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.

a. Savings are usually used for immediate purchases/ short term investments.
2. _____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.
a. Sometimes the stock one has invested in actually decreases because the business is
not going as well as planned.
5. __true___Investments earn compound interest.
6. _false____Investments are insured by the FDIC.
a. The stock market is a game of luck; one that is not federally insured. If the money was
insured there would be no risk in the stock market.
7. ___false__Bonds are ownership interest in a company.
a. Bonds are certain amounts of money given to the government for them to use; in a set
time the money they use will mature and after the time of maturation is over, you will
receive the original deposit with an addition of interest.
8. __true__Stocks have the highest potential return on investment.
9. __false___The shorter the term on the bond, the higher the interest earned.
a. It is advised to invest in bonds for the longer term to allow increasing maturation on
the bond; taking it out early could result In money loss.
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?
Typically people invest for long term financial security. It is not for immediate use
but to ensure that there will be money available if an emergency were to occur,
larger planned out purchases, and maybe even retirement.
12. Why are investments considered riskier than traditional savings accounts?
Investments are not insured by the FDIC unlike a savings account would be in a
bank. With the investments not being insured, there is more of a risk for losing all
the money one had put into the investment, only for it decrease in value.

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

Disadvantag
es

Main Uses

Collectible
s

A rare asset that

increases in value over
time

Varies
between
person and
the
collectible
itself. Some
take longer
to increase
in value
than
others; and
no
assurance
to value in
future

Many offer
protection
from
inflation

No tax
protection;
True value
difficult to
determine;
not liquid
and hard to
sell at
desirable
price; does
not offer
income;
many
uncertainties
> do not
count on for
retirement

Capital
appreciation;
inflation
protection;
self
fulfillment

ADRs

American Depository
Receipt:
A stock that trades in
the US, representing a
specified number of
shares in a foreign
cooperation.

Save
individual
investors
money by
reducing
admin
costs and
avoiding
duty on
each
transaction
; gr8 way
to buy
shares in
foreign
companies
> growth
potential
outside of
NA
Allows for
investor to
target
objectives:
such as
capital
appreciatio
n and/or
income.

Greater ease
on
investments
out of NA;
potential to
capitalize on
emerging
economies

Comes with
more risks:
political
factors,
exchange
rates etc.

>Capital
appreciation
>Income
>Diversificati
on

Easily
achieved
goal of
either
capital
appreciation
or income;
mortgages
allow to
borrow
against
property up
to three
times the

Selling
property
quickly can
be difficult;
Significant
holding
costs; espc if
not residing
in property:
property
taxes,
insurance,
maintenance
, etc.

Provides
income;
capital
appreciation;
leverage

Real
Estate &
Property

Investment when
purchasing a house,
vacation home,
commercial property,
land
(developed/undeveloped
), condominiums and
more. Consider location;
dramatically effected by
immediate surrounding
area.
Extremely illiquid

Mutual
Funds

Common
Stock

Many people coming

together, giving it to a
management company
to invest it on their
behalf.

Ideally
long-term
investment
; each fund
differs in
objective:
growth/
aggressive,
low risk,
balanced,
momentum
, etc.

An ownership in part of a
company

No other
investment
provides
better
returns at
reasonable
risk than
common
stock;
potential
for income

value. Can
dramatically
increase an
investors
leverage
(first need
5% down
payment)
No matter
amount of
investment;
involves
ownership of
several
countries
(instant
diversificatio
n)
Easily make
monthly
contribution
s; money
managed
professionall
y; in theory
one should
receive
above
average
returns
Easy to buy
and sell;
easy to find
reliable
information
on public
companies;
over 11,000
public
companies
in NA to
choose from

Majority do
not come
close to
beating
market
averages;
Fund
managers
receive part
of profit for
their work (it
may be quite
high of an
expense)
Management
fees are paid
whether the
fund makes
money or
not.

Capital
appreciation;
provides
income; taxdeferred
savings

Original
investment
not
guaranteed,
always risk
for it to
decline in
value and
possibility in
loss of entire
principal;
stock only as
good as
company in
which you
invest

Capital
appreciation;
income;
liquidity

1. Which type of investment is the riskiest?

a. The riskiest to involve oneself with would be the stock, one moment it could
increase and one could make money on it, but at the same time it is easily
susceptible to plummet, and risk losing all of the money invested.
2. Which type of investment has the greatest return?

a. ADRs provide the greatest return due to such diversification.

3. Which type of investment is best for diversifying your portfolio?
a. ADRs are the best for diversification because it provides the opportunity to
obtain stocks outside of the US region.

4. Which type of investment provides best returns at a reasonable risk?

a. Common stock provides the greatest returns than any other
investment; it averages 11-12% per year, outperforming every other
type of security including bonds and preferred shares.
5. Which type of investment do you feel the least likely to pursue in the future? Why?
a. I would most likely least pursue collectibles in the future because there is no

guarantee that they will increase in price overtime, or may even become so
useless that they eventually just take up unnecessary space.
6. Which type of investment do you feel most likely to pursue in the future? Why?
a. I will most likely pursue investment in the common stocks, with extreme
caution, mostly because they can increase significantly, it all comes down to
observational skills, and diligently checking the stock market.
7. Why is it a good idea to invest in several different forms?
a. Investing in several different forms diversifies the investments that are dealt
with, along with several different opportunities to gain income and benefit
from those investments.