10/26/2023

Announcements
❑Assignment #2 grades – still working on these; hope to have them graded by next
week
❑Scholarship competition due Friday, October 27th at 5 pm
❑MSUFCU Financial 4.0 Sessions - https://msufcufin40.evergreen3c.com/events/ Investment
❑How to compute current score in the class?
❑Add up the total points you have as of now and divide by the number of possible points
right now.
❑We use a typical grading scale (90% - 100% is a 4.0; 85 – 89.99% is a 3.5; 80 – 84.99% is a
Basics
3.0; 75-79.99% is a 2.5; 70 – 74.99% is a 2.0; 65-69.99% is a 1.5; 60 – 64.99% is a 1.0;
59.99% or below is a 0.0)
❑Exam grades posted in D2L
❑Have a question about the exam? Starting Friday, you can come to office hours (or attend
class early on Tuesday's or Thursday's)
❑If you took the exam and do not see your score in the gradebook, please see Dr. Tobe

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Savings vs Investing: What’s Preparing for an Investment Program

the Difference
Investing:
• Having your money work
for you!
• Setting your money aside
for goals (long-term)
• No guarantee the money
will grow (long-term)
Rules of Thumb:
• When you are FAR from
your goal…. Be Aggressive
• When you are CLOSE to
your goal…. Be
Conservative
1. Why invest now? – The sooner you start, the more time you have
2. Specific goals must be the driving force behind your plan (i.e. SMART)
3. Time value of money involves increases in an amount of money that
you save or invest because you earn interest or dividends or increase in
value. The longer your money can work for you and earn interest or
dividends and/or appreciate, the more your investments will be
worth.
Before you start – Perform a Financial Check-Up
Pay your bills on time (and pay down debt!)
Work to balance your budget.
• Limit consumer credit payments to 20% of your net (after-tax) income.
Start an emergency fund, money you can access quick in case of need
• Goal: at least three months worth of living expenses

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+ Endless amount
Establishing Investment Goals of Choices
How much risk are you
How much money do
willing to assume in
you need to satisfy your
your investment
Bonds are interest-
investment goals?
program? bearing, negotiable
certificates of long-term
Considering your debt.
What possible
economic
LOAN Mutual funds pool the
circumstances and how
economic or personal
long your investments invested funds of many
conditions could alter
your investment goals?
can work for you, are
Stocks are shares of
investors and use them to
your investment goals
reasonable? ownership in a business invest in a diversified
corporation’s assets and portfolio. (includes Stocks
Are you willing to make earnings.
the sacrifices necessary
and/or Bonds)
to ensure that you meet OWN
your investment goals?

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I need $5000 to help
launch an aspect of
my company…
If you were going to lend my
company money, what
would you expect?
What would you want to
know about this financial
relationship?
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I have a new company and need
investors
If you were going to buy into
my company, what would
you need to know?
What would entice you to
buy shares in my company?
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What if I wanted to buy an
investment that let me
purchase a lot of companies…
What advantages would that
have?
Why might someone be
interested in this type of
investment?
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+
Example: Bonds
US Government Bonds Municipal Bonds
◦ Low risk, low reward ◦ Some risk, some reward
◦ No federal taxes; and if purchased
in same state you reside, no state
Expectation: tax
You will receive your principal back in
full after a particular amount of time Corporate Bonds
You will receive interest payments
◦ Higher risk, higher reward
every six months to a year throughout ◦ Will pay tax
the length of the bond
◼ Bottom Line:
◼ Most Conservative Option
Purchasing:
+
Example - Stocks Share of Ownership
Price * no. of shares + commission
Goal: increase in market price and dividends
if available
+ Example: Mutual Funds
Group of investments formed by a mutual fund company that is managed
by a mutual fund manager; each has a stated objective (goal)
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Risk Preference Factors to Consider: Safety and Risk.

