INB - Investment Information Lesson

Investment Information

Before investing, an investor must first make sure their financial house is in order by taking these steps:

Let's learn a little more about these steps in the presentation below.

Let's focus a moment on that investment plan. What are you saving for? What is the time frame for needing the money? Answering these questions and understanding your risk tolerance will help you decide what portion of your investment should be in growth securities and what portion should be in income securities. Growth securities are those stocks and mutual funds that will grow in value over time, while income securities pay interest or dividends at regular intervals. While the income from these securities can be reinvested, they can also be taxed. The balance and proportion of growth and income stocks change over time. Generally, growth securities are held to grow over a long period because they are riskier and more time allows them to recover from economic downturns. Income securities, such as bonds or stocks with dividends, would become a larger proportion of an investment portfolio as income is needed, say at retirement.

Stock Information and Tools

Investors use stock indexes to measure the overall health of the market. Three popular indexes are described below:

Dow Jones Industrial Average: A price-weighted average of 30 important stocks traded on the NYSE and NASDAQ. Large companies like General Motors, IBM, and Exxon are represented in these averages.

Standards and Poor's 500: An index of 500 stocks chosen for market size, liquidity, and industry grouping. Because of the number of stocks listed, the S and P 500 is considered to be a better measure of market health than the Dow Jones.

NASDAQ Composite Index: A weighted index of more than 3000 stocks listed on the NASDAQ exchange. In addition to common stocks, this index includes American depository receipts and real estate investment trusts.

Beyond overall market health, investors want to know how individual stocks are doing. This information is easily found on the internet, in newspapers, and even through certain TV news networks. Here is a sample of what a stock quote might look like:

Here is what each column means:

• 52 W High - the highest price the stock sold for in the past year
• 52 W Low - the lowest price the stock sold for in the past year
• Stock - the name of the company
• Ticker - the three or four-letter symbol for the stock
• Div - the dollar amount of dividends paid per share of stock during the current year
• Yield % - the percentage of the price paid out in dividends
• P/E - the price-earnings ratio represents the relationship of the price to the earnings per share. Too high a P/E is an indication the stock may be overpriced
• Vol 00s - the number of shares sold in thousands
• High - the highest price the stock sold for that day
• Low - the lowest price a stock sold for that day
• Close - the price the stock was selling for at the close of business that day
• Net Chg - The change in price in the stock from the previous closing price to the current day's closing price

Stocks are often valued by examining this information, or by looking for trends. As noted, the P/E can help determine if a stock's price is more than the company's earnings demonstrate that it should be. Analysts also look at Earnings Per Share, which basically takes a company's net earnings and divides them by the number of shares of a company's stock. This facilitates the comparison among stocks. A final common valuation method looks at a company's historic growth in both sales and income to try to predict trends. This information comes from the company's financial statements which by law must be available to the public.

Bond Information and Tools

Bonds can be either government-issued or issued by corporations. Either way, bonds represent a debt of the issuing entity. Bonds usually have a face value of $1,000 each. Face value refers to the value of the bond as stated on its front. Bonds also have a stated interest rate and interest payment dates as well as maturity dates. The stated interest rate is the percentage of interest paid annually to the bondholder. Interest payment date refers to the dates the interest will be paid each year. Maturity dates are the date the bond amount will be paid back to the bondholder. 

Bonds are rated as an indication of their credit quality or likelihood of default. Default is the inability to pay interest or principal. Bond ratings are expressed in letters with AAA being the highest rating (and the safest investment) and C being the lowest. Bonds with a rating of C are sometimes called "junk" bonds because of their high risk and the likelihood of default. Different rating services use the same letter grades, but different combinations of the upper and lower case to differentiate themselves. Private independent rating services include companies such as Standard & Poor's, