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AOF Financial PlanningLesson 16Stocks, Bonds, and Mutual FundsStudent ResourcesResourceDescriptionStudent Resource 16.1K-W-L Chart: Stocks, Bonds, and Mutual FundsStudent Resource 16.2Reading: Stocks, Bonds, and Mutual FundsStudent Resource 16.3Memo: Stocks, Bonds, and Mutual Funds PosterStudent Resource 16.4Planning Guide: Investing at 25Student Resource 16.1K-W-L Chart: Stocks, Bonds, and Mutual FundsStudent Name:_______________________________________________________ Date:___________Directions: Record what you know about growth investment products in the first column. Then write questions you still have about investing in the second column. You’ll have a chance to come back and fill in the last column, What I Learned, at the end of the presentation.What I KnowWhat Else I Want to KnowWhat I LearnedStudent Resource 16.2Reading: Stocks, Bonds, and Mutual FundsOne of the key roles of a financial planner is to provide advice to clients on how to invest their money for the long term, such as saving for retirement. One of the best ways to save for the long term is through growth investment products.In this presentation, you will learn about the main characteristics of three growth investment products: stocks, bonds, and mutual funds. Although these three products have greater risk and volatility than income investments, they also have a greater potential for long-term growth.You’ll also learn how these products fit into a client’s financial plan, including the tax implications of growth investments. Finally, you’ll learn how to purchase and sell stocks, bonds, and mutual funds. There are two main categories of investments: growth investments and income investments. Growth investments have the greatest potential for growth over the long term, while income investments have lower risk and are excellent for short-term investments or if regular income is needed from the investment.The three most common types of growth investment products are stocks, some bonds, and some mutual funds. The three are very different, but they share the common characteristic of being investment tools that are often good for long-term saving.The common characteristics of income investments are relatively low risk, low volatility, and high liquidity. However, in exchange for their low risk and volatility, income investments have relatively low rates of return. Income investments are best for short-term investing or when the investor needs guaranteed income on a regular basis.The common characteristics of growth investments, in contrast to income investments, is that they have relatively high risk and increased volatility, and they are often slightly less liquid. With all of these potential drawbacks, what makes growth investments so important? Their chance for higher returns, especially in long-term investing!For example, while the return on many income investments is under 5%, it is not uncommon for the returns on growth investments to be 10% or higher. While the volatility on growth investments makes it risky to anticipate any positive return in the short term, most growth investments have shown steady growth over the decades, another reason they are good long-term investments.One very important type of growth investment is stocks. Stocks represent fractional ownership of a publicly owned company, so when you buy shares of stock, you are actually becoming a part owner of the company. This means that in many cases you can even have a voice in making decisions in the company by voting in shareholder meetings and electing members of the company’s board of directors.Stocks are considered a volatile investment because their value depends on how well the company is doing—and many different factors, often unexpected, can affect how a company is faring. Natural disasters, economic downturns, increased competition, new inventions, and many other factors can affect a company either negatively or positively.Very large companies with a long history have tended to exhibit steady, long-term growth. Stocks for these companies are known as blue chip stocks. In general, stocks for large companies are called large cap stocks, while stocks for smaller, newer companies are called small cap stocks. The large cap stocks are generally thought of as less risky, while small cap stocks have greater risk but higher potential for large returns.The stock market is the larger system that allows people to invest in companies by buying shares. Don’t think of it like a market where you buy food—the stock market would be like the global system of food sales, including all the supermarkets, corner stores, farmers markets, and produce stands. The markets most people think of are the stock exchanges, places that facilitate the buying and selling of stocks. There are many stock exchanges all over the world. One of the largest is the New York Stock Exchange. You’ve probably seen pictures or videos of traders on the floor of a stock exchange, buying and selling stocks.Like most of the capitalist system of commerce, the stock market operates on a system of supply and demand. The more people who want to buy a particular stock, the higher the price for each share will go. The more people trying to sell a stock, the lower it will go. Stock exchanges keep continuous track of the price of every stock listed in their market.With thousands of stocks available for purchase, all rising and falling in value in different amounts and at different times, it would be hard to get a general sense of how the market was doing without some way to categorize and group stocks.A market index (indices is the plural) is a grouping of a number of stocks whose performance is tracked together. For example, when you hear that the Dow Jones fell 12 points, it means that taken together, the average decline of stocks in the Dow Jones Industrial Average was 12 points but that the actual performance of individual stocks in the index may have been higher or lower.In addition to tracking indices, sometimes it is helpful to track the performance of a sector of the economy, such as high technology or the automobile industry, or a certain category of stocks, such as large cap or small cap stocks.For most people, the only way to buy or sell stocks is to work with a stockbroker or brokerage firm. Brokers and brokerage firms serve as intermediaries, placing the orders with a stock exchange, usually for a fee.Brokers provide different levels of service, ranging from full-service brokers who will call you with stock tips to online brokerages, which provide you with an online tool to make trades but offer limited personalized assistance. In general, the more service you get, the higher the commissions or fees that the broker charges.An experienced investor may want to use an online broker because of the low fees, while a new investor, or one who does not wish to spend a lot of time researching investment options, may want to use a full-service broker. While the initial fees may be higher, the full-service broker may help the investor choose stocks that perform well, more than making up for the initial fees or commission.Although some people use bonds as an income investment, others use them as growth investments. While the potential return on bonds is higher than most income investments, in general the potential for returns is not as high as with stocks. (In fact, some very safe types of bonds could be considered income investments.) The