Finance Ch 11 Concepts

5 Stages of Investing 1. Put & Take (temporary savings)- spend as you need- deposit paycheck into checking account, have some in account for emergencies. (3-6 months of net pay set aside). can get hands on money easily.2. Beginning investing- permanent- Take excess $, diversify- conservative and low risk3. Systematic Investing- invest on a regular basis, long range, retirement 4. Strategic investing- maximize portfolio 5-10 years,planning, diversification5. Speculation- high risk (make or lose in a short amount of time)
Difference between temporary and permanent investing. Temporary is for short term(3-6) month investing (savings account) and permanent is longer investing.
3 reasons for investing 1. make $, increase wealth.2.Help beat inflation3. Fun & challenging
Rule 72 – how does it work Divide 72 by the interest rate received on investment to determine amount if years it will take to double money (initial investment).
How does risk relate to potential return? The higher the risk the higher the potential return.
How does inflation affect an investment’s return? With inflation, prices rise and the money is not going to buy as much as it did. If you are making interest on the money that is the same rate as inflation or higher then you will be better off. If you do not invest that money it will buy less and be less valuable.
Criteria used to evaluate an investment 1. degree of safety (risk of loss)2. Degree of liquidity (ability to get your $ quickly)3. Expected dividends or interest4. Expected growth in value, preferably exceeding inflation rate.5. Reasonable purchase price and feesTax benefits (saving or postponing tax liability
7 wise investment practices 1. Define your financial goals2. Go slowly3. Follow through4. Keep good records5. Seek good investment advice6. Keep investment knowledge current7. Know your limits
6 main sources of financial information 1. Newspapers2. Investor Services and Newsletters3. Financial Magazines (Business Week, Money, Fortune)4. Brokers (Merrill Lynch, Fidelty discount: Charles Schwab, Ameritrade, Etrade)5. Financial Advisors (Edward Jones)6. Annual Reports7. Online Investor education (teenvestor, Motley Fool)
Advantages/disavdantages discount broker vs full service broker Full service brokers offer analysis and opinions (advice)- have higher fees. Discount brokers buy and sell securites at a reduced commission (save $ if you don’t need the advice).
Investment info online Online Investor education (teenvestor, Motley Fool), yahoo search engine
Differences between t- bill, Treasury notes, and Treasury bonds t-bills- available in denominations of $10,000 and then in increments of $5000. matures in one year or less (usually 3 month, 6 month or 1 year maturity)Treasury Notes- issued in unit of $1000 or $5000. Matures in 2years to 10 years. Interest rates are higher than t-bills.Treasury bonds- issued in minimum units or $1000 with maturity rates of 10-30 years. Interest rates higher than t-bills or Treasury notes. Interest paid every 6 months by govt, exempt from state and local income taxes.
Difference between stocks and bonds Bonds are debt obligations of a corporation or government. Stocks are a unit of ownership in a corporation. Bonds are a set interest rate. Stocks are more risky because they go up and down.
Advantages investing mutual funds 1. Able to invest in diversified stocks with little money or limited resources. 2.Mutual funds are professionally managed.
Why are futures and options risky investments? Futures- you are betting on the future price of a commodity – risky. SpeculativeOptions- You are betting that the stock will increase in value on that future date- not obligated to buy though with an option.

Leave a Reply

Your email address will not be published. Required fields are marked *