11.2 Making Investment Choices

Financial Magazines A number of weekly and monthly magazines specialize in business and financial information Ex:

-Business Week -Forbes -Money -Fortune -Kiplinger's Personal Finance -The economist

You can buy saving bonds from:

-commercial banks -through payroll deductions plans -online -Saving bond certificates should be stored in a safe deposit box. -If you are seeking safety, savings bonds are a good choice. -You can hold them to maturity or cash them in at a bank of their current value after holding them for at least one year. -their interest is not subject to state or local taxes, only federal. -Some saving bonds used to finance a college education are free of federal taxation as well. -If savings bond certificates are lost, stolen, or destroyed, they can be replaced without cost.

Newspapers

-local newspaper -financial pages list all types of securities: stocks and bonds -reading pages daily will help you keep track of financial markets and obtaining information needed to make wise investment decisions. -The Wall Street Journal: daily paper that provides detailed coverage of the business and financial world. -Barron's: is a weekly paper that also provides charts of trends, financial news, and technical analysis of financial data.

Two major advantages of a mutual fund for investors are:

-professional management and -diversification

FINANCIAL ADVISERS

Are professional investment planners (CFPs) -They are trained to give investment advice based on your goals, age, lifestyle, and other factors. -will ask you to supply confidential information about your assets, liabilities, net worth, income, and budget, as well as your financial goals. -usually receives a fee for consulting services -some also receive a commission when they sell your investment products (stocks, bonds, or life insurance policies) -generally, you will get better overall advice when the adviser does bot stand to make a profit on the investments you choose to buy.

Discount broker Some people are well informed and know what they want to buy and sell. For these investors, a discount broker is adequate.

Discount brokers: Buy and sell securities for clients at a reduced commission. -A discount broker usually provides little or no investment advice to a client. Ex: -Charles Schwab -TD Ameritrade -E*TRADE

LOW RISK/LOW RETURN

For your first investments, you will likely want to consider fairly safe investments, even though their returns will be relatively low. However you should continue to include some low-risk investments as part of your diversified portfolio.

Sources of Financial Information To make good investment choices, you must have good information.

Investment information can be found in: -print -online -through other sources to help you evaluate investment options

U.S. savings bonds are available in two forms:

Series EE savings Bonds Series I Savings Bonds

Series I Savings Bonds

These bonds are designed for investors wanting to protect against inflation and earn a guaranteed rate of return. -Interest is added to the bond monthly and is paid when the bond is cashed. -are sold at face value (you pay $50 for a $50 bond) -they grow with inflation-indexed earnings for up to 30 years. -in other words: the I bond pays a fixed rate combined with a semiannual inflation adjustment to help protect purchasing power.

Series EE Savings Bonds

These bonds are know as discount bonds -A discount bond is purchased for less than the maturity value. -The purchase price of a Series EE bond is one half of its maturity value Ex: you could buy a $50 bond for $25 and a $100 bond for $50. -At maturity, you receive the full value of the bond. -If you don't cash the bond at maturity, it continues to earn interest for up to 30 years.

Treasury Securities For those with cash to invest, there are three types of U.S. Treasury security

U.S. Treasury Bills U.S. Treasury Notes U.S. Treasury Bonds

Annuities An annuity is...

a contract that provides the investor with a series of regular payments, usually after retirement. -generally, you receive income monthly, with payments to continue as long as you live. -you usually buy an annuity directly from a life insurance company. -the interest on the principal, as well as the interest compounded on that interest, builds up free of current income tax. -taxes are deferred until you receive payments from your annuity (these are called tax-deferred annuities). -the payments from an annuity are normally used to supplement retirement income. -the annuity is often described as the opposite of life insurance. -it pays while you are alive; life insurance pays when you die.

Mutual Funds Suppose you have $500, which is not enough to buy a diversified portfolio of stocks. You can buy shares in a large, professionally managed group of investments called...

a mutual fund

The owner of stock is called...

a stockholder

when you loan money to a state or local government unit, such as a city, county, community college district, or utility district, you are...

also paid interest on your investment. -Your principal is repaid when the bond matures. -Typically, interest earned on municipal bonds is tax-free, giving the investor a tax advantage.

Brokers Full-service brokers provide clients with...

analysis and opinions based on their judgments and the opinions of experts at the company they represent. However you cannot expect a broker to pick winners for you every time. -they provide monthly market letters giving advice on the purchase and sale of certain securities. Some include: -Merrill Lynch -Fidelity Investments -American Express

Futures

are contracts to buy and sell commodities (products that are mined or grown) or stocks for a specified price on a specified date in the future.

Corporate and Municipal Bonds Bonds:

are debt obligations of corporations (corporate bonds) or state or local governments (municipal bonds.

Penny Stocks

are low-priced stocks of small companies that have no track record. -the stock usually sells for under $5 per share. -the small companies often have low revenues and few assets to assure future growth. -Occasionally, a penny stock will be successful, and the investor will make a large windfall. -generally penny stocks are highly risky

the maturity date of a bond is the date on which the...

borrowed money must be repaid.

when a corporation or government body sells a bond, it is...

borrowing from an investor.

Although some mutual funds fall in the speculative category and others fall in the low-risk category, such as those that specialize in money market securities, most mutual funds fall somewhere in the...

broad medium range in terms of risk and return.

