MONEY WORKS FOR WOMENAT CURTIS MEMORIAL LIBRARY

STARTING OUT IN INVESTING

WHAT IS INVESTING?

The purchase of a financial product or other item of value with an expectation of favorable future returns. In plain English, it is the use of money in the hope of making more money.

FEAR OF INVESTING?

Fear keeps many people from investing

Some are ‘afraid’ of investing, equating it to a form of gambling, believing that if you invest, you will more than likely end up losing your money.

Others feel they should invest for the long-run, but don’t know where to begin. They may be afraid as a result of their lack of knowledge, and may leave their financial decisions up to professionals.

UNDERSTAND YOURSELF AS AN INVESTOR

Age range – the more time you have the more risk you can afford to take.

Goals – why are you investing

Time frames for goals

Risk tolerance – attitude towards risk

WHAT CAN WE INVEST IN?

Bank products

Government securities

Stocks, bonds and funds

Real estate

Commodities: Diamonds, silver, gold, oil, etc.

RISK VS RETURN

As risk increases, so does potential reward

BANK PRODUCTS

Deposit accounts – savings accounts, money market accounts, CD’s

Very low yield, but very safe (insured up to $250,000)

Typically liquid – most are immediately accessible; CD’s have varying terms during which you will lose $ if you access them and IRA’s have tax implications for early withdrawals

THE MAGIC OF COMPOUNDING

Albert Einstein referred to compound interest as "magic" and called it "The most powerful force in the universe…".

You earn interest not only on your principal, but also on the interest that accumulates.

Year Principal Rate Return Princ. + Ret.1 $1,000 9% $90 $1,0902 $1,090 9% $98 $1,18810 $2,172 9% $195 $2,36720 $5,142 9% $463 $5,60440 $28,816 9% $2,593 $31,409

HANDY TOOL: RULE OF 72

Way to figure out how many years it will take for compounding to double your money at a given rate:

Divide the rate you’re getting (or expecting) into 72

Example: you have $1000 and will earn 6%

72 / 6 = 12 (years to double your money)

GOVERNMENT SECURITIES

Considered one of the most secure investments because the general belief is that the issuing government (in our case the US) will continue to have a prosperous economy way into the future therefore having virtually no risk of defaulting on payments.

Collectively known as ‘treasuries’: Bills - securities maturing in less than one year. Notes - securities maturing in one to 10 years. Bonds - securities maturing in more than 10 years. Find out all you need to know here: http://www.treasurydirect.gov/

STOCKS

When you invest in (buy) a share of stock, you become an OWNER of the company that issued the stock.

The shareholders own the factory, the equipment, the income and the expenses.

Stocks are also referred to as equity

WHY BUY STOCKS?

Potential for higher yields than other investments – average 10% OVER TIME

Hope is that stock price will rise over time And that the company will be profitable and

choose to distribute profits to shareholders - dividends

2 general approaches to investing in stock: Trade Buy-and-hold

IF YOU TRADE….

You will need to stay on top of the following info: Are the company’s products in demand and

considered high quality? Is the industry as a whole doing well? How has company performed in the past? Do they have good management? Sudden changes? Are operating costs too high or too low? Is the company in heavy debt? What are obstacles/challenges the company/industry

faces? Is the stock worth the current price? Are there factors that will cause rapid price changes?

It’s a lot of work!!!

WHAT AFFECTS STOCK VALUE?

What affects stock value? Company’s performance Economic conditions – if interest rates are high,

people might sell stock and buy bonds instead Political uncertainty, domestic and global

Types of stock Common – buy equity, maybe get dividends, price

changes all the time, stockholders vote Preferred – usually a guaranteed fixed dividend; price

doesn’t move as much as common stock; first to get paid back if company fails; usually not allowed voting rights

BONDS – FIXED INCOME SECURITIES

If you invest in a bond issued by a company or gov’t, you have essentially made a loan to that organization.

