Post on 23-Dec-2015
Copyright 2002 by Harcourt, Inc. All rights reserved.
CHAPTER 11:
INVESTMENT PLANNING
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How Can You Get Started Investing?
Accumulate money by regularly allocating a portion of your earnings for investing.
Take advantage of automatic investment and dividend reinvestment programs.
While saving, learn as much as possible about investments and "play" trade.
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What are Your Investment Objectives?
Supplement current income— appropriate for retired persons.
Save for major expenditures— such as college education, down payment on a home, or starting a business.
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Shelter income from taxes—to preserve more of your earnings.
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Save for retirement—to live comfortably in your "golden years."
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Different Ways to Invest
Common Stock Bonds Preferreds and Convertibles Mutual Funds Real Estate Commodities, Financial Futures,
and Options
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Securities Markets
Place (not always physical) where financial instruments are traded.
Capital market—where long-term securities (those with maturities greater than 1 year) are traded.
Money market—where low-risk, short-term securities (those with maturities less than 1 year) are traded.
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Secondary market—for trading previously issued securities. Trading is done between investors; issuing company gets nothing.
Primary market—for new issues which are available for the very first time. The issuing company gets the proceeds.
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–Secondary markets for trading listed securities.
–Physical marketplaces such as the NYSE, AMEX, and regional exchanges.
–Utilize brokers to facilitate trading between buyers and sellers.
–Handle transactions of larger, well-known companies' securities.
Organized Securities Exchanges
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–Secondary market where securities are traded via a telecommunications network.
– Investors trade directly with securities dealers.
–Larger, actively traded issues make up NASDAQ, while smaller, thinly traded issues are listed on "pink sheets."
Over-the-counter Market
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–Organized securities exchanges exist in more than 100 countries worldwide.
–Found in major industrialized nations such as Japan, Great Britain, Germany and Canada.
–Also found in developing markets around the globe.
Foreign securities markets
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Federal and state laws regulate the sale of securities.
Purpose is to provide for adequate and accurate disclosure of financial information.
Securities and Exchange Commission (SEC) is the agency in charge of administering federal securities laws.
Regulating the Securities Markets:
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Bull market—generally rising securities prices for an extended period of time.
–Reflects investor optimism.
–Associated with favorable economy.
Bear market—generally falling securities prices for an extended period of time.
–Reflects investor pessimism.
–Associated with economic downturn.
Market Trends:
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Making TransactionsIn the Securities Markets
Stockbrokers purchase and sell securities for investors.
Select from full-service, discount, or online broker, depending on your needs.
Consider brokerage fees when making securities transactions.
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Securities Investor Protection Corp. protects customer accounts against financial failure of brokerage firm.
SIPC insures accounts up to $500,000 (brokerage firms often purchase even greater amounts of coverage).
Guarantees securities or cash held by broker will be replaced (does not guarantee dollar value of securities!).
Investor Protection:
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Executing Trades:
Market orders generally take less than 2 minutes!
Investor must first establish account with broker.
Trades can be executed by phone, at the brokerage firm, or online with a PC.
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Investor placesthe order with the broker
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Investor placesthe order with the broker
Broker transmitsorder to the market via tele-communications equipment.
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Investor placesthe order with the broker
Broker transmitsorder to the market via tele-communications equipment.
Order isfilled at themarket byother buyersand sellers.
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Investor placesthe order with the broker
Broker transmitsorder to the market via tele-communications equipment.
Order isfilled at themarket byother buyersand sellers.
Execution ofthe order isconfirmedto the broker.
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Investor placesthe order with the broker
Broker transmitsorder to the market via tele-communications equipment.
Order isfilled at themarket byother buyersand sellers.
Execution ofthe order isconfirmedto the broker.
Broker confirms order fulfillment. Investor has 3 days to settle account.
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Types of Orders:
Market order—trade now at best available price.
Limit order—trade when a specified price or better is reached; investor is seeking opportunity.
Stop-loss order—sell if price drops to certain price; investor is seeking to limit losses.
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Margin Trading:
Allows investor to purchase securities on credit by borrowing part of purchase price from broker.
Increases gains when
returns are positive.
Increases losses when returns are negative.
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Example of Margin Trade with Profit:
Transaction w/out w/margin Initial investment (100 shares @ $50)
Amount invested $5,000 $2,500
Amount borrowed $ 0 $2,500
Total purchase $5,000 $5,000
Price INCREASES (100 shares @ $70)
Gross proceeds $7,000 $7,000
Less interest (9%) $ 0 $ 225
Net proceeds $7,000 $6,775
Net profit $2,000 $1,775
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Example of Margin Trade with Loss:
Transaction w/out w/margin Initial investment (100 shares @ $50)
Amount invested $5,000 $2,500
Amount borrowed $ 0 $2,500
Total purchase $5,000 $5,000
Price DECREASES (100 shares @ $30)
Gross proceeds $3,000 $3,000
Less interest (9%) $ 0 $ 225
Net proceeds $3,000 $2,775
Net loss ($2,000) ($2,225)
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Margin Trade Returns:
Return = Profit (loss) Amount Invested
w/out w/margin
Price Increase $2,000 $1,775$5,000 $2,500
Return 40% 71%
Price Decrease ($2,000) ($2,225)$5,000 $2,500
Return (40%) (89%)
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Short Selling: Allows investor to sell securities
borrowed from the broker or broker's accounts.
Before period is over, investor must buy securities to replace those borrowed.
Investor loses if security’s price has increased.
Investor profits if security’s price has declined.
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Example of Short Sale:
Investor wishes to short 100 shares of ABW now selling at $52.50/share.
Broker sells borrowed shares for investor:
100 x $52.50 = $5,250 proceeds
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Costs 100 x $40 = $4000 to replace shares.
Investor receives:
$5250 – $4000 = $1250 profit!!
Scenario A:
Price of security drops to $40/share & investor repurchases:
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Costs 100 x $60 = $6000 to replace shares.
Investor receives:
$5250 – $6000 = ($750) loss!!
Scenario B:
Price of security rises to $60/share & investor repurchases:
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To profit from short selling—
not only must the price of the security fall, but it must do so within the given time period.
Double jeopardy!
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Becoming an Informed Investor
Types of Information to Follow:
–Economic developments and current events
–Alternative investment vehicles
–Current interest rates and price quotations
–Personal investment strategies
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Available Investment Information :
Annual Reports Financial Press
(WSJ and financial magazines)
Brokerage Reports
Advisory Services
Investment Advisors
On-Line Sources
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Online Investing
Online services Educational
material Investment
tools Investment
planning
Research and screening
Portfolio tracking
Day trading
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Using the Internet Wisely:
Do your own research. Realize that frequent trades
mean higher transaction costs. Don’t believe everything you
read. Avoid online scams.
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Questions to Ask:
Is the stock registered? Who is making the sales pitch? Is it too good to be true?
Refer to SEC Web site:www.sec.gov/consumer/offertip.htm
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Managing Your Investment Holdings
Build a diversified portfolio of securities based upon your goals and personal situation.
Allocate your assets according to your objectives.
Track your investments and rebalance your portfolio as your needs change.
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THE END!