Stocks generally...

carry more risk than choices with fixed interest, such as saving bonds, because a stockholder's earnings can go up or down, depending on the company's profits.

Collectibles Many people like to collect items such as...

coins, art, memorabilia, ceramics, or other items that are popular from time to time, such as Beanie Babies or baseball cards. -If you collect an item that goes up in value rapidly, you can reap large rewards. -If however, you don't sell when your items are a hot commodity, they are likely to lose their value just as quickly, making them a risky investment. -collectors must be aware of the market and realize that their collections are subject to changing public tastes and can be difficult to resell.

By investing in both funds, you are...

diversifying your investments. -if your riskier fund does not do well, your stable fund will limit your losses.

Mutual funds are the...

fastest-growing segment of the American financial services industry.

Investors Services and Newsletters Companies called investor services provide extensive...

financial data to clients. Major services include: -Moody's Investors Service -Standard and Poor's Report -Value Line *found in public libraries *found online *investors subscribe to weekly or monthly investment newsletters

HIGH RISK/HIGH RETURN High-risk/high-return choices involve considerable uncertainty. Returns can be...

high, but they can also be low or even negative, resulting in a loss of principal (the amount of the original investment) -if you are willing to take the risks involved with these choices, you stand to make high returns over time. -but you also risk high losses if your investments prove to be poor performers.

You can further diversify your portfolio by...

investing in mutual funds with different objectives. Ex: -some funds buy securities in riskier small companies, hoping to earn a higher return. -others stick to well-established, safe companies to earn a lower but stable return.

The National Association of Investors Corporation

is a nonprofit site dedicated to investor education -this organization helps investment clubs get started.

ANNUAL REPORTS

is a summary of a corporation's financial results for the year and its prospects for the future. -The Securities and Exchange Commission (SEC) requires all public corporations to prepare this report each year and send it to stockholders. -Investors can use the information contained i the report to evaluate the corporation as an investment prospect.

Stock

is a unit of ownership in a corporation.

Security funds are grouped to...

meet the fund's stated investment goals.

when you invest in a corporate bond, the corporation...

pays you a fixed amount of money (called interest) at a fixed interval (usually every 6 months) -the corporation also must repay the principal (amount borrowed) at maturity.

MEDIUM RISK/MEDIUM RETURN when you feel secure enough to take more risk and you have additional money to invest, you are...

ready to step up to the medium-risk range to increase your return. -some of these medium-risk options involve investing with companies that manage the investment.

Real Estate Many people like to invest in...

real estate-houses and land. -usually represents a large and often nonliquid investment of cash -it has proven to be protection against inflation in most parts of the United States. -in some areas, market values of homes have increased faster than the inflation rate. -real estate investments also have tax benefits -certain costs associated with home ownership are deductible from gross income, and thus lower taxable income -while investing in your own home carries little risk, investment in other types of real estate can be very risky.

Stocks in well-established companies are...

reasonable safe, while stocks in less-stable companies can be quite risky. -however, a diversified portfolio of stocks of various risk levels can achieve a medium overall risk.

A stockholder

receives a stock certificate, which is evidence of the ownership. -when you are a stockholder, you will share in a corporation's profits, which are paid to you as dividends. -if the company does well, you earn returns in two ways: --in dividends and --in the increased value of the stock you own

The investor is betting...

that the price of the commodity or stock will be higher on that future date than it is at the time of the contract. -Thus, trading in futures is very risky speculation. -If prices fall, the investor loses -If prices rise, the investor stands to make a lot of money. -This type of investment is not for beginners or for individuals who cannot afford to lose their investment.

ONLINE INVESTOR EDUCATION

the internet offers many educational sites for new investors. Teeniest is a website dedicated to helping teens learn how to invest and manage their money

A mutual fund is...

the pooling of money from many investors to buy a large selection of securities.

Options An option is...

the right, but not the obligation, to buy or sell a commodity or stock for a specified price within a specified time period. -as with futures, the investor is betting that, during the option period, the price of the stock will rise. -If it does, the investor can choose to buy it at the lower option price, resulting in an instant profit. -Typically, options are short-term investment devices used by speculators to make a quick profit. -They are risky and not for inexperienced investors.

INVESTMENT CHOICES Investment can be categorized by...

their degree of risk and expected return.

U.S. Treasury Bills

these bills (called T-bills) are available for a minimum purchase of $100. -the maturity date for these bills ranges from a few days to 52 weeks (one year).

U.S. Treasury Bonds

these bonds are issued for a minimum of $100 with a 30-year maturity. -interest rates are generally higher than rate for either T-bills or T-notes because of the longer maturity. -interest is paid every six months.

U.S. Treasury Notes

these notes (called T-notes) are available for a minimum purchase of $100 -the maturities are 2, 5, or 10 years. -interest rates for Treasury notes are slightly higher than for Treasury bills.

you can find annual reports online at the SEC

www.sec.gov -Corporations often publish their financial performance data in the investor section of their web sites. -you can receive a copy of the annual report by writing to the company or submitting a request at the company's web site. -some large libraries keep copies of annual reports of major corporations.

U.S. Government Savings Bonds when you buy a savings bond,...

you are lending money to the United States government