advantage of bonds, however, is their lower level of risk and the tax advantages of certain types of bonds.Bonds are a form of loan to a company or government entity. To reward the bond purchaser for lending the entity money for a period of time, the bondholder is paid interest on the bond. While most government bonds are relatively risk free, bonds purchased from companies are riskier, as it is possible that a company may do poorly and be unable to repay the bond. It can be difficult to assess a company’s ability to pay back a bond. Luckily, there are several credit rating agencies that assess a company’s or government entity’s ability to repay a loan. The highest credit rating is AAA. In 2005, there were only eight companies in the United States that were given a AAA rating!The returns on some types of government bonds, such as municipal bonds, are tax free.Bonds can be purchased in a variety of ways, the most common being from a full-service or discount broker. A bond broker can also purchase bonds but usually requires a minimum purchase of $5,000.If you are purchasing bonds, it is a good idea to check the credit rating of the companies whose bonds you are purchasing.One common way to reduce risk when purchasing bonds is to invest in a mutual fund that includes a diverse portfolio of bonds. Investing in many bonds at once reduces the impact on the investment if one company or government entity is unable to pay.Investing in mutual funds is a convenient way to buy a diversified blend of stocks or bonds. The funds are managed by professionals who select investments to meet a certain profile or to specialize in a certain type of stock. There are mutual funds that strive for low risk and volatility, and others that accept the chance of risk and volatility to try for higher returns. Other mutual funds specialize in investments in particular regions or in particular industries. Mutual funds are an increasingly popular way for people to invest, especially those who do not have experience in investing in the stock or bond markets. Mutual funds are unique in that they are diversified portfolios of investment products managed by a professional investment manager. There are many types of mutual funds, from very low risk to very high risk and high potential for gain. A mutual fund manager may invest in a wide variety of investment products, including stocks, bonds, and even income investments. Before investing in a mutual fund, it is important to research if the fund has the level of risk and the potential for returns that the investor is looking for. Mutual funds will list their past performance as well as their level of risk.Many brokers charge fees to purchase funds. These fees are known as a load. For some funds, the load must be paid when the funds are purchased and, for others, when the funds are sold. There are also funds that charge no fees, and these are known as no-load mutual funds. Additionally, some mutual funds have very low expenses because they are managed by computer instead of highly paid professionals—these are called passively managed funds. Sometimes low-expense, passively managed funds perform as well as professionally (or actively) managed funds. Income from investments, like most other income, is taxed! So if an investor makes $5,000 in the stock market in one year, that money may count as income. On the other hand, if the investor loses $5,000, the loss could be deducted from income!However, there are a few exceptions that are important for a financial planner to know about. Individual Retirement Accounts (IRAs) are an investment product that is tax deferred. This means that if an investor makes $5,000 in one year in an IRA account, that money is not taxed as long as the investor does not withdraw it in that year.There are limits on the amount of money that can be put into an IRA each year. You’ll learn more about IRAs and other retirement-saving tools in the lesson on retirement planning.Municipal bonds are another form of tax-free investments. Because of the power of compounding interest, growth investments are the best way to save up money for long-term goals, such as retirement. For this very important reason, they should be part of everyone’s investment portfolio.But it is also important to invest in income products, because they are highly liquid, which means you can easily withdraw the money you need for daily life.After retirement, it is often a good idea to shift some investments from the riskier growth investments to more-secure, more-liquid income investments. Since wages decline or disappear after retirement, retirees must live on the interest or easily draw on the capital of their investments.Student Resource 16.3Memo: Stocks, Bonds, and Mutual Funds PosterTo: AOF Financial Planning StudentsFrom: Stella Delminga-Ruiz, Director of Development, TeenBank USARe: Growth Investment Product PublicityWe at TeenBank USA are very interested in helping our customers begin investing young so that they can achieve their financial goals. For this reason, we would like you to apply your unique perspective, as financially educated teens, to creating a poster for our customers advertising the three growth investment products: stocks, bonds, and mutual funds. Please create a poster that illustrates the advantages (and disadvantages) of each of these investment products. As you are aware, our clientele is young, so be sure to point out the features of each that will appeal to our customers. Also, think about and put on the poster images that teens will both relate to and find interesting. These are the features we will look for in your poster:The poster makes clear what the three growth investment products are.The poster gives a clear summary of each product.The poster explains the pros and cons of each product.The poster includes images that teens and young adults can relate to.The poster is visually appealing with clean, clear graphics and text.The poster uses proper spelling, grammar, and punctuation.After you create your final copies of the posters, we will hang them in our branch offices to stimulate customers’ interest and investment in stocks, bonds, and mutual funds. We appreciate your help on this project and look forward to seeing your posters and how they show that growth investment products can help today’s teens and young adults achieve their financial goals. Student Resource 16.4Planning Guide: Investing at 25Student Name:_______________________________________________________ Date:___________Directions: Fill in the type of investment product, the reason you think the investment product makes sense, and where to buy and sell the investment product.My short-term goal(this year)Cost to meet goalBest investment product to meet goalWhy this product makes senseWhere to purchase and sell this productDirect OpportunityMy mid-term goal(in one to five years)Direct OpportunityMy long-term goal(in more than five years)Cost to meet goalBest investment product to meet goalWhy this product makes senseWhere to purchase and sell this productDirect OpportunityMake sure your planning guide meets or exceeds the following assessment criteria:The recommendations make sense for the goal.The reasoning for each recommendation is clearly explained.The direct and opportunity costs are realistic.The place where the products can be bought and sold is correct.The guide uses proper spelling, grammar, and punctuation. ................
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