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. T- Savings accounts are ideal for long-term investments.

2. F- Investments become your income when you retire. Investments should never be your
income, thats super dangerous.
3. T- Dividends are given to shareholders on savings accounts.
4. F- Stocks always increase in value over time. It depends on how well the stock is doing.
5. T- Investments earn compound interest.
6. F- Investments are insured by the FDIC. Investments are risks that the investor takes.
7. F- Bonds are ownership interest in a company. Bonds are agreements on loans between the
issuer and the person buying the bond.
8. T- Stocks have the highest potential return on investment.
9. F- The shorter the term on the bond, the higher the interest earned. The longer the term on
the bond, the higher the interest earned.
10. T -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?
People make investments in order to make extra money by owning parts of a company,
selling collectibles, and investing in bonds.
12. Why are investments considered riskier than traditional savings accounts?
The amount an investor makes depends on the value of the stock, bond, or property that they
are invested in. Savings accounts are more reliable in that they dont fluctuate.

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
Collectible
s

Rare physical
assets that
increase in
value over
time

Objective

Advantages

Disadvantages

Main Uses

Vary
depending on
the person and
collectible

Most valuables
increase in
value along
with inflation

Can take long

to increase in
value, offer no
income

Capital
appreciation,
inflation
protection, self
fulfillment

ADRs

Real Estate
& Property

Mutual
Funds

Common
Stock

1.
2.
3.
4.
5.

Stock that
trades in the
US but
represents
shares in a
foreign
corporation
Purchasing
property for
the purpose of
reselling

Save people
money by
reducing costs
on
transactions

ADRs allow
you to invest
in companies
outside North
America with
greater ease

Capital
appreciation or
income

Group of
people who
give money to
a company to
invest on their
behalf

Change from
fund to fund

Ownership in
part of a
company

Potential for
capital
appreciation,
protection
against
moderate
inflation

Helps you
achieve your
objective,
mortgage can
increase
leverage
Instant
diversification,
make
contributions
easily, money
is in good
hands
Easy to buy
and sell, easy
to find reliable
info, over
11000
companies to
choose from

ADRs come
with more
risks, involving
political
factors,
exchange rates
etc
Selling
property
quickly can be
hard, there are
holding costs

Capital
appreciation,
income,
diversification

Managers take
some of the
profit, pay
management
fees whether
making money
or not
Original
investment is
not
guaranteed,
stock is only as
good as the
company

Capital
appreciation,
provide
income, taxdeferred
savings

Provide
income, capital
appreciation,
leverage

Capital
appreciation,
income,
liquidity

Which type of investment is the riskiest? Common stock

Which type of investment has the greatest return? Common stock
Which type of investment is best for diversifying your portfolio? ADRs
Which type of investment provides best returns at a reasonable risk? Mutual Funds
Which type of investment do you feel the least likely to pursue in the future? Why? I would be
least likely to invest in real estate because I would get too attached to the property before
selling it.
6. Which type of investment do you feel most likely to pursue in the future? Why? I would be
most likely to invest in common stocks because they are easiest to buy and sell.
7. Why is it a good idea to invest in several different forms? If one investment falls through, the
others can provide support.