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. _False Savings accounts are ideal for long-term investments. Savings accounts are for
short term investments while other investments are for long term.
2. _True Investments become your income when you retire.
3. ___True Dividends are given to shareholders on savings accounts.
4. _False Stocks always increase in value over time. Stocks can increase but can also
decrease in value in just a short amount of time.
5. _True Investments earn compound interest.
6. __False Investments are insured by the FDIC. The money invested in securities is not
federally insured.
7. ___False Bonds are ownership interest in a company. A bond is an agreement on a loan
between the issuer and the person buying the bond (bondholder). A stock is
ownership interest in a company.
8. __True Stocks have the highest potential return on investment.
9. _False The shorter the term on the bond, the higher the interest earned. The longer the
bond, the higher and more interest is earned on it.
10.__True 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?

12. Why are investments considered riskier than traditional savings accounts?
Investments are considered to be riskier than traditional savings accounts because
there is more of as risk with your money. If you put your money into a security like
a bond, stocks or mutual funds is it possible to lose all of your money or a lot of it
because it is not federally insured unlike the traditional savings account which is
financially insured. The other risk is that inflation can occur.

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

Objective

Advantages

Disadvantage
s

Main Uses

Collectible
s

A collectible
is any
physical asset
that
appreciates in
value over
time because
it is rare or it
is desired by
many.

Can vary
depending
on the
person and
the
collectible.

Many collectibles
offer reasonable
protection from
inflation

Not very
liquid,
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.

Capital
Appreciation
Inflation
Protection
Self
Fulfillment

ADRs

American
Depository
Receipt (ADR)
is a stock that
trades in the
United States
but
represents a
specified
number of
shares in a
foreign
corporation

save
individual
investor
money by
reducing
administratio
n costs and
avoiding duty
on each
transaction

ADRs allow you to

invest in companies
outside North
America
By investing in
different countries,
you have the
potential to
capitalize on
emerging
economies

ADRs come
with more
risks
Language
barriers and a
lack of
standards
regarding
financial
disclosure can
make it
difficult to
research
foreign
companies.

Capital
Appreciation
Income

Diversificatio
n

Real
Estate &
Property

Real estate
investing
doesn't just
mean
purchasing a
house - it can
include
vacation
homes,
commercial
properties,
land,
condominium
s

Buying a
rental
property can
help provide
regular
income.
Also can
target
whatever
their object is

Can help you

achieve your goal.
Mortgages allow
you to borrow
against the property
up to three times
the value.

Selling
property
quickly can be
difficult
There are
significant
holding costs

Provides
Income
Capital
Appreciation
Leverage

Mutual
Funds

Common
Stock

A large group
of people who
lump their
money
together and
give it to a
management
company to
invest it on
their behalf

Long term
investment
and the
objective can
change for
each fund

Instant diversificatio
n
Can easily make
monthly
contributions.
Managed by a
professional
manager

Fund
managers
take a slice of
the profits for
their work.
You pay
management
fees whether
the fund
actually
makes you
money or not

Capital
Appreciation
Provides
Income
TaxDeferred
Savings

Common
stock is
ownership in
part of a
company

A better
return and
potential for
capital
appreciation
and income
and offer
protection
against
inflation

Easy to buy and

sell
Easy to find
reliable information
on public companies
Over 11,000
public companies
in North America to
choose from.

Original
investment is
not
guaranteed
Your stock
is only as
good as the
company in
which you
invest (a poor
company
means poor
stock
performance)

Capital
Appreciation
Income
Liquidity

1. Which type of investment is the riskiest? ADRs and collectibles are the riskiest
2.
3.
4.
5.
6.
7.

investments.
Which type of investment has the greatest return? ADRs have the greatest return.
Which type of investment is best for diversifying your portfolio? Mutual funds are the best
for diversifying your portfolio.
Which type of investment provides best returns at a reasonable risk? Common stock has
the best returns at a reasonable risk.
Which type of investment do you feel the least likely to pursue in the future? Why? I would
least likely pursue real estate investments because the property can be hard to
sell, its a big commitment and could require a lot of work.
Which type of investment do you feel most likely to pursue in the future? Why? The common
stock because its easy to buy and sell and the information on it is easy to access.
Why is it a good idea to invest in several different forms? Its a good idea to invest in
several different forms because there is different risks with different forms and its
good to have a variety of risks due to the fact you could lose or gain money.