PART 4:MANAGING YOUR INVESTMENTSChapter 11Investment Basics
11-2Learning ObjectivesSet your goals and be ready to invest.Understand how taxes affect your investments.Calculate interest rates and real rates of return.Manage risk in your investments.Allocate your assets in the manner that is best for you.
11-3Investing Versus SpeculatingWhen you buy an investment, you put money in an asset that generates a return.–Part of that is income:Rent on real estateDividends on stockInterest on bonds–Even if the stock or bond does not pay income now, in the future it may.
11-4Investing Versus SpeculatingWith speculation, assets don’t generate an income return and their value depends entirely on supply and demand.Examples include:–Gold coins–Baseball cards–Non-income producing real estate–Gems–Derivative securities
11-5Investing Versus SpeculatingDerivative securities derive their value from the value of another asset.–Futures - a written contract to buy or sell a commodity in the future. –Options - the right to buy or sell an asset at a set price on or before maturity date. Call option – right to buyPut option – right to sell
11-6Investing Versus SpeculatingFutures contracts deal with commodities such as oil, soybeans, or corn.It requires the holder to buy or sell the asset, regardless of what happens to its value in the interim.Contract sets a price and a future time at which you will buy or sell the asset.With futures, it is possible to lose more than you invested.
11-7Investing Versus SpeculatingOptions markets and futures markets are a “zero sum game.”If someone makes money, then someone must lose money.If profits and losses are added up, the total would be zero.Can lose more than invested.
11-8Setting Investment GoalsWhen you make a plan, you must:–Write down your goals and prioritize them.–Attach costs to them.–Determine when the money for those goals will be needed.–Periodically reevaluate your goals.
11-9Setting Investment GoalsFormalize goals into:–Short-term – within 1 year–Intermediate-term – 1-10 years–Long-term – over 10 years