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. __F___Savings accounts are ideal for long-term investments.

Savings accounts are ideal for setting aside a fixed amount of your earned income for a short
period of time to accomplish short term goals.

2. __T___Investments become your income when you retire.

3. __F___Dividends are given to shareholders on savings accounts.
Dividends are given to shareholders on investment accounts.
4. __F___Stocks always increase in value over time.
Stocks may increase or decrease in value over time depending on how well the company is
doing.
5. _ T___Investments earn compound interest.
6. __F___Investments are insured by the FDIC.
Money that is invested in securities is not federally insured. The FDIC does not insure
investment accounts.
7. __F___Bonds are ownership interest in a company.
Stocks 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 on the bond, the higher the interest 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 for financial security. By saving and
investing over long periods of time, your money can earn more money by itself because of
interest.
12. Why are investments considered riskier than traditional savings accounts?
Investments are considered riskier than traditional savings accounts because some or all of
the money you invested can be lost. The money invested is not federally insured. However,
the greater the risk, the greater the possibility of getting more money. Savings accounts are

secured, insured, and earn a steady guaranteed interest rather than a dynamic interest that
may change depending on which type of investment you are using.

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

Objective

Advantages

Disadvantages

Main Uses

Not liquid, can

sometimes be
hard to sell at
a desirable
price. No tax
protection. No
income. True
value may be
difficult to
determine.
Cannot be
depended on
for retirement.
ADRs come
with more
risks, involving
political
factors,
exchange
rates and so
on. Language
barriers and a
lack of
standards
regarding
financial
disclosure can
make it
difficult to
research
foreign
companies.

Capital
Appreciation,
Inflation
protection, and
self-fulfillment.

Selling
property
quickly can be
difficult. There
are significant
holding costs,

Provides
income, capital
appreciation,
leverage.

Collectible
s

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

Keep rare
items over
long periods of
time and hope
its value
increases.

Many
collectibles
offer
reasonable
protection
from inflation.

ADRs

A stock that
trades in the
US but
represents a
specified
number of
shares in a
foreign
corporation.
ADRs are
bought and
sold on US
stock markets
like regular
stocks.

ADRs 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

Real estate
investing could
be purchasing
a house,
vacation
home,

To save
individual
investors
money by
reducing
administration
costs and
avoiding duty
on each
transaction.
ADRs allow
individuals to
buy shares in a
foreign
company and
capitalize on
growth
potential
outside North
America.
Many
objectives like
capital
appreciation,
income, and
which ever

Whether your
objective is
income or
capital
appreciation,
real estate

Capital
appreciation,
income,
diversification.

Mutual
Funds

Common
Stock

commercial
properties,
land,
condominiums,
and many
other
possibilities.

object you
want.

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.
Each mutual
fund can have
a different
strategy.
Strategies
include
growth/aggres
sive, low risk,
balanced,
momentum,
and many
others.

Called shares,
securities,
equity.
Ownership in
part of a
company. For
every stock
you own in a
company, you
own a small
piece of the
office furniture,
company cars,
and even that
lunch the boss
paid for with
the company
credit card.

Stocks provide
potential for
capital
appreciation
and income
and offer
protection
against
moderate
inflation.

investing can
help you
achieve your
goal.
Mortgages
allow you to
borrow against
the property
up to three
times the
value.
Instant
diversification,
easily make
monthly
contributions,
money is being
managed by a
pro manager.

Common stock
is very easy to
buy and sell.
Easy to find
reliable info on
public
companies,
making
analysis
possible. There
are over
11,000 public
companies in
North America
to choose from

especially if
you are not
residing in the
property.
Examples
include
property taxes,
insurance,
maintenance,
etc.
Majority of
mutual fund
companies
don't come
close to
beating market
averages like
the S&P 500
and the DJIA.
Fund
managers take
a percent of
the profits for
their work.
Sometimes
quite high. You
pay
management
fees whether
the fund
actually makes
you money or
not.
Original
investment is
not
guaranteed.
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 the
company in
which you
invest a poor
company
means poor
stock
performance.

Capital
appreciation,
provides
income, taxdeferred
savings.

Capital
appreciation,
income,
liquidity

1. Which type of investment is the riskiest?

The riskiest investment is the collectibles because one's true value is difficult to
determine and sometimes the price does not rise at all.
2. Which type of investment has the greatest return?

The investment with the greatest return could be the Real Estate if you sold
something that is very expensive.
3. Which type of investment is best for diversifying your portfolio?

Investing in ADRs diversifies your portfolio because it is different than usual stocks or
mutual funds that is common.
4. Which type of investment provides best returns at a reasonable risk?

The investment in mutual funds provides great returns at a reasonable risk but it all
depends on your objective.
5. Which type of investment do you feel the least likely to pursue in the future? Why?

I feel the least likely to pursue Real Estate unless I find an amazing investment
opportunity. I like to stay with investments that are less risky and easy to manage like
stocks.
6. Which type of investment do you feel most likely to pursue in the future? Why?

I feel I will most likely pursue stocks in the future. They are easy to manage and with
my career, Computer Science, I can estimate which companies may be doing better
with products in the technology field. Also ,I have played the Stock Market Game in
GATE during my Middle and Elementary School Years.
7. Why is it a good idea to invest in several different forms?

It is good to invest in several different forms of investment because each investment has
its own risks that each have a chance of giving no return of even your principal amount.
It is ideal to invest in different forms to hopefully have at least one of them work.