Investing Fundamentals

Paying Off Debt

First, review personal balance sheet

Consider paying off loans before investing
Even though investing may be more attractive, paying
liabilities first usually makes more sense, particularly when
loan rates are higher than anticipated investment returns
Ensure adequate liquidity
Types of Investments
Money market securities
Stocks
Common versus preferred stock
Common stock: a certificate issued by a firm to raise
funds that represents partial ownership in the firm
Preferred stock: a certificate issued by a firm to raise
funds that entitles shareholders to first priority to
receive dividends
Types of Investments
Primary and secondary stock markets
Primary market: a market where newly issued securities are traded
Initial public offering (IPO): the first offering of a firm’s stock to
the public
Secondary market: a market where existing stocks are traded
Types of Investments
Types of investors
Institutional investors: professionals responsible for managing money on
behalf of the clients they serve
Portfolio managers: employees of financial institutions who make
investment decisions
Individual investors: individuals who invest funds in securities
Day traders: investors who buy stocks and then sell them on the same
day
Financial Planning Online
Go to the finance section of Finance.Yahoo.com
This Web site provides historical price movements for a
stock that you specify. Type in the symbol for your stock
then click on “Charts.” You can easily monitor the price of
a stock you already own or may purchase in the future.
Types of Investments
Bonds
Long-term debt securities issued by government agencies or
corporations
Mutual Funds
Sell shares to individuals and invest the proceeds in a portfolio of
investments
Types of Investments
Publicly traded indexes: securities whose values move in
tandem with a particular stock index representing a set of
stocks
Real estate
Buying a home or investing in rental property or land
Precious Metals
Gold, platinum, silver, palladium
Bullion, mining stocks, ETFs
Investment Return
Return from investing in stock
Returns come through dividends and price appreciation
Growth stocks: stocks of firms with substantial growth
opportunities
Income stocks: stocks that provide investors with
periodic income in the form of large dividends
Investment Return
Return from investing in bonds
Coupon payments and bond price appreciation
Return from investing in mutual funds
Can generate a capital gain and shares may increase in value
Return from investing in real estate
Rental income and price appreciation
Investment Return
Measuring the return on your investment

Pt − Pt −1
R=
Pt −1

R = return
Pt = price when sold
Pt−1 = price when purchased
Investment Return
Incorporating dividend or coupon payments
Your return would be even higher if you also earned
dividend or coupon payments

(Pt − Pt −1 ) + D
R=
Pt −1

D = dividends earned while you owned the investment

Investment Return
Differing tax rates on returns
Interest payments and coupon payments taxed as ordinary income
Capital gains from investments held one year or less are taxed as
ordinary income
Capital gains from investments held more than one year are subject to a
long-term capital gains tax
Investment Return
How your wealth is influenced by your return
Any return saved increases the value of assets and therefore increases
wealth
Future value calculations can help estimate these increases
Risk from Investing
Returns are uncertain
Illustration of risk
Some types of investments are similar to gambling and
appeal to investors because of the potential of a large
gain
Many investors in denial about the risk involved
Risk from Investing
Risk due to uncertainty surrounding economic conditions
Future values of investments are dependent on the demand by investors
2005-2007 the economy was very strong
2008-2009 the economy was very weak
Risk from Investing
Measuring an investment’s risk
Range of returns: returns of a specific investment over a given period
Standard deviation: the degree of volatility in the stock’s return over time
Subjective measures of risk
Bond rating agencies are one example where investors can assess risk
based on the firm’s bond rating
 Trade-Off between Return and Risk
Return-risk trade-off among stocks
Small firms tend to have more growth potential, but higher risk
IPOs may offer high returns, but also have high risk, especially for
individual investors
Return-risk trade-off among bonds
Large, well-known firms have low return, low risk
High-risk bonds offer higher payments
 Trade-Off between Return and Risk
Risk-return trade-off among mutual funds
Mutual funds containing small stocks are more risky than those containing
large stocks
Mutual funds containing bonds of weak corporations are more risky than
those with bonds of creditworthy corporations
 Trade-Off between Return and Risk
Return-risk trade-off among real estate investments
Renters could default
Property value could decline
Comparing different types of investments
Select investments that suit your personal objectives
 How Investment Decisions Vary with Your Situation
Situation Decision

You have Rs. 5,000 to invest but will need You need liquidity. You should only
the funds in one month to pay bills. consider money market securities.

You have Rs. 300,000 to invest but will need

You should consider safe money market
the funds in a year to make a tuition fee
securities such as a one-year insured CD.
payment.
You have Rs. 500,000 to invest and will likely Consider a three-year insured CD or stocks
use the funds in about three years when of relatively stable firms that have relatively
you buy a home. low risk.

You have Rs. 10,00,000 to invest and have Consider investing in a diversified stock
no funds set aside for retirement in 20 years. mutual fund.

You should probably invest the funds in

You have Rs. 200,000 to invest. You expect
money market securities so that you will
that you will be laid off from your job within
have easy access to the funds if you lose
the next year.
your job.
Learning from Investment Mistakes
Making decisions based on unrealistic goals
Borrowing to invest
Investing with money that could have been used to pay
off an existing loan
Taking risks to recover losses
How Investments Fit within Your Financial Plan
Key decisions about investments that should be included in your
financial plan are:
What are your investment goals?
Given your existing budget, should you make investments?
Based on your risk tolerance, how should you invest funds?
How Investments Fit within Your Financial Plan

Goals for Investing

1. Determine my priorities before making investments.
2. Determine whether to make investments, and if so, how much
risk to accept.
How Investments Fit within Your Financial Plan
Type of Investment Assessment
CDs and Other Money Many money market securities provide good liquidity and
Market Securities are safe, but they typically offer low returns.

Can provide high returns, but are risky given the limited
Stocks
amount of funds I anticipate I will have for investing.
Some bonds have low risk, but they offer lower potential
Bonds
returns than stocks.
The value of my home may increase over time. Additional
Real Estate real estate investments can generate high returns but are
usually risky.
Can provide high returns, and offer more diversification
Stock Mutual Funds than investing in individual stocks, but can generate losses
if stock market conditions are weak.
Offer more diversification than investing in individual
Bond Mutual Funds bonds, but can generate losses if bond market conditions
are weak.
How Investments Fit within Your Financial Plan
Decisions
My first priority is to ensure adequate liquidity. My next priority is to
pay off my car loan and student loan with any excess funds.
Because I received a large bonus, I will use the money to pay off
those loans.
After paying off those loans, I have Rs 100,000 of bonus money
remaining. I will invest those funds. I will consider types of
investments that could earn a high return, but only if the
investments have limited risk. I will not consider any type of
investment that could possibly decline by a substantial
percentage such as a 30% decline.
Thank You..!