Investment Unit

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Investment Unit

• Why Invest?
• Interest
• Dividends
• Appreciation

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What are the dangers?

• Inflation

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The Power of Compounding Interest
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Formula For Compounding Interest

• FV P(1 r)n
• P is the principal (the initial amount you borrow
  or deposit)
• r is the annual rate of interest (percentage)
• n is the number of years the amount is deposited
  or borrowed for.
• FV is the future value of your investment

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Investment

• Stocks
• Mutual Funds
• Bonds

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Stocks

• In return for putting up the dough to finance the
  company, the investor becomes a part owner of the
  company.

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Types of Stock

• Common Stock
• Preferred Stock

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Common Stock

• It is an ideal investment vehicle for individuals
  because anyone can own it there are absolutely
  no restrictions on who can purchase it.
• Because they own a part of the business,
  shareholders get one vote per share of stock to
  elect the board of directors.

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Preferred Stock

• It is called "preferred" stock because preferred
  shareholders have claims to the assets of a
  company in the case of a bankruptcy liquidation
  that are superior to the common stock holder -
  meaning that they get any proceeds before common
  stock shareholders.
• Preferred stock always carries a dividend,
  although the company can elect not to pay this
  dividend if it does not have the financial
  resources. However, another benefit of the
  preferred share is that the dividends are often
  "cumulative.
• As a hybrid security, preferred stocks do not
  appreciate as much as common stocks if the
  company that issued them improves financially

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Mutual Funds

• A mutual fund is simply a collection of stocks
  and/or bonds. Most mutual funds are "actively
  managed," meaning the mutual fund shareholders,
  through a yearly fee, pay a mutual fund manager
  to actively buy and sell stocks or bonds within
  the fund.

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Bonds

• Lending an institution money that will be repaid
  with interest.
• Corporate- Loan to a private sector company
• Corporate bonds normally carry higher interest
  rates than government bonds because there is a
  risk that the company could go bankrupt and
  default on the bond, unlike the government, which
  can just print more money if it really needs it.
• Government- Loan to the government
• Treasuries come in a variety of different
  "maturities," or lengths of time until maturity,
  ranging from 3 months to 30 years.
• Treasuries are guaranteed by the U.S. government
  and are free of state and local taxes on the
  interest they pay.
• The risk here is inflation.

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Investment Terms
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Dividend Yield

• A ratio of a company's annual cash dividends
  divided by its current stock price expressed in
  the form of aage. To get the expected annual
  cash dividend payment, take the next expected
  quarterly dividend payment and multiply that by
  four. For instance, if a 10 stock is expected to
  pay a 25 cent quarterly dividend next quarter,
  you just multiple 25 cents by 4 to get 1 and
  then divide this by 10 to get a dividend yield
  of 10.

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Earnings Per Share (EPS)

• Earnings, also known as net income or net profit,
  is the money that is left over after a company
  pays all of its bills. For many investors,
  earnings are the most important factor in
  analyzing a company. To allow for
  apples-to-apples comparisons, those who look at
  earnings use earnings per share (EPS).
• You calculate the earnings per share by dividing
  the dollar amount of the earnings a company
  reports over the past 12 months by the number of
  shares it currently has outstanding. Thus, if XYZ
  Corp. has 1 million shares outstanding and has
  earned 1 million in the past 12 months, it has
  an EPS of 1.00.
• 1,000,000/ 1,000,000 shares 1.00 in earnings
  per share (EPS)

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Market Capitalization

• The current market value of all of a company's
  shares outstanding. To calculate market value,
  you take the number of shares outstanding and
  multiply them by the current price of each share.
  You can find information about shares outstanding
  from the company's last quarterly report or any
  online quote service.
• For instance, if a company has 10 million shares
  outstanding and trades at 13 per share, the
  market capitalization is 130 million.
• Market Cap.Shares Outstanding Share Price
• example. 10 million 13 130 million

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Capitalization categories
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Price/Earnings Ratio (P/E)

