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. T Investments become your income when you retire.
3. T Dividends are given to shareholders on savings accounts.
4. F Stocks always increase in value over time.
You never know if the stock is going to increase or decrease in value.
5. T Investments earn compound interest.
6. F Investments are insured by the FDIC.
Only non-deposit investment products are insured.
7. T Bonds are ownership interest in a company.
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 of the bond, the more interest will be 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 invest in stocks, bonds, and mutual funds to earn money for their money. If
you buy a stock that is noticeably getting larger, then you will make money.
12. Why are investments considered riskier than traditional savings accounts?
Investments are considered to be riskier than traditional savings accounts because
at any given moment the investment can both crash and become less than what
you already paid for it, or it could become worthless all together.

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

Any physical
asset that
appreciates in
value over time
because it is
rare or it is
desired by
many.

Objective
To sell at
popular places,
like flea
markets,
antique stores,
collectible
retailers,
auctions,
garage sales,
and online at
eBay.

Advantages

Disadvantages

Offer
reasonable
protection from
inflation.

-Not very liquid,

they can often
be hard to sell
at a desirable
price
-They do not
offer any income
to the investor
-The true value
can often be
difficult to
determine

Main Uses
-Capital
Appreciation
-Inflation
Protection
-Self Fulfillment

ADRs

(American
Depository
Receipt) is a
stock that
trades in the
United States
but represents
a specified
number of
shares in a
foreign
corporation.

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

Real Estate
& Property

Doesnt mean
just purchasing
a house- it can
include vacation
homes,
commercial
properties, land
(both developed
and
undeveloped),
condominiums
and many other
possibilities.

If your objective
is capital
appreciation,
then buying a
promising piece
of property in a
neighborhood
with great
potential will
help you
achieve this.

Mutual
Funds

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

-Long-term
investment
It is your job to
decide what
your objectives
are and which
fund best suits
those objectives

Sometimes
referred to as
shares,
securities or
equity. Simply
put, common
stock is
ownership in
part of
company.

This investment
provides better
returns at a
reasonable risk.

-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
investors
leverage.
-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 manages
by a
professional
manager.
-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,

Common
Stock

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

-Capital
Appreciation
-Income
-Diversification

-The majority of
mutual fund
companies dont
come close to
beating market
averages like
the S&P 500 and
the DJIA
-Fund managers
take a slice of
the profits for
their work. This
slice varies, but
it can be quite
high.

-Capital
Appreciation
-Provides
income
-Tax-Deferred
Savings

-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

-Capital
Appreciation
-Income
-Liquidity

-Provides
Income
-Capital
Appreciation
-Leverage

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

the company in
which you
invest- a poor
company means
poor stock
performance.

1. Which type of investment is the riskiest?

Collectibles are the riskiest because theres no promise that your object will make
money.
2. Which type of investment has the greatest return?
Mutual Funds, because you are always most likely to win something throughout all
the money you have put in.
3. Which type of investment is best for diversifying your portfolio?
Common Stocks because you could diversify your shares throughout different
companies and decide which ones are best and what will have the best return.
4. Which type of investment provides best returns at a reasonable risk?

The common stocks provide the best returns at a reasonable because there
are multiple ways you could make money.
5. Which type of investment do you feel the least likely to pursue in the future? Why?
I would chose not to pursue the collectable aspect of investments, because
thats the hardest investment to ensure that you will get something in
return.
6. Which type of investment do you feel most likely to pursue in the future? Why?

I would invest in common stocks because it has the most diversification possible if
needed, and theres a bigger chance of the return of more money.
7. Why is it a good idea to invest in several different forms?
Its good to invest in several different forms other than just one form, because
there is more of a chance to gain money from multiple investments rather than just
one investment.