• Conservative
• Safety = minimal risk or less
• Moderate Your Tolerance for Risk
• Risk = a measure of uncertainty about the outcome
• Aggressive • How long do you plan on keeping your investments?
Investments range from very safe to very risky
• How much money can you stand to lose?
• Investors sometimes want predictable income (may
Your Investment Time Horizon
Poll: What’s your Factors choose safe and conservative investments (i.e. CD’s,
Treasury securities)
• When will you need the money?
preference? • How long can your money continue to grow? Affecting the • Speculative investment = high-risk investment with
Your Age Choice of hope of earning a large profit in a short time (growth
potential)
• Growth vs. income (older people more conservative)
• Recovery time if investments tumble
Investments Potential return directly related to risk
• Recommendations: • Risk Tolerance: ability to deal with changes in
• One guideline: 110 – age = % of portfolio in stock investment value
• Financial experts suggest you subtract you age from Liquidity is the ability to buy or sell an investment
100, and the difference is the percentage of your quickly without substantially affecting the investment’s
assets that should be invested in growth value (Cash investments to more frozen investments)
Source: Dr. Barbara O’Neill, Rutgers University investments.

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1. Inflation risk is a rise in the general level of prices.

2. Interest rate risk is the result of changes in the
interest rates in the economy.
3. Business failure risk is often a result of bad
management, unsuccessful products, competition, or
a host of other factors that cause the business to be
less profitable than originally anticipated or to
experience a loss.
4. Market risk may be caused by political or social
conditions, as well as many other factors.
Components Example: COVID-19 led to huge losses in the market.
Asset Allocation
Asset allocation is the process of spreading your assets
among several different types to lessen risk
• What percentage of my assets do I want to put in
stocks and mutual funds?
• What percentage do I want to put in bonds or CDs?
Diversification provides a measure of safety and
reduces risk because a loss in one type may be offset by
gains from others.

of the Risk and

Factor
How do you reduce risk?
Stocks have returned an average return of a little less than
Diversification Percentage of investments invested in each asset class:
• Your age;
10% per year.
• Your investment objectives;
• Returns are not guaranteed, and there have been (and
will continue to be) some years of negative returns. • How much you can save and invest each year;
Long-term average return for the stock market is well
• The dollar value of your current investments;
ahead of inflation and the return on bonds, real estate, and • The economic outlook for the economy; and.
savings accounts or CDs.
• Other factors.
• Before purchasing stocks, consider how asset allocation
can help you create a balanced portfolio and may help
reduce risk in your investment program.

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Factors Used to
Evaluate Traditional
Investment
Alternatives

Type of Investment Safety Risk Income Growth Liquidity

Corporate stock Average Average Average High Average

Corporate bonds Average Average High Low Average

Government bonds High Low Low Low High

Mutual funds Average Average Average Average Average Poll: What do you think? Income or
Real estate Average Average Average Average Low Growth

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Accumulate the Money Needed

Your Role in the to Fund Your Investments
Investment Process Suggestion Comments
1. Pay your bills, then pay yourself. Many financial experts recommend that you
1. Evaluate potential investments (1) pay your monthly bills, (2) save or invest a reasonable amount
2. Monitor the value of your investments of money, and (3) use the money left over for personal expenses
and entertainment.
3. Keep accurate records
4. Other factors - Consider using a 2. Take advantage of employer-sponsored Some employers will match part or all of the contributions you
retirement programs. make to a company-sponsored retirement program.
professional financial planner who has
had training in securities, insurance, taxes,
real estate, and estate planning. 3. Participate in an elective savings program. You can elect to have money withheld from your pay check each
payday and automatically deposited in a savings or investment
account.
Invest the time required to research different
4. Make a special savings effort one or two By cutting back to the basics, you can obtain money for
investment alternatives so that you can make months each year. investment purposes.
an informed decision.
5. Take advantage of gifts, inheritances, and Use money from unexpected sources to fund an investment
windfalls. program.

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The Psychology of Stock Investing

Stocks
Why invest in stocks?
• For almost 100 years, stocks have returned an average return of a little less than 10% per
year – well above the nation’s inflation rate.
• Investors who want larger returns choose stocks.

Common sense goes a long way when evaluating potential investments

• Is an increase in sales revenues a healthy sign for a corporation?
• Should a firm’s profits increase or decrease over time?

Remember three facts:

1. While the almost 10% average annual return on stock investments is enticing, keep in
mind the value of stocks can decrease.
2. There is risk when you invest in stocks.
3. The key to success with any investment program is often allowing your investments to
This Photo by Unknown Author is licensed under CC BY-NC work for you over a long period of time, and stocks are no exception.

