bennie waller wallerbd@longwood 434-395-2046
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Bennie Waller [email protected] 434-395-2046 Longwood University 201 High Street Farmville, VA 23901. Understand the difference between investing and speculating. An investment is an asset that generates a return. For example, many stocks pay dividends and bonds pay interests. - PowerPoint PPT PresentationTRANSCRIPT
Bennie D Waller, Longwood University
Personal Finance
Bennie [email protected]
434-395-2046Longwood University
201 High StreetFarmville, VA 23901
Bennie D Waller, Longwood University
Investments
Bennie D Waller, Longwood University
Investing Understand the difference between investing and speculating.
An investment is an asset that generates a return. For example, many stocks pay dividends and bonds pay interests.
Speculation is in essence a gamble on what might happen in the future. For example, buying a piece of real estate because you heard a rumor that Microsoft was moving into the area.
Gold coins Baseball cards
Speculation revolves largely around supply and demand
Invest, don’t speculate
Bennie D Waller, Longwood University
InvestingStarting your investment program
Pay yourself first.
Make investing automatic.
Take advantage of Uncle Sam and your employer.
Windfalls
Make two months each year investment months.
Bennie D Waller, Longwood University
InvestingSecurities – stocks and bonds issued by companies to raise
capital
Securities markets – where you buy and sell securitiesPrimary market – where companies take the company
“public” (IPO)Seasoned new issues – Investment banking
Secondary market – marketplace where previously issued securities tradeOrganized exchanges, (NYSE)OTC – NASDAQ
Bennie D Waller, Longwood University
InvestingRegulation of Securities markets
SEC Insider tradingChurning
Types of OrdersMarket order – buy/sell at current market priceLimit order – trade made only at certain priceStop-loss order – order to sell if price drops some
specified amount
Bennie D Waller, Longwood University
InvestingShort selling – very dangerous!
If you believe that stock will drop, you borrow stock from broker account and sell it.
IF stock price does drop, you buy it back at the lower price and return to broker account
HOWEVER, if price goes up, you must buy it back at higher price and return to broker account.
Bennie D Waller, Longwood University
InvestingFull service brokers
Get paid on commissionsDiscount brokers – execute trades, but no advice
Cost of trading includesCommissions to buy/sell stockTransaction fees
Day trading is not investing
Good sources of investment informationFinancial newsYahoo! FinanceWSJ
Bennie D Waller, Longwood University
Investing Derivative securities – a security whose value is dependent
upon the value of some underlying asset, e.g., MBS
Bennie D Waller, Longwood University
InvestingOptions – a security (financial instrument) that gives the owner
the right to buy or sell an asset (typically common stock) for a specified price over a specified period of time.
Call option – gives the owner the right to purchase an asset at a given price (strike price) before the expiration of the option. e.g., if you believe that a stock will increase in price, you could purchase a call option. If the stock goes above the strike price, the option could be exercised and the underlying stock purchased.
Put option – give the owner the right to sell an asset at a given price before the expiration of the option.
Bennie D Waller, Longwood University
Investments Investment goals should consist of short-term (<1 year),
intermediate (1-10 yrs.) and long term (>10 yrs.)
Basic Investment choices Lending (Debt) investments –
Bonds (corporate or government) Savings account
Ownership (Equity) investments – ownership in an income producing asset
Stocks Real estate
Bennie D Waller, Longwood University
Investments Returns on investments
Holding period return Tax considerations
Capital gains (or loss) –
Income – Stocks – dividend payments Bonds – interest payments Real Estate – rental payments
Bennie D Waller, Longwood University
Interest rates Interest rates
Affect the value of assets
Interest rates are affected by a number of factors. The Federal Reserve, which is charged with maintaining the stability of the nation's financial system, raises or lowers short-term interest rates in an effort to maintain that stability (bankrate.com)
Nominal Interest rate -
+ IP + DRP + LP + MRP
Bennie D Waller, Longwood University
Interest RatesNormal Yield Curve - A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates.
Bennie D Waller, Longwood University
Risk/Return Expected return is a function of risk.
“The risk curve is upward sloping” The more risk you assume, the more return you should
expect to earn!
The objective is to optimize the trade-off between risk and return.
Bennie D Waller, Longwood University
Risk and Return
Both kickers made 10 field goals. Which one would you want on your team? Why?
A B
Bennie D Waller, Longwood University
Risk and Return
E(Return)
Time
The “Risk Curve” is upward sloping A
Bennie D Waller, Longwood University
Risk and Return
E(Return)
Time
The “Risk Curve” is upward sloping B
Bennie D Waller, Longwood University
Risk/Return
2%
4%
6%
8%
10%
12%
14%
16%
18%
0% 5% 10% 15% 20% 25% 30% 35%
Ann
ual R
etur
n Av
erag
e
Annual Return Standard Deviation
T-BondsT-Bills
Large-Company Stocks
Small-Company Stocks
Bennie D Waller, Longwood University
Risk/Return Sources of Risk
Interest rate risk - Inflation risk - Liquidity risk Business risk – risk associated with particular business Market risk – overall market fluctuations
Diversification – the reduction of risk by investing in different assets. “Don’t put all of your eggs in one basket”
Bennie D Waller, Longwood University
Diversification
Bennie D Waller, Longwood University
Asset allocation
The Early years (<54) Your investment horizon is significant, so you can handle
fluctuations in the market. A typical portfolio might include 80% in stocks, 20% bonds.
The Golden Years (55-64) Preserve wealth and plan for retirement
Move out of stocks (due to volatility and investment horizon) and into bonds. (e.g., 60% stocks, 40% bonds)
Retirement You will be spending more than saving. Income should be
primary investment objective. Continue to move into bonds and other liquid assets.
Bennie D Waller, Longwood University
Asset allocationCalculating returns
Holding period return
Bennie D Waller, Longwood University
InvestmentsMarket efficiency – asset prices reflect information.
Be mindful of trying to “beat” the marketDon’t get overconfident (arrogance) – trading too often
“Disposition” effect – no one wants to be a loser
“House money” effect – don’t take irrational risk
“Herd behavior” effect –
Bennie D Waller, Longwood University
Thank You