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. Savings accounts are meant
to accomplish short term goals. Your savings are not growing nearly as much as an
investment potentially could, just being put in a safe place.
2. __T___Investments become your income when you retire.
3. __F___Dividends are given to shareholders on savings accounts. Savings accounts are not
held by shareholders. They are owned by one person or a family so dividends are
not paid on them.
4. __F___Stocks always increase in value over time. Stock value depends on the success of
the business you hold stock in. If they do poorly, or even go bankrupt you stock will
be worth much less.
5. __T___Investments earn compound interest.
6. __F___Investments are insured by the FDIC. Investments are not insured by the federal
government.
7. __F___Bonds are ownership interest in a company. A bond in money you lend to the
government who then pays you interest on that loan.
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 interest rate
on a bond will increase as the bond term increases.
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 these things
to make their money earn money. Although savings accounts can earn interest,
these are long term ways to earn money off of the money you already have rather
than the short term goals of a savings account. These investments have the
potential to earn you much more in the long run.

12. Why are investments considered riskier than traditional savings accounts? Investments are
risky because there is no guarantee that you will earn money. Most depend on the
success of the business you invest in.

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

-Can vary
because they
take very long
to increase in
value and offer
no assurances
on future value
-Offer no
immediate
income

-Advantage is
that they
increase in
value along
with inflation
-Reasonable
protection
from inflation

ADRs

A stock that
trades in the
United States
but represents
a specified
number of
shares in a
foreign
corporation

To save
individual
investors
money by
reducing
administration
s costs and
avoiding duty
on each
transaction

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

Real Estate
& Property

Buying
property to
rent out or sell
later at a
higher price

Allows the
investor to
target his or
her own
objectives

-Whatever
your objective,
this can help
you to achieve
your goal
-Mortgages
allow you to
borrow against
the property
up to three
times the
value which
can
dramatically
increase an

-Not very
liquid, can
often be hard
to sell at a
desirable price
-No tax
protection
-Offer no
income to the
investor
-True value can
be difficult to
determine
-So many
uncertainties
that it cannot
be counted on
for your
retirement
-Come with
more risk,
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
-Selling quickly
can be difficult
-Significant
holding costs
especially if
not residing on
the property

-Capital
appreciation
-Inflation
protection
-Self fulfillment

- Capital
appreciation
-Income
-Diversification

-Provides
income
-Capital
appreciation
-Leverage

investors
leverage

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

Change from
fund to fund
but are longterm
investments

-No matter
how much you
invest, you get
to own several
companies
-Can easily
make monthly
contributions
-Your money is
being
managed by a
professional

Common
Stock

Ownership in
part of a
company

To provide
large returns,
no investment
provides better
returns at a
reasonable risk

-Easy to buy
and sell
-Very easy to
find reliable
information on
public
companies
making
analysis
possible
-Over 11,000
public
companies in
North America
to choose from

1.
2.
3.
4.
5.

-Majority of
mutual fund
companies
dont come
close to
beating market
averages
-Fund
managers take
a slice of the
profit for their
work
-You pay
management
fees whether
the fund
actually makes
you money or
not
-Original
investment is
not
guaranteed,
always a risk
that it will
decline in
value
-Your stock is
only as good
as the
company you
invest in

-Capital
appreciation
-Provides
income
-Tax-deferred
savings

-Capital
appreciation
-Income
-Liquidity

Which type of investment is the riskiest? Stocks

Which type of investment has the greatest return? Stocks
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 dont typically bat average gains
6. Which type of investment do you feel most likely to pursue in the future? Why? Stocks
because they typically bring back more in return than any other investment
7. Why is it a good idea to invest in several different forms? It secures your money because
if one thing fails, you didnt lose everything. You still have investments in other
places.