March 16, 2015 What is a Mutual Fund? Mutual Funds

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1 March 16, 2015 What is a Mutual Fund? Mutual Funds Professionally managed portfoliosmade up of stocks, bonds and other investments Pools money from many investors Securityis a tradable asset of any kind Profits returned to you (the shareholder) in the form of dividends

2 Advantages Allows small investors to take advantage of professional account management Diversification: to invest in a variety of securities. Trade-offs Not insured Moderate level of RISK

3 Who puts Money in Mutual Funds? Small and moderate income investors 401 (k) accounts 529 Plans (College Savings funds) I.R.A.s What are 3 basic types? Equityfunds stocks Fixed Income funds -government and corporate bonds Balanced funds both stocks and bonds

4 How do they work and what are the fees? Fund Managers: paid based upon performance Open Ended Purchased or sold whenever Load: the sales charge Front end you pay when you buy Closed end load you pay when you sell No Load funds no sales fee; no salesperson

5 What are Bonds? Money lent tothe government ortoa private business It s an IOUor a loan from you Government bonds: Obligations or Treasuries The principal is FROZEN until it matures Rateof return (interest) is called its YIELD

6 Government Bonds: Absolutely No risk Yield is low. Types of government bonds T Bills: matures < 1 year T Notes: 2 10 years T Bonds: years.

7 T Notes and T Bonds Interest paid twice a year not at the end. Example: You do not have to copy this example $10,000 2 year T Note at 4% would pay $400 annually You would get $200 twice a year. That s a total of $800 at the end of two years. At maturity you would receive the par value or face value of $10,000

8 Municipal Bonds ( Munis ) Offered by cities Advantage: Triple-Tax Free! Plus, they help your city! Note: Federal Treasuries (T Bills, Notes and Bonds) are Exempt from local and state taxes But not Federal Income Tax. Munis are exempt from everything.

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10 Corporate Bonds: Potentially high return and high risk Possibly double digit returns! No guarantee business will exist when bonds mature

11 Just like Government Bonds (or Treasuries ) Bond holders receive their interest throughout the life of the bond Good news for bond holders: If the business goes bankrupt, bond holders are always paid first (assuming there s any money left!)

12 Rating Bonds 2 Big Companies rate bonds (what is the RISK?) MOODY s and STANDARD AND POOR SCALE: AAA to D AAA : Great; little risk of default AA / A / BBB good investment: moderate risk BB: Stocks at this level and lower are called JUNK BONDS; Considered speculative or Not desirable B CCC: Poor, vulnerable to default CC / C D: Bond in default Next Up: Stocks

13 Topic: Investing Aim: What are stocks and why do people own them?

14 Stocks Buying stocks means purchasing a share or a part of a corporation. Note: Privately owned businesses cannot sell shares.

15 People who own stock are called stockholders or shareholders. Today, it s not just the rich who own stock. All stockholders must be comfortable with RISK

16 1.Corporation: sells shares to obtain funds to expand First time a company makes itself available: Initial Public Offering (IPO)

17 Only 2 ways you make money owning stock 1. Receive dividends Corporation announces a profit. It shares the profit with all of its shareholders. Suppose a company with 100 million shares makes a profit of $300 million Each share would receive $3. OR....

18 2. Sell your stock for more than you paid: buy low, sell high Suppose you bought 5,000 shares at $12 a share. That means you invested $$60,000 A year later, it s selling for $15 a share. You sell. You receive $75,000. That s a profit of $15,000

19 Why do Privately-owned Businesses go Public? To obtain funds (money) to expand Benefit: Make larger profits Trade-Off: Lose ownership IPO: Initial Public Offering August 19,2004 GOOG IPO: $ ,605,052 shares sold Money brought in that day: $1,666,429,420 ($1.6 Billion) Note: Google has 330 million shares. 271 million shares were not available for sale; those were held by founders Larry Page, Sergey Brinn and Eric Schmith and many Google employees. July, 2013: $928 February, 2014 $607 March 6, 2015 $567

20 Only if Buy 500 shares in 2004 Cost was $42,500 July 2013 Value $464,000 Profit of $421,000 (about a 1000% profit in less than 10 yrs) Feb 2014 Value $303,500 Profit of $261,000 March 2015 Value $283,000 Profit of $240, shares $8,500 Highest : $92,800 Today: $56,700 A little less than 700% profit in less than 10 years.

