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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. __F___Savings accounts are ideal for long-term investments. Savings account are better
for short term goals.
2. __T___Investments become your income when you retire.
3. __T___Dividends are given to shareholders on savings accounts.
4. __F___Stocks always increase in value over time. Sometimes stocks can decrease in
value over time.
5. __T___Investments earn compound interest.
6. __F___Investments are insured by the FDIC. Investments are not Federally Insured.
7. __F___Bonds are ownership interest in a company. Stocks are ownership interest in a
company
8. ___T__Stocks have the highest potential return on investment.
9. __F___The shorter the term on the bond, the higher the interest earned. The longer the
term on the bond, the higher the interest.
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?
People invest in stocks, bonds, and mutual funds because they want to make more
money and have financial security. It also helps when they are thinking about
retirement.
12. Why are investments considered riskier than traditional savings accounts?
Investments are considered riskier than traditional savings accounts because
you are not putting the money into a bank right away. You are putting it into a bank
where the account can crash.

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
Description
Collectible
s

Any physical
asset that
appreciates in
value over time

Objective

Advantages

The objectives Many


behind

collectibles

investing in

offer

collectibles

reasonable

Disadvantages

Hard to sell at
a desirable
price, does
not provide
tax

Main Uses

-Capital
Appreciation
- Inflation
Protection
- Self

because it is
rare or it is
desired by
many.

vary

protection

protection, do

depending on

from inflation.

not offer any

the person

income to the

and the

investor, true

collectible.

value can

Fulfillment

often be
difficult to
determine.
ADRs

(American
Depository
Receipt) a

stock that trades


in the United
States but
represents a
specified
number of
shares in a
foreign
corporation.

Real Estate
& Property

The main
objective of
ADRs is to save
individual
investors
money by
reducing
administration
costs and
avoiding duty on
each

Your objective

investing

is capital

doesn't just

appreciation

mean

then buying a

purchasing a

promising piece

house - it can

of property in a

include vacation

neighborhood

homes,

with great

commercial

potential will

properties, land

help you

(both developed

achieve this.

undeveloped),
condominiums
and many other

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
Appreciation
Income

Diversification

Whether
your objective
is income or
capital
appreciation,
real estate
investing can
help you
achieve your
goal.
Mortgages
allow you to
borrow against
the property
up to three
times the
value. This can
dramatically
increase an
investor\'s

-Selling

Provides
Income
Capital
Appreciation
Leverage

transaction.

Real estate

and

ADRs allow
you to invest
in companies
outside North
America with
greater ease.
By investing
in different
countries, you
have the
potential to
capitalize on
emerging
economies.

property
quickly can be
difficult.
-There are
significant
holding costs,
especially if
you are not
residing in the
property.

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

possibilities.

Mutual
Funds

A mutual fund is

Objectives

simply a large

change from

group of people

fund to fund.

who lump their

Each mutual

money together

fund has a

and give it to a

different

management

strategy - it is

company to

your job to

invest it on their

decide what

behalf.

your objectives
are and which
fund best suits
those
objectives.

Common
Stock

No matter
how much you
invest, you get
to own several
companies. In
other words,
you get
instant
diversification.
You can
easily make
monthly
contributions.
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 Over the long

-Common

is ownership

stock is very

in part of a
company.

term, no

investment
provides better
returns at a
reasonable risk

easy to buy
and sell.
-Thanks in large

The majority
of mutual fund
companies
don\'t 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
Appreciation
Provides
Income
TaxDeferred
Savings

-Your original

Capital
Appreciation
Income
Liquidity

investment is
not guaranteed.
There is always
the risk that the
stock you invest

than common

part to the

in will decline in

stock.

growth of the

value, and you

Internet, it is

may lose your

very easy to
find reliable

entire principal.
-Your stock is

information on

only as good as

public

the company in

companies,

which you

making analysis

invest-a poor

possible.

company means

-There are

poor stock

over 11,000

performance.

public
companies
in North
America to

choose from.

1. Which type of investment is the riskiest? The type of investment that is the riskiest is
2.
3.
4.
5.
6.
7.

Collectables.
Which type of investment has the greatest return? The type of investment that has the
greatest return is Mutual.
Which type of investment is best for diversifying your portfolio? ADRs are the best for
diversifying.
Which type of investment provides best returns at a reasonable risk? The type of
investment that provides the best returns at a reasonable risk is Common stock.
Which type of investment do you feel the least likely to pursue in the future? Why? The
investment that I feel the least likely to pursue in the future is ADRs because I
would not want to invest in different countries.
Which type of investment do you feel most likely to pursue in the future? Why? The
investment I feel I would most likely pursue in the future is the common stock
because you have a better chance for a higher return.
Why is it a good idea to invest in several different forms? It is a good idea to invest in
several different forms because if something goes wrong with one form, you are
still invested in several others that you can rely on.

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