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Why Corporations Issue Common Why Investors Purchase Common

Stock Stock
Common stock is the most basic form of ownership for a corporation
Income from dividends
◼ In a position to feel success or lack of success; Share price rises and falls • Corporation’s board members are under no legal obligation to pay
◼ No price ceilings dividends.
◼ Can pay dividends; not guaranteed • If the board declares a cash dividend, each common stockholder
receives an equal amount per share.
Corporate managers prefer selling common stock :
• Stock is equity financing; money obtained doesn’t have to be repaid and company doesn’t • Most companies pay dividends on a quarterly basis.
have to buy back shares from the stockholders. • Record date is the date on which a stockholder must be registered
• Dividends are paid out of profits; they are not mandatory. on the corporation’s books in order to receive dividend payments.
• Corporations are required to have an annual meeting at which stockholders have a right to
vote, either in person or by proxy.
• Stockholders elect board of directors and must approve major changes in policies. Dollar appreciation of stock value
• As a shareholder- have voting rights. (more shares = more power) • Stock price may change if potential investors or current stockholders
• Residual Claim – a right to share in the income/assets AFTER higher priority claims are receive information about the firm of its future prospects.
given

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Expectations of Common Stock How do you make money

with stocks?
◼Cash Dividends- Corporation ◼Market Price – Current price Dividends Capital gains
will be profitable enough that that a buyer is willing to pay a
income will EXCEED expenses willing seller will INCREASE over ◼When companies are ◼When a stock price goes
time profitable- distribute higher than what you paid to
◼Example: some of those earnings to buy it, you can sell your shares
◼Goal: Capital Gain (increase in
◼Own 100 shares shareholders (i.e. at a profit.
value of stock)
◼$1 dividend quarterly)
◼Dividend Profit = $100 Capital losses
◼Choice: Cash or reinvest
◼In contrast, if you sell your
to purchase more shares
stock for a lower price than you
in the company
paid to buy it, you’ve incurred
a capital loss.

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+ Example… Sue owns…

100 shares of Blue Co stock
Assume receives dividend payments:
Computing Gains and Losses $6.32/share for that time

Sarah bought 900 shares of stock at a price of Costs when purchased… Return when sold…
$50 per share. She later sold her stock at a price ◦ 100 shares @ $57/share…$5700 ◦ 100 shares $64/share…. $6,400
of $53. Without factoring any fees associated ◦ Plus Commission …. $25 ◦ Minus Commission… $25
◦ Total Investment… $5,725 ◦ Total Return…. $6,375
with the stock purchase, what was her total
return on the investment?
◼ Transaction Summary
What was her gain or loss? Other costs:
- Capital Gains
◼ Total Return….. $6,375

◼ Minus Total Investment… $5,725

Tax OR Taxes
on Dividends ◼ Profit from Stock Sale… $650
received at ◼ Plus Dividends… $632
Answer: $53-50 = 3 x 900 = $2,700 year end
◼ Total Return $1,282.00

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Preferred Stock +
“The Pecking Order” – if a company
Preferred stock is a type of stock that gives the owner the fails… who gets paid first
advantage of receiving cash dividends before common
stockholders are paid any dividends.
• Dollar amount of dividend on preferred stock is known A company’s revenue is utilized/paid in order:
before the stock is purchased (fixed income
opportunity); dividend regardless of how company
performs 1. Company expenses
2. Interest to bondholders,
Referred to as “middle” investments because they a. Creditors
represent an investment midway between common stock
and corporate bonds. b. In collapse paid first
• Compared to corporate bonds, yield on preferred 3. Taxes
stocks is often higher but preferred stock is often less
secure. 4. Cash dividends to preferred stockholders
• Compared to common stocks, preferred stocks are 5. Cash dividends to common stockholders
safer investments that offer more secure dividends.

Compared to the sale of common stock, issuance of

preferred stock is used less often and by fewer firms.

