Topic 1 – Introduction to

investing
 What is an Investment?
▪ 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
 Types of Investments
▪ 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 an interest in a professionally
managed collection of securities or properties
 Types of Investments (cont'd)
▪ 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
 Types of Investments (cont'd)
▪ Short-Term or Long-Term
▪ Short-Term: mature within one year
▪ Long-Term: maturities of longer than a year
▪ Domestic or Foreign
▪ Domestic: U.S.-based companies
▪ Foreign: foreign-based companies
Suppliers and Demanders of Funds
▪ 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
The Investment Process
 Types of Investors
▪ Individual Investors
▪ Invest for personal financial goals
(retirement, house)
▪ Institutional Investors
▪ Paid to manage other people’s money
▪ Trade large volumes of securities
▪ Include: banks, life insurance companies, mutual funds and
pension funds
Overview of Investment Vehicles
 Steps in Investing
▪ Step 1: Meeting Investment Prerequisites
a.Adequately provide for necessities of life, including funds for
meeting emergency cash needs
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
d.Sheltering income from taxes
 Steps in Investing (cont'd)
▪ 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
b.Make investment selections
 Steps in Investing (cont'd)
▪ 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
b.Take corrective action when needed
 Investing Decisions
▪ Types of Income for Individuals
▪ Active Income: income from working (wages, salaries,
pensions)
▪ Portfolio Income: income from investments (interest,
dividends, capital gains)
▪ Passive Income: income from special investments (rents
from real estate, royalties, limited partnerships)
 Investing Decisions Over Investor
Life Cycle
▪ 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
 Investing Decisions Over Investor
Life Cycle (cont'd)
▪ 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
 Investing Decisions Over Investor
Life Cycle (cont'd)
▪ 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 and mutual funds, government
bonds, quality corporate bonds, bank certificates of deposit
 Investing in Different Economic
Environments
▪ 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
▪ Change in the general direction of the economy’s movement
 Different Stages
of an Economic/Market Cycle
 The Role of Short-Term Vehicles
▪ Liquidity: the ability of an investment to be converted into cash
quickly and with little or no loss in value
▪ Primary use is for emergency cash reserve or to save for a
specific short-term financial goal
The Advantages and Disadvantages
of Short-Term Vehicles
▪ Advantages
▪ High liquidity
▪ Low risks of default
▪ Disadvantages
▪ Low levels of return
▪ Loss of potential purchasing power from inflation
Popular Short-Term Investment
Vehicles

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Popular Short-Term Investment
Vehicles
Popular Short-Term Investment
Vehicles
 Investment Suitability
▪ 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