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. ___true __Savings accounts are ideal for long-term investments.

2. ___false . the income is the money you have saved __Investments become your income when
you retire.
3. ___false given to investors __Dividends are given to shareholders on savings accounts.
4. ___false . they vary from increasing to decreasing __Stocks always increase in value over time.

5. ___true__Investments earn compound interest.

6. ___false . all money can be lost __Investments are insured by the FDIC.
7. ___true __Bonds are ownership interest in a company.
8. ____true _Stocks have the highest potential return on investment.
9. ___false the longer the term__The shorter the term on the bond, the higher the interest
earned.
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?
they want it to make money over time and grow interest.
12. Why are investments considered riskier than traditional savings accounts?
The investments are not insured and could lose all of your money.

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

Collectible
s

Description

Objective

Any physical
asset that
appreciates in
value over
time because
its rare or
desired by
many

Depends on
the person and
collectible

Advantages

Disadvantages

Main Uses

Many
collectibles
offer
reasonable
protection
from inflation

No tax
protection
Not very liquid
hard to sell at
desirable price
True value
difficult to
determine

Capital
appreciation
Inflation
protection
Self-fulfillment

ADRs

Real Estate
& Property

A stock that
trades in the
united states
but represents
a specified
number of
shares in a
foreign
corporation
Becoming a
landlord or
renting out a
type of
property

Mutual
Funds

A large group
of people who
give money to
the company
for them to
invest for
them

Common
Stock

Part ownership
of a company.
entitled to a
piece of the
companies
profit

Save individual
investors
money by
reducing
administration
costs and
avoiding duty
on each
transaction
To make
capital
appreciation
through buying
land or making
income
through
renting
property
Should be
bought as a
long term
investment.
objectives
change from
fund to fund
No investment
provides better
returns at a
reasonable risk
than common
stock.
Outperforms
every other
stock

Allows
investing
outside north
America
Ability to
capitalize on
emerging
economies

Comes with
more risks
,political
factors and
exchange rates

Capital
appreciation
Income
Diversification

Mortgages
allow you to
borrow against
the property
up to three
times the
value

Selling quickly
is difficult
Significant
holding costs

Provides
income
Capital
appreciation
Leverage

Instant
diversification
Easily make
monthly
contributions
Managed by a
professional
manager
Easy to buy
and sell
Large part in
the growth of
the internet
11,000 public
companies in
north America
to choose from

Management
fees
Costs money
Doesnt beat
the market

Capital
appreciation
Provides
income
Tax differed
services

Original
investment not
guaranteed
always the risk
of value
decline
Stock is only as
good as the
company

Capital
appreciation
Income
Liquidity

1. Which type of investment is the riskiest? Collectibles because there is no promise of ever
making money compared to others.

2. Which type of investment has the greatest return? Mutual funds because it has instant
3.
4.
5.
6.
7.

diversification.
Which type of investment is best for diversifying your portfolio? ADRS because it allows
investing outside the united states
Which type of investment provides best returns at a reasonable risk? The common stock
because it has a low risk and more chance of returns
Which type of investment do you feel the least likely to pursue in the future? Why?
Collectibles because there is no chance of making money and it can be hard to determine the
worth or if it has any value
Which type of investment do you feel most likely to pursue in the future? Why? Common
stocks because it has the lowest risk and makes the most amount of money.
Why is it a good idea to invest in several different forms? Because one might fail but then you
still have multiple stocks it is also good for diversifying your stocks portfolio.