Higher interest than bank products and guaranteed income (coupons)

Generally safer than stocks so investors use them to balance other investments

Par or face value – the amount of the bond that you expect to be paid back

Term – length of time to maturity Interest – the rate you will be paid for the use of your

money over the term

BONDS – FIXED INCOME SECURITIES

Corporate bonds are to help finance new projects and operations; can stay privately owned; will not dilute value of existing stock by issuing new shares

Municipal bonds (munis) issued by state, county or city gov’ts to either supplement tax revenue or pay for public projects such as hospitals, roads, bridges, schools, etc . Interest pd by munis is usually free from fed inc tax, and sometimes local inc taxes as well

Treasuries – issued to finance the gov’t, schools, roads, buildings: bills (short-term), notes (mid-term), bonds (long-term)

MORE ABOUT BONDS

Inflation-tracking treasuries: TIPS (Treasury Inflation Protected Securities) and I-bonds – use CPI % change to derive rate (http://www.bls.gov/cpi/home.htm )

Table of comparisons: http://treasurydirect.gov/indiv/products/prod_tipsvsibonds.htm

MUTUAL FUNDS

Investment company that pools money from many investors and invests it jointly based on specific investment goals. Stock funds Bond funds Money market funds Balanced fund

Equity investments like stocks – you become part owner of the fund.

Details about a fund – investment strategy, risk profile, performance history, fees etc. – are described in prospectus.

Mutual Fund Prospectus

Learn to read it here: http://www.getrichslowly.org/blog/2009/04/23/how-to-read-a-mutual-fund-prospectus/

MUTUAL FUNDS

Example of balanced fund:

MUTUAL FUNDS

Active or passive management – index funds example of passive management

All mutual funds charge fees – management fees; 12b-1 fees (fees for marketing the fund, services, and sometimes employee bonuses – capped at 1% of assets); account maintenance fees; other fees based on actions you take. Look for field labeled “expense ratio”.

Check and compare fund fees at www.finra.org/fundanalyzer (does not include transaction fees)

INDEX FUNDS

Type of mutual fund

Tracks performance of a specific index and buys portfolio that includes all of the stocks in that index in the same proportion.

Common indexes: S&P 100, 500; DJIA, NASDAQ 100

(and others); Russell 1000, 2000, etc.

Since they are passively rather than actively managed, the fees are usually lower than other mutual funds

EXCHANGE TRADED FUNDS (ETF’S)

Type of an investment company whose objective is to achieve the same return as a particular market index.

Pooled investments that combine aspects of MF’s with those of individual stocks

Each fund owns a group of investments (called ‘basket’) which reflects the composition of the index that the ETF tracks

Many ETF’s that track broad and narrow segments of market, so you can add assets to your portfolio that you might not be able to otherwise

EXCHANGE TRADED FUNDS (ETF’S)

Bought through brokerage account like stocks

Have fees similar to MF’s but often lower than MF fees (closer to index funds), plus the per-trade commission

Can have higher return than MF’s as they don’t need to include cash equivalents

If making regular deposits into a fund, better to use index funds than ETS’s because of transaction fees

DIVERSIFICATION

Spreading your money among different investments to reduce risk. By picking the right group of investments, you may be able to limit your losses and reduce the fluctuations of investment returns without sacrificing too much potential gain.

HOW TO BUY

Usually need to have an account at a brokerage firm, where stockbrokers execute the orders on your behalf

Fees and commissions vary – most charge a fee per trade, some charge commission on top of that, some charge fees to maintain an account – read carefully!!

Full-service brokerage firms will also offer investment advice, financial planning, customized portfolio management, banking services and others.

Check http://www.fool.com/how-to-invest/broker/index.aspx?ref=60index for sample comparison

HOW TO BUY, CONT.

A few ways to buy w/o broker:

Some companies offer Direct Purchase Plans (DPPs) Some companies offer Dividend Reinvestment

Programs (DRIPs) – need to have at least ONE share already, then dividends and partial payments can be added to shares ( http://www.oneshare.com/ )

These are usually administered by a third party who typically charge substantially less than brokers