Investment

2.  Investment: any vehicle into which funds can
be placed with the expectation that it will
generate positive income and/or that its value
will be preserved or increased
 Return: the reward for owning an investment
◦ Current income
◦ Increase in value

3.  Securities or Property
◦ Securities: stocks, bonds, options
◦ Real Property: land, buildings
◦ Tangible Personal Property: gold,
artwork, antiques
 Direct or Indirect
◦ Direct: investor directly acquires a claim
◦ Indirect: investor owns part of a portfolio
 Debt, Equity or Derivative Securities
◦ Debt: investor lends funds in exchange for interest income and repayment of loan in
future (bonds)
◦ Equity: represents ongoing ownership in a business or property (common stocks)
◦ Derivative Securities: neither debt nor equity; derive value from an underlying asset
(options)
 Low Risk or High Risk
 Risk: chance that actual investment returns will differ from those expected
 Domestic or Foreign
◦ Domestic: U.S.-based companies
◦ Foreign: overseas-based companies
 Short-Term or Long-Term
◦ Short-Term: mature within one year
◦ Long-Term: maturities of longer than a year

4.  Government
◦ Federal, state and local projects & operations
◦ Typically net demanders of funds
 Business
◦ Investments in production of goods and services
◦ Typically net demanders of funds
 Individuals
◦ Some need for loans (house, auto)
◦ Typically net suppliers of funds

6.  Individual Investors
◦ Invest for personal financial goals
(retirement, house)
 Institutional Investors
◦ Paid to manager other people’s money
◦ Typically manage large amounts of money
◦ Include: banks, life insurance companies, mutual funds
and pension funds

7.  Step 1: Meeting Investment Prerequisites
a. Make certain necessities of life are provided for
b. Adequate protection against losses from death,
illness and disability
 Step 2: Establishing Investment Goals
Examples include:
a. Accumulating retirement funds
b. Enhancing current income
c. Saving for major expenditures
 Sheltering income from taxes
 Step 3: Adopting an Investment Plan
a. Develop a written investment plan
b. Specify target date and risk tolerance for each goal
 Step 4: Evaluating Investment Vehicles
a. Assess potential return and risk
b. Chapter 4 will cover risk in detail
 Step 5: Selecting Suitable Investments
a. Research and gather information on
specific investments
 Make investment selections
 Step 6: Constructing a Diversified Portfolio
a. Use portfolio comprised of different investments
b. Diversification can increase returns or decrease risks (Chapter 5 will cover
diversification in detail)
 Step 7: Managing the Portfolio
a. Compare actual behavior with expected performance

8.  Market Timing: process of identifying the
current state of the economy/market and
assessing the likelihood of its continuing on its
present course
 Three Conditions of the U.S. Economy
◦ Recovery or expansion
 Corporate profits are up, which helps stock prices
 Growth-oriented and speculative stocks do well
◦ Decline or recession
 Values and returns on common stocks tend to fall
◦ Uncertainty

10.  Investors tend to follow different investment philosophies as they move
through different stages of the life cycle.
 Youth Stage
◦ Twenties and thirties
◦ Growth-oriented investments
◦ Higher potential growth; higher potential risk
◦ Stress capital gains over current income
 What are some examples of age-
appropriate investments?
◦ Common stocks, options or futures
 Middle-Aged Consolidation Stage
◦ Ages 45 to 60
◦ Family demands & responsibilities become important (education expenses, retirement
savings)
◦ Move toward less risky investments to preserve capital
◦ Transition to higher-quality securities with lower risk
 What are some examples of age-
appropriate investments?
◦ Low-risk growth and income stocks, preferred stocks, convertible stocks, high-grade
bonds
 Retirement Stage
◦ Ages 60 and older
◦ Preservation of capital becomes primary goal
◦ Highly conservative investment portfolio
◦ Current income needed to supplement
retirement income
 What are some examples of age-
appropriate investments?
◦ Low-risk income stocks, government bonds, quality corporate bonds, bank certificates

11. The act of committing money or capital to an endeavor with the
expectation of obtaining an additional income or profit.
It's actually pretty simple: investing means putting your money to
work for you. Essentially, it's a different way to think about how to
make money. Growing up, most of us were taught that you can earn
an income only by getting a job and working. And that's exactly what
most of us do. There's one big problem with this: if you want more
money, you have to work more hours. However, there is a limit to how
many hours a day we can work, not to mention the fact that having a
bunch of money is no fun if we don't have the leisure time to enjoy it
There are many different ways you can go about making an
investment. This includes putting money into stocks, bonds, mutual
funds, or real estate (among many other things), or starting your own
business. Sometimes people refer to these options as "investment
vehicles," which is just another way of saying "a way to invest."

12.  Short-Term Vehicles are used for:
◦ Savings
 Emphasis on safety and security instead
of high yield
◦ Investment
 Yield is often as important as safety
 Used as component of diversified portfolio
 Used as temporary outlet waiting for attractive permanent
investments

13. 
Obviously, everybody wants more money. It's pretty
easy to understand that people invest because they
want to increase their personal freedom, sense of
security and ability to afford the things they want in
life.
However, investing is becoming more of a necessity.
The days when everyone worked the same job for 30
years and then retired to a nice fat pension are gone.
For average people, investing is not so much a
helpful tool as the only way they can retire and
maintain their present lifestyle

14.  Investing is about making your money work for you.
 Reinvesting your earnings allows you to take advantage of
compounding.
 Each investor is different in his or her objectives and risk
tolerance.
 There isn't just one strategy that can be used to invest
successfully.
 Each investment vehicle has its own unique characteristics.
 Diversifying investments in a portfolio helps to manage risk.
 Together, all these points make up a foundation of knowledge
with which any investor should be comfortable. However, these
concepts mean nothing unless you can put them into practice.
It's great to know that compounding accelerates your
investment earnings,

15. THE FUNDAMENTAL CORNER STONES OF SUCCESSFUL INVESTING
ARE :
SAVE REGULARLY, INVEST REGULARLY
START EARLY
USE TAX SHELTERS
INVESTMENT RETURNS SHOULD EXCEED THE INFLATION