Exam 4 - Investing and Such Flashcards
(61 cards)
Investing vs. Speculating
Investing: -long-term -stewardship, ownership -slow, disciplined Speculating: -short-term, greater risk
First Presidency - Investing
-in response to fraud, unwise investments
-COUNSEL
=live within budget
=avoid consumer debt
=save against time of need
=invest wisely w/ good institutions
-INVESTMENT CONCERN
=relationships of trust used to promote bad stuff
-COUNSEL
=before investing, seek advice
Eight Principles of Successful Investing
- know yourself, goals, family (budget, risk..)
- understand risk (inflation, market, liquidity..)
- invest low-cost, tax-efficiently (watch out for transaction costs)
- invest for long-run (don’t time market)
- stay diversified (variety!)
- monitor portfolio (look periodically at returns)
- invest only w/ good people, institutions
- develop good investment plan, follow closely
Three Asset Classes
- cash and cash equivalents
- fixed-income investments (bonds)
- equities (stocks)
Cash and Cash Equivalents
Ex: -checking accounts, CD, treasury bills... Adv: -liquidity (turn to cash quickly) -stable principal (insured by FDIC) -low risk -good for emergency fund Dis: -low rate of return (doesn't keep up with inflation!)
Fixed-Income
Ex: -treasury bonds, corp. bonds, bond mutual funds.. Adv: -greater rate of return than cash -generally stable Dis: -less liquidity than cash -less rate of return than stocks
Stock Equities
Ex: -stocks =Large cap ($10+ billion) =Mid cap ($2-10 billion) =Small cap (s, diversification) =pools money of 1000s of people together =fund managers invest money into one or more asset classes (money market, bonds, stocks/equities) Adv: -excellent return long-term (8-12%!) Dis: -volatile -less stability -more risky
The Bottom Line of Investing
- create livable budget + 10% GI to long-term savings
- invest in no-load, low fee, tax-advantaged mutual fund that represents a diversified set of stocks and bonds
- DON’T TRY TO TIME THE MARKET
What are stocks?
- real ownership of part of business
- all stocks = total ownership of co.
- stock values vary dramatically (three days in 2008, the whole market dropped by 22%!)
Three Major Stock Exchanges
- New York Stock Exchange (3,200+ co’s, majority are large, Dow Jones, S&P more reliable b/c more co’s)
- NASDAQ (OTC market, 2,800 smaller co’s)
- NYSE AMEX (stocks of small-med co’s)
What are dividends?
-distribution of portion of business to investors
=usually paid 1/4
=usually paid by large, est. co’s
=reduces risk to holding the stock
Six principles for successfully investing in stocks
- take on right amount of risk
- diversify!!
- don’t try to time market: get in, stay in
- invest in passively-managed stock index funds
- keep expenses low
- minimize taxes
Take on right amount of risk
two basic risks:
-co. risk
=manage by investing in mutual funds or index funds
-overall market risk
=cannot manage…
basic advice
-if need money soon (<5 yrs) do not invest heavily in stock market
-stable, well-paying job helps you to take greater risks
Diversify!!!!
portfolio should have broad range: -large cap stocks -small cap -international mutual funds and index funds!!
Don’t try to time the market!!!
avg. investor in stock market earns 5% less than overall stock
-WHY?? = trying to time the market!, transaction costs
most gains in stock market are on 10-20 big UP days
Invest in passively-managed stock index funds
- eliminates co-specific risks
- secures return that matches overall market
- reduces costs (0.1%/yr!; actively = 1-3%/yr…)
- probability of same actively managed fund beating market: 63%, 85%, 95%
Keep expenses low
=costs: -sales charge -mgmt fees -distribution expenses -custodial/legal/admin -brokerage commissions =avoid by investing in no-load, passive index funds =avoid day-trading like the plague!!! =avoid actively managed funds
Minimize taxes
-make major stock investments to tax-adv retirement accounts
=(401k, traditional IRA defer income taxes on your investments and returns)
=Roth IRA makes all returns tax free when withdrawn after 59.5 (do pay income tax on money going in)
-make charitable contributions w/ appreciated stock
=pay tithing this way and you can deduct market value of stock on income tax and not pay income tax on the gain!
Three types of stock orders
-market order
=order to buy or sell shares at current market value price
=assumes you know current price of stock
-limit order
=specify price at which you want to buy sell “x” # of shares
=risk: might select price that is too high/low and order will expire
-stop-loss order
=set limit in an attempt to stop your loss
=sell when price drops to certain level
=can set up multiple for gain and/or loss
Stock Split
- co. lowers price of high-priced stock by splitting shares
- almost always good event
- reverse stock split exact opposite
Two kinds of Bonds
Coupon
-bond issuer sells bond for set amount to bond purchaser until a maturity date
-issuer makes regular interest payment to purchaser until maturity date
-issuer repays face value on maturity date
Zero-coupon
-issuer sells bond for a set amount (<face value)
-issuer does NOT make reg interest payment
-issuer repays face value on maturity date
Things to look at when considering bond purchases
- interest the bond pays (coupon rate)
- # times interest is paid
- end of bond term (maturity date)
- amount paid back at end of term
How value of bonds is affected by IR
- IR go down, bond prices go up
- IR go up, bond prices go down
Other considerations when buying bonds
Obtain
-prospectus (types of bonds a fund invests in)
-shareholder report: breakdown of credit ratings
Look at
-fees the bond manager is charging you
-don’t pay more since the bond manager isn’t really going to do much overall
