal.
Your stock is
only as good
as the
company in
which you
invest - a poor
company
means poor
stock
performance.

Capital
Appreciation
Income
Liquidity

1. Which type of investment is the riskiest?

a. The investment that is the riskiest is Common Stock
2. Which type of investment has the greatest return?
a. Stocks typically have the greatest return
3. Which type of investment is best for diversifying your portfolio?
a. Mutual funds are the best for diversifying your portfolio
4. Which type of investment provides best returns at a reasonable risk?
a. Mutual Fund
5. Which type of investment do you feel the least likely to pursue in the future? Why?
a. Mutual Fund because you dont typically get the average gain
6. Which type of investment do you feel most likely to pursue in the future? Why?
a. Stocks because Im young and can afford to blow my money on things, I have
no expenses.
7. Why is it a good idea to invest in several different forms?
a. It secures your money because it makes sure that even if one fails then the
others will most likely be able to still pull through and make you some money.