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. __F___Savings accounts are ideal for long-term investments. The statement is false because 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.
2. __T___Investments become your income when you retire.
3. __F_ _Dividends are given to shareholders on savings accounts. This statement is false because it is
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, not on a savings account
4. __F__ Stocks always increase in value over time. This statement is false because the value of that
ownership stake can rise and fall based on the success of the underlying business, so if the
business does badly the stock will fall.
5. __T__ Investments earn compound interest.
6. __F__Investments are insured by the FDIC. This statement is false because unlike deposits at FDICinsured banks and NCUA-insured credit unions, the money you invest in securities is not federally
insured.
7. __F__Bonds are ownership interest in a company. This statement is false because a bond is an
agreement on a loan 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. This statement is false
because the longer the term on the bond, the better interest rate the bondholder receives.
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 invest in stocks, bonds, and mutual funds to beat inflation, to be able to buy a car or pay
for college, and pay for retirement. Investing can also provide financial security for long-term
goals.
12. Why are investments considered riskier than traditional savings accounts?
Investments are considered riskier than traditional savings accounts because the fluctuations are
based on the rise and fall of the success of the company, so if the company does badly the stock
for the company falls, while a savings accounts is more reliable.

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

Collectibles

ADRs

Real Estate
& Property

Description

Objective

Advantages

Disadvantages

Main Uses

A physical
asset that
appreciates in
value over
time because
it is rare or it is
desired by
many
A stock that
trades in the
United States
but represents
a specified
number of
shares in a
foreign
corporation

Varies depending
on the person and
the collectible but
the item can be
sold in the future
for a profit

Protected
from inflation

Not very liquid

No tax
protection
No income
No absolute
true value

Capital
appreciation
Inflation
protection
Self fulfillment

Save individual
investors money
by reducing
administration
costs and avoiding
duty on each
transaction

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
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

Language
barriers and a
lack of
standards
Political
factors,
exchange
rates and so
on.

Capital
appreciation
Income
Diversification

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

Real estate
means
purchasing a
house - it can
include
vacation
homes,
commercial
properties,
land (both
developed
and
undeveloped),
condominiums
to rent or sell
for a profit.

Capital
appreciation,
monthly profit
(rent)

typically need
a 5% down
payment first.

Mutual
Funds

a large group
of people who
lump their
money
together and
give it to a
management
company to
invest it on
their behalf

Mutual fund
strategies include
growth/aggressive,
low risk, balanced,
momentum

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

ownership in
part of a
company

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

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.
Twitter
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

Capital
Appreciation
Provides
Income
Tax-Deferred
Savings

Capital
Appreciation
Income
Liquidity

companies,
making
analysis
possible.
There are
over 11,000
public
companies in
North
America to
choose from.

your entire
principal.
Your stock is
only as good
as the
company in
which you
invest - a poor
company
means poor
stock
performance.

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? Mutual Fund
Which type of investment provides best returns at a reasonable risk? Mutual Fund
Which type of investment do you feel the least likely to pursue in the future? Why? Mutual fund
because they usually dont beat the average gains
6. Which type of investment do you feel most likely to pursue in the future? Why? Stocks because
they usually have the best profit over other types of investments
7. Why is it a good idea to invest in several different forms? It helps secure your money in case of a
crash or an accident. For instance if someones money was all in a stock and that stock crashed
the person would lose all of their money
1.
2.
3.
4.
5.