• Earnings per share alone mean absolutely nothing.
  In order to get a sense of how expensive or cheap
  a stock is, you have to look at those earnings
  relative to the stock price. To do this, most
  investors employ the price/earnings (P/E) ratio.
  The P/E ratio takes the stock price and divides
  it by the last four quarters' worth of earnings.
  If XYZ Corp. is currently trading at 15 a share
  with 1.00 of earnings per share (EPS), it would
  have a P/E of 15.
• 15 share price 1.00 in trailing EPS 15 P/E

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Relative Strength

• Relative strength, also known as relative price
  strength, rates the performance of a stock versus
  the performance of the market as a whole over a
  given time period. The rating system gives a
  numerical grade - just like the ones Mr. Spicer
  used to scrawl in bright red ink on your algebra
  quizzes - to the performance of a stock over a
  given period, normally the past 12 months. Thus,
  relative strength is a momentum indicator.
• The most popular form of relative strength
  ratings are those published in Investor's
  Business Daily, which go from 1 to 99. A relative
  strength of 95, for example, indicates a
  wonderful stock, one that has outperformed 95 of
  all other U.S. stocks over the past year.
  However, given that relative strength is only a
  mathematical relationship between the stock's
  performance and an index's performance, many
  others have created their own relative strength
  measures.

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Volume

• The number of shares traded on a given day is
  known as the volume. Many investors look at
  volume over a month or a year to come up with
  average daily volume. Market watchers will say a
  company has traded at a certain number of times
  the average daily volume, giving the investor a
  sense of how active the stock was on a certain
  day relative to previous days. When major news is
  announced, a stock can trade as much as 20 or 30
  times its average daily volume, particularly if
  the average daily volume is very low.
• The average number of shares traded gives an
  investor an idea of a company's liquidity - how
  easy it is to buy and sell a particular stock.
  Highly liquid stocks trade easily in large
  batches with low transaction costs. Illiquid
  stocks trade infrequently and large sales often
  cause the price to rise or fall dramatically.
  Illiquid stocks on the Nasdaq also tend to carry
  the largest spreads, the difference between the
  buying price and the selling price.

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Buying Stocks
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Use a Brokerage

• The most common way to buy stocks is to use a
  brokerage. You can either use one of the many
  way-too-expensive full-service (or full-price)
  brokers, or use a discount broker to execute your
  trades.

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Buying on margin

• Using margin gives you more "buying power" and
  can increase your returns -- and your risk. Don't
  get carried away by the term "buying power." A
  better name would be "borrowing power" because
  that's what you are doing, and you shouldn't
  forget it. But brokers have a vested interest in
  encouraging their investors to use margin, so
  they like the sexy name. Brokers make a good part
  of their money from margin loans, plus buying on
  margin generates more commissions. Margin loans
  are a great racket. The broker collects the
  interest and has total control over the
  collateral for the loan, including the ability to
  step in and force you to sell stock if they think
  you are in danger of defaulting on their loan.
  Margin is a two-edged sword for investors -- but
  it's a cash cow for brokers.

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Short Selling

• If you buy a security with the expectation that
  the price will rise, you are "long" the stock.
  But you can profit from stocks that go down, too.
  This is an advanced investing technique called
  "short selling." When you short a stock, your
  broker arranges for you to borrow stock from a
  pool of shares maintained by brokers for that
  purpose. The shares are then sold and the
  proceeds from the sale are credited to your
  brokerage account.

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More on Short Selling

• What Is Shorting?
• An investor who sells stock short borrows shares
  from a brokerage house and then sells them to
  another buyer. Proceeds from the sale go into the
  short-seller's account. He must eventually buy
  those shares back (called covering) at some point
  and return them to the lender. The short-seller
  expects that the stock price will go down, so
  when he buys back the stock to cover, he will pay
  less for the shares and keep the difference.
• Thus, if you sell short 1000 shares of Gardner's
  Gondolas at 20 a share, your account gets
  credited with 20,000. If the boats start sinking
  - since David Gardner, founder and CEO of the
  company, knows more about singing gondolier show
  tunes than about keeping gondolas afloat - and
  the stock follows suit, tumbling to new lows,
  then you will start thinking about "covering"
  your short there for a very nice profit. Here's
  the record of transactions if the stock falls to
  8

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