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.

False, savings accounts are merely a place to store money, while investing is a
better method of achieving long term goals.
2. __True___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.
If a company does poorly, the stock value will decrease.
5. ___True__Investments earn compound interest.
6. __False___Investments are insured by the FDIC.
False, investments are not insured by any government organization.
7. __False___Bonds are ownership interest in a company.
False, stocks are ownership interest in a company.
8. ___True__Stocks have the highest potential return on investment.
9. __False___The shorter the term on the bond, the higher the interest earned.
False, the longer 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?
People invest in stocks, bonds, and mutual funds in order to secure a long-term
financial stability. They can use investments to build up their money, and have
enough money when they retire.
12. Why are investments considered riskier than traditional savings accounts?
Investments are considered riskier than savings accounts because it is possible to
lose most, or all of the money you invest. When you invest, you are putting your
trust in some company that may or may not end up making you 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
Description

Objective

Advantages

Disadvantages

Main Uses

Collectible
s

any physical asset

that appreciates in
value over time
because it is rare or
it is desired by
many. Many people
think of collectibles
as things like
stamps, coins, fine
art or sports cards,
but there really are
no strict rules as to
what is or is not a
collectible.

vary depending on
the person and the
collectible.
Collectibles can take
very long to increase
in value, and they
offer no assurances
as to their value in
the future.
Furthermore, unlike
other investments,
collectibles offer no
income. The one
advantage is that
most collectibles
increase in value
along with inflation.

Many collectibles
offer reasonable
protection from
inflation.

-Not very liquid, they

can often be hard to
sell at a desirable
price.
-They do not provide
any tax protection.
Collectibles do not
offer any income to
the investor.
-The true value can
often be difficult to
determine.
-Because there are
so many
uncertainties don't
count on any
collectible for your
retirement.

-Capital Appreciation
-Inflation Protection
-Self Fulfillment

ADRs

a stock that trades

in the United States
but represents a
specified number of
shares in a foreign
corporation. ADRs
are bought and sold
on U.S. stock
markets just like
regular stocks and
are
issued/sponsored in
the U.S. by a bank or
brokerage.

save individual
investors money by
reducing
administration costs
and avoiding duty
on each transaction.
For individuals, ADRs
are an excellent way
to buy shares in a
foreign company
and capitalize on
growth potential
outside North
America. ADRs offer
a good opportunity
for capital
appreciation as well
as income if the
company pays
dividends.
Analyzing foreign
companies involves
more than just
looking at the
fundamentals.

-ADRs allow you to

invest in companies
outside North
America with greater
ease.
-By investing in
different countries,
you have the
potential to
capitalize on
emerging
economies.

ADRs come with

more risks, involving
political factors,
exchange rates and
so on.
Language barriers
and a lack of
standards regarding
financial disclosure
can make it difficult
to research foreign
companies.

Capital Appreciation
Income
Diversification

Real
Estate &
Property

Real estate investing

doesn't just mean
purchasing a house it can include
vacation homes,
commercial
properties, land
(both developed and
undeveloped),
condominiums and
many other
possibilities.

investing allows the

investor to target his
or her objectives.
For example, if your
objective is capital
appreciation, then
buying a promising
piece of property in
a neighborhood with
great potential will
help you achieve
this. On the other
hand, if what you
seek is income, then
buying a rental
property can help
provide regular
income.

Whether your
objective is income
or capital
appreciation, real
estate investing can
help you achieve
your goal.
Mortgages allow you
to borrow against
the property up to
three times the
value. This can
dramatically
increase an
investor\'s leverage.
Remember that you
typically need a 5%
down payment first.

Selling property
quickly can be
difficult.
There are significant
holding costs,
especially if you are
not residing in the
property. Examples
include property
taxes, insurance,
maintenance, etc.

-Provides Income
-Capital Appreciation
-Leverage

Mutual
Funds

simply a large group

of people who lump
their money
together and give it
to a management
company to invest it
on their behalf. A
mutual fund
manager proceeds
to buy a number of
stocks from various
markets and
industries.
Depending on the
amount you invest,
you own a part of
the overall fund.