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Primary vs. Secondary Market Sold

Secondary Markets for Stocks
Created
PRIMARY MARKET SECONDARY MARKET
COMPANY SELLS TO INVESTORS INVESTORS SELL TO INVESTORS

Securities exchange is a marketplace where

Investor buys securities from issuer
of those securities via an investment
bank
◦ Investment bank = financial firm
that assists corporations in raising
funds, usually by helping sell new
security issues (underwriting)
IPO = when a corporation sells stock
to general public for first time
◦ Cash from security sales goes to
issuing company
◦ Generally considered a high-risk
investment
Market for existing financial securities
Traded among investors via brokers and
dealers
Markets
◦ Stock exchanges (NYSE, AMEX,
NASDAQ, foreign securities exchanges)
◦ In the US – MUST comply with the
federal securities laws, Securities and
Exchange Commission (SEC) as well as
state laws.
member brokers who represent investors meet to
buy and sell securities.
• New York Stock Exchange (NYSE) is one of the largest
securities exchanges in the world.
• Most members of the NYSE represent brokerage firms;
other members are called specialists and buy or sell a
particular stock to maintain a fair and orderly market.
Over-the-counter (OTC) market is a network of dealers who
buy and sell the stocks of corporations that are not listed on a
securities exchange.
• Most OTC securities are traded through Nasdaq, an
electronic marketplace for stocks. (newer stocks)

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DJIA • 30 most common stocks

+ Dow Jones Industrial Average
Indexes S&P
• 100 unique economic sectors - 400 Industrial
firms; 40 financial institutions; 40 public
(DJIA)
utilities; and 20 transportation companies

Monitors what is
NASDAQ • electronic marketplace listing prices of over Amgen Nike American Apple VISA Boeing
happening 5000 stocks (technology and Growth
Express
(composite) companies)

Trends Caterpillar Chevron Cisco Coca-Cola Dow 3M

• tracks performance of 3000 largest US
Economy Russell 3000 companies

Walgreens Goldman Home Depot Intel IBM Johnson and

Wilshire Boots Sachs Group Johnson
• tracks performance of all US company stocks Alliance
DJIA Video: 5000
http://www.investopedia.com/ JP Morgan United Health McDonalds Merck and Co Microsoft Procter and
video/play/what-is-the-dow- Chase Group Gamble
jones-industrial- NIKKEI • Japanese markets
average#axzz1mHQettxH
Salesforce Travelers Honeywell Verizon WalMart Walt Disney
Corp

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+ General Question: + Not all indexes are the same…

I’m wondering…
How can the Dow be down and the NASDAQ
and S&P be up? Price Weighted Index
◦ Add the prices of each stock and divide by total number of stocks.
◦ Stocks with higher price = more weight and have a greater influence over the index
◦ Common Indexes Following this Approach: Dow Jones Industrial Average and Nikkei
◦ One stock is priced $30 and one stock is $15. Which has more weight?

Market Weighted
◦ Weighted according to market capitalization; larger companies carry larger weight
◦ Add up all market capitalizations and divide by number of securities in index
◦ Example: S&P, NASDAQ, Wilshire

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+ Reading the Stock Prices…

What’s the difference between an Newspaper
Exchange and an Index? 52 week 52 week Abbr Sales Last Chg
high low (000’s)

Exchanges Indexes
96.13 48.38 ATT 12728 85.56 -2.44
Where stocks are bought Assess the general activity of
and sold the stock market. ◼52-week High-Low
◼highest and lowest selling prices for the last year
Widely reported in news, tv, ◼Example: High - $96.13; Low - $48.38
radio and internet
Where can we ◼Abbreviation (of stock name)
One type of mutual fund is an ◼Example: AT&T
typically buy index mutual fund
stocks from? More to Come: Can buy index mutual funds
◼Sales (000s)
that follow particular indexes! ◼The number of shares traded yesterday x by 1,000.
◼Example: AT&T sold 12,728,000 shares the previous day.

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+ Reading the Stock Prices…

Newspaper
52 week 52 week Abbr Sales Last Chg
In preparation for next week:
high low (000’s)
❑ Think of five companies that you might
be interested in learning more about and
96.13 48.38 ATT 12728 85.56 -2.44
possibly investing a "fictitious amount of
Last money" in
◦ Price at closing yesterday. ❑Consider why you would want to invest in them
◦ Example: AT&T $85.56 per share.
❑What the company is about; products or
Chg service they provide
◦ The difference in the closing price yesterday and ❑What their company philosophy is (at the
the day before. present time) (i.e.growing and younger; older
◦ Example: The price for AT&T today was $2.44 and more stable, etc.)
lower than yesterday’s.

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