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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.
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
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.
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.
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
Capital
Appreci
ation
Provide
s
Income
TaxDeferre
d
Savings
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.