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. ___T__Savings accounts are ideal for long-term investments.

2. __F___Investments become your income when you retire.
you have social security
3. __T___Dividends are given to shareholders on savings accounts.
4. _F____Stocks always increase in value over time.
Not always, the stocks can sometimes decline in value
5. __T___Investments earn compound interest.
6. __F___Investments are insured by the FDIC.
they are not insured by the FDIC because you are not guaranteed your money back
7. ___F__Bonds are ownership interest in a company.
bonds are loans given to a company with interest
8. __F___Stocks have the highest potential return on investment.
they are based on luck
9. _T___The shorter the term on the bond, the higher the interest earned.
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?
They can be very beneficial if you get lucky enough.
12. Why are investments considered riskier than traditional savings accounts?
They are not insured so if you lose money your never getting it back

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

Collect
ibles

Descrip
tion
a
collecti
ble is
any
physical
asset
that
appreci
ates in
value
over
time
becaus

Objectiv
e
The
objectiv
es
behind
investin
g in
collectib
les vary
dependi
ng on
the
person
and the

Advantages
Many
collectibles
off
reasonable
protection
from
inflation

Disadvantages
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.

Main
Uses
Capital
Appreci
ation
Inflation
Protecti
on
SelfFulfillm
ent

Because there are so many uncertainties don't

count on any collectible for your retirement.

ADRs

Real
Estate
&
Proper
ty

e it is
rare or
it is
desired
by
many
An
America
n
Deposit
ory
Receipt
is a
stock
that
trades
in the
U.S but
represe
nts a
specifie
d
number
of
shares

collectib
le.

To save
individu
al
investor
s
money
by
reducin
g
adminis
tration
costs
and
avoidin
g duty
on each
transact
ion

Allows you
to invest in
companies
outside
North
America
with greater
ease

Buying
a home
will be
the
largest
single
investm
ent we
make in
our
lifetime.

Allows
the
investor
s to
target
his or
her
objectiv
es

Whether
your
objective is
income or
capital
appreciation
, real estate
investing
can help you
achieve your
goal.

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
Appreci
ation
Income
Diversifi
cation

Investing in
different
countries
you have
the potential
to capitalize
on emerging
economies

Mortgages
allow you to
borrow
against the
property up
to three
times the
value. This
can
dramatically
increase an
investor's
leverage.

Selling property can be difficult

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

Provide
s
income
Capital
appreci
ation
Leverag
e

Remember
that you
typically
need a 5%
down
payment
first.
Mutual
Funds

A
mutual
fund is
simply
a large
group
of
people
who
lump
their
money
togethe
r and
give it
to a
manage
ment
compan
y to
invest it
on their
behalf.

Investor
s should
buy
mutual
funds
as a
longterm
investm
ent. The
nice
thing
about
mutual
funds is
that the
objectiv
es
change
from
fund to
fund.

Comm
on
Stock

Stock is
someti
mes
referred
to as
shares,
securiti
es or
equity.
Simply

Commo
n stock
is just
that,
"commo
n". The
majority
of
stocks
trading

No matter
how much
you invest,
you get to
own several
companies.
In other
words, you
get
instant diver
sification.
You can
easily make
monthly
contribution
s.
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.
Common
stock is very
easy to buy
and sell.
Thanks in
large part to
the growth
of the
Internet, it is
very easy to

The majority of mutual fund companies

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

Capital
Appreci
ation
Provide
s
Income
TaxDeferre
d
Savings

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
Appreci
ation
Income
Liquidit
y

put,
commo
n stock
is
owners
hip in
part of
a
compan
y.

today
are in
this
form.

find reliable
information
on public
companies,
making
analysis
possible.
There are
over 11,000
public
companies
in North
America to
choose from.

1. Which type of investment is the riskiest? ADRS

2. Which type of investment has the greatest return? Mutual funds
3. Which type of investment is best for diversifying your portfolio? stockbonds risk? Common
stock
4. Which type of investment do you feel the least likely to pursue in the future? Why?
collectibles
5. Which type of investment do you feel most likely to pursue in the future? Why? Common
stocks because it can have a huge pay out if done right
6. Why is it a good idea to invest in several different forms? If one fails you have back up