Investing 101: How To Make Your Money Work For You
Investing 101: How To Make Your Money Work For You
Investing 101: How To Make Your Money Work For You
A A Investment Strong
C D Junk In Default
Types of Investments - Bonds
• Bonds are generally a very safe investment. What is the drawback?
• Payback on bonds is usually lower than other types of investments
• Bonds are a great investment for people who are risk averse
• An investor who prefers an investment with lower risk.
• Pay attention to grades; bonds can be as risky/riskier than stocks
Types of Investments - Stocks
• Definition: A term used to describe the
ownership certificates of any company
• Also called: equities, shares
• Stocks are volatile; their value fluctuates
frequently (on a daily basis)
Types of Investments - Stocks
• Why do companies issue stocks?
• To raise money
• Sell part of the company (AKA issuing stocks) – equity financing
• Do not have to pay money back or make interest payments
• Shareholders make money when the stock is worth more than they paid
Types of Investments - Stocks
• Why do stocks make money?
• You (as an owner) are entitled to a portion of
the company’s profits
• Paid out in the form of dividends
• A sum of money paid regularly by a
company to its shareholders out of profits
(or reserves).
• Where is the risk?
• If the company goes bankrupt, there are no
assets to claim
Types of Investments - Stocks
• Risk
• Shareholders are not guaranteed any return if the
company goes bankrupt
• No guarantee that shareholders will receive
dividend payments
• With no dividends, investors make money only
through an increase in stock price
• The bright side?
• Stocks generally outperform other investments due
to their higher risk
• Historically, stocks average 10-12% returns
Types of Investments - Stocks
• Two Main Types of Stock: Common and Preferred
• Common stock – most commonly referred to
• Represent ownership in a company and claim
on profits
• One vote per share
• Higher Yields
Types of Investments - Stocks
• Preferred Stock
• Guaranteed a fixed dividend
• In the event of liquidation, preferred shareholders are paid first
• Do not have the same voting rights as common stockholders
• May be callable (company can purchase shares from shareholders at any
time for any reason)
Types of Investments - Stocks
• Companies can also customize different classes of stock in any way they
would like
• Reasons for this may include wanting voting power to remain with certain
people
• Traditionally noted as Class A, Class B, etc.
Types of Investments - Stocks
• Most stocks are traded on exchanges
• Physical – trades are carried out on a
trading floor
• Virtual – composed of a network of
computers
• Purpose of the stock market – facilitate
the exchange of securities between
buyers and sellers
• Reduces risk of investing because it
brings buyers and sellers together
Types of Investments - Stocks
• Different markets: Primary and Secondary
• Primary market –securities are created and stocks are initially issued
through IPO
• Secondary Market – investors trade previously-issued stocks
• What people refer to when talking about the stock market
• Trading of a company’s stock does not directly involve that company
• Examples: NYSE, Nasdaq, AMEX
Types of Investments - Stocks
• Why do stock prices change?
• Stocks are volatile and can change in price rapidly
• Fundamentally, supply and demand determine the price of stocks
• Earnings predominately affect investor evaluation of stocks, but there are other
factors
• There is no one theory that can explain stock prices
Types of Investments - Stocks
• There are two ways to buy stocks:
• Through a brokerage
• Most common
• Full-service brokers - expensive but manage
your account
• Discount brokerages - less expensive and
provide less assistance
• DRIPs & DIPs
• Dividend reinvestment plans (DRIPs) and
direct investment plans (DIPs) allow
shareholders to purchase stock directly from
the company
Types of Investments - Stocks
• Buying stocks through a brokerage:
• Step 1: Obtain a stock quote. This shows the bid (buy) price and the offer or
ask (sell) price.
• Step 2: If you are interested in buying a stock, you make a bid. If you are
interesting in selling a stock, you would submit an offer or an ask.
• Step 3: When a bid and offer match, a trade occurs.
Types of Investments - Stocks
• How to read a stock table or stock quote
Week high and low price: Ticker: Alphabetic name unique to the stock
highest and lowest prices that identifies it on exchanges
stock has traded at in 52
weeks