21 How do I buy stocks? You need a broker A broker is the go-between between buyers and sellers They work for Brokerage Houses who charge a fee for services They (or the brokerage house) has a SEAT on the NY Stock Exchange

22 4 Popular On-Line brokerage houses: E Trade Ameritrade Choice Trade Scottrade To open an account you must send a check (usual minimum is $500); and then go on-line and buy and sells stock. Often, it is $12.95 per trade.

23 How do you know which stocks to buy? 1. Professional can give advice (for a price) 2. Invest in companies whose products you know, like and buy 3. Do research on your own (using popular metrics)

24 BLUE CHIPS: Companies with a history of strong earnings, increasing dividends and an outstanding balance sheet. Blue Chips are usually Large Cap corporations such as

25 Capital Gain vs. Capital Loss Buy stock at $30 a share; sell it for $40 a share. Profit of $10 per share is CAPITAL GAIN It is taxable because it s income Buy stock at $40; sell it for a loss of $10 per share: CAPITAL LOSS This can be used to lower your taxable income.

26 Key Question for stock holders: Buy? Hold? Sell?

27 Stockholders have a voice in how the corporation is run. At stockholders meetings people vote on company plans and elect officiers. Every shareholder has one vote for each share he owns.

28 What is the Dow Jones Industrial Average? An index or average of 30 key stocks Their success or failure (based upon their daily share price) is a reflection of the entire nation s industrial well-being. If the Dow Jones Average goes up the price per share goes up that is considered a BULL MARKET. If it goes down: that s a BEAR MARKET

29 Oldest, largest and most prestigious: NY Stock Exchange on Wall Street. Other markets: AMEX and NASDAQ National Association of Securities Dealers Automated Quotations

30 Stocks are risky different from bonds; you are an owner; not a creditor. There are no guarantees that the corporation will make a profit. If the compaydoesn t make a profit, there are no DIVIDENDS. &. If they don t make a profit, no one will buy your stock from you. But, IF profits are made - you will receive dividends on a regular basis. Or if you bought low you can sell high for a profit!

31 Historically, stocks have out-performed traditional bank earnings over the LONG TERM However, timing is everything

32 Prosperity Recession

33 Since there is a lot of money crossing hands in the Stock Market, temptation to cheat is great! The government tries to regulate and oversee the stock market to minimize this possibility. The federal agency is the SEC The Security Exchange Commission

34 There are manytoolsanalysts use to judge stocks. Here are 4 socalled Metrics : P/E RATIO: Price to earnings ratio: Price of the stock divided by the EARNINGS PER SHARE (EPS). $30 per share divided by $2 earnings per share equals a P/E of 15. The lower the P/E the better. 30 divided by $3 is a P/E of 10: that s better. YIELDS: The percentage of a dividend paid against the stock price. If you get a $3 dividend on a $30 stock, your yield is 10%. If you get a $6 dividend on a $30 stock, your yield is 20% In this one, the higher the yield, the better

35 MARKET CAPITALIZATION: (Market Cap) The number of outstanding shares multiplied by the current price per share. This number is usually in billions. If the number is > $10 B it is a large cap ; <2B is a small cap stock. Large cap stock are less volatile (stable) & usually pay dividends but have lower growth potential. Small cap stock offer the potential for big gains in sort spans of time. PRICE TO BOOK RATIO: Share price divided by Book Value of the stock Book Value is all of the company s assets minus its liabilities. Like P/E Ratio, the lower the number the better

36 Examples of other possibly risky investments 1. Collectibles:baseball cards, coins, Stamps, sneakers, dolls, caps et. al.)

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45 Precious metals Foreign Currencies

46 Real Estate no true liquidity Crop Futures corn, coffee, oranges Buy at alow rate before the harvest. Penny stocks (stocks <$5) Often end up in bankruptcy Foreign markets

47 If it sounds too good to be true; It is! Any investment of money that you can tafford to lose! Don t do it. It s too... Risky.

48 Practice Bank of America March 8 $14.06; May 8: $12.56 Loss per share is??? Apple March 8: $ May 8: $ Gain per share is??? You own 5,000 shares of Pfiser. It announces a dividend of.40 cents per share. How much do you receive????

49 To obtain wealth, you must first earn it. To earn it, you must use your personal resource: your labor. This includes your education, training, skills, creativity and work ethic. When you invest your discretionary money, you have to be comfortable with risk. You now know a variety of strategies to enable it to grow.