The Basics of Investing Stocks, Bonds & Cash Accounts.
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Transcript of The Basics of Investing Stocks, Bonds & Cash Accounts.
Types of Investments: 4 Asset Classes
• Stocks:– Over 5000 individual stocks to choose from!
• Bonds:– Government bonds, corporate bonds, mortgage bonds
• Cash Accounts:– Savings accounts, CD’s, money markets
• Real Estate– Residential, commercial, houses, apartments, etc….
Why Invest Money?• Purchasing power = amount of goods/services money buys
• Money loses purchasing power overtime– Prices for goods rise on average +2.5% per year – rising prices is called inflation
• Investors must earn more than the rate of inflation for purchasing power to rise
Real & Nominal return per year by Asset Class 1925 - 2012
SavingsAccount
Returns before inflation = nominal return
.= real return
Risk vs. Reward? • Holding period = when do you need your money back?
– Time horizon determines which asset class you should invest in
• The longer the holding period----the more risk you should take!– Stocks = long term investment (5-years or longer)
– Bonds = medium term investment ( 1-3 years)
– Bank CD’s = short term investment (30 days to 2 years)
Asset Allocation
Process of picking sectors to invest in
Bonds CashAccount
Stocks
no risk med. risk high risk
I thinkI’m brilliantvery high risk
Rule of “70”
• 70 divided by RETURN = # Years for money to double • Money Doubles in:
• 70/2% = 35 years• 70/5% = 14 years• 70/10% = 7 years• 70/15% = 4.6 years Average return of
stock market over last 75 years
How Money Grows!• Money grows exponentially as it compounds
• $10,000 invested at 4% return for 30-Years:
• $33,000
• $10,000 invested at 15% return for 30-years
• $875,000
The powerof compound
interest!
Bonds• Bonds: are a loan to a Gov’t or business where you earn interest
every year until you are paid back.
• If the company goes bankrupt => you usually will not be paid back!
You buya Bond
U.S. Gov’t 5-Year Bond
$1,000
Gov’t pays you 2% interest per year
$20 per year
Plus $1,000 in 5 years
$1,000 turns into $1,100 over 5 Years
Stocks
• Investors buy shares (stock) in a company and then become part owners– A company will issue stock to raise money to expand their business– Some companies pay dividends on their stock (similar to interest on a bond)
– Investment Banks help companies issue stock
• IPO = initial public offering– When a new company sells stock for the 1st time
– Many employees in an IPO own “stock options”
Key Stock Indices
• S&P 500 Index
– Largest 500 companies by $ value
• Dow Jones Index
– 30 very large American companies
• Nasdaq Index
– primarily technology stocks
WHY INDICES:
A stock index provides the average return of a basket of stocks
Easy way to “match” the market return
ETF’s = exchange traded funds• a way to invest in various stock indices by purchasing 1 stock•Example: SPY = SP500 index MDY = midcap index IWM = smallcap index