For the most part,

investors should buy
mutual funds as a
long-term
investment. The nice
thing about mutual
funds is that the
objectives change
from fund to fund.
Each mutual fund
has a different
strategy - it is your
job to decide what
your objectives are
and which fund best
suits those
objectives. Mutual
fund strategies
include
growth/aggressive,
low risk, balanced,
momentum, and
many others.

No matter how much

you invest, you get
to own several
companies. In other
words, you get
instant
diversification.
You can easily make
monthly
contributions.
Your money is being
managed by a
professional
manager. Because of
his/her experience
and knowledge, you
should receive
above average
returns, at least in
theory.

Common
Stock

Stock is sometimes
referred to as
shares, securities or
equity. Simply put,
common stock is
ownership in part of
a company. For
every stock you own
in a company, you
own a small piece of
the office furniture,
company cars, and
even that lunch the
boss paid for with
the company credit
card. More
importantly, you are
entitled to a portion
of the company's
profits and any
voting rights
attached to the
stock. With some
companies, the
profits are typically
paid out in
dividends. The more
shares you own, the
larger the portion of
the company (and
profits) you own.

Over the long term,

no investment
provides better
returns at a
reasonable risk than
common stock.
History dictates that
common stocks
average 11-12% per
year and outperform
just about every
other type of
security including
bonds and preferred
shares. Stocks
provide potential for
capital appreciation
and income and
offer protection
against moderate
inflation.

Common stock is
very easy to buy and
sell.
Thanks in large part
to the growth of the
Internet, it is very
easy to find reliable
information on
public companies,
making analysis
possible.
There are over
11,000 public
companies in North
America to choose
from.

The majority of
mutual fund
companies don\'t
come close to
beating market
averages like the
S&P 500 and the
DJIA. (Notice we said
you will receive
above average
returns "in theory".
This will be
discussed in detail in
future pages.)
Fund managers take
a slice of the profits
for their work. This
slice varies, but it
can be quite high.
You pay
management fees
whether the fund
actually makes you
money or not.
Your original
investment is not
guaranteed. There is
always the risk that
the stock you invest
in will decline in
value, and you may
lose your entire
principal.
Your stock is only as
good as the
company in which
you invest - a poor
company means
poor stock
performance.

-Capital Appreciation
-Provides Income
-Tax-Deferred
Savings

-Capital Appreciation
-Income
-Liquidity

1. Which type of investment is the riskiest?

ADRs are the riskiest investment because not only are you buying stocks,
which can be unreliable, you are also trading internationally. There can be
several disadvantages such as political factors and language barriers that
can hinder your ability to trade.
2. Which type of investment has the greatest return?
Mutual funds have the greatest returns because you pool your money with
other investors, which means more money can be accumulated. Also,

mutual funds are usually long-term investments, which means more money
will be accumulated over time.
3. Which type of investment is best for diversifying your portfolio?
ADRs are the best for diversifying your portfolio because you invest in
several companies, both foreign and domestic. You gain several connections
with other investors and companies across the world.
4. Which type of investment provides best returns at a reasonable risk?
Common stock investments provide the best returns at a reasonable risk.
Common stocks can both make you a lot of money, and make you lose most,
if not all of your money. However, if you understand how to invest in
common stocks, you can potentially earn high returns while still having
some risk.
5. Which type of investment do you feel the least likely to pursue in the future? Why?
I feel least likely to pursue real estate and property investments. It seems
that the general trend nowadays is difficulty in selling property. Even if I
succeed in raising the value of some property, it is not guaranteed that I will
sell the property for a greater price, which means that I will have wasted a
lot of money.
6. Which type of investment do you feel most likely to pursue in the future? Why?
I feel most likely to pursue a mutual fund in the future, once I have a decent
amount of money to invest. I feel that a mutual fund is more secure than
other investment methods, and I can gain a good amount of money from it.
7. Why is it a good idea to invest in several different forms?
It is a good idea to invest in several forms for a few reasons. Firstly, you
gain diversity, and you can invest in many different forms, with all of the
benefits from those methods. Secondly, if one method of investment fails
for you, you still have several others to rely on. Thirdly, you can gain more
money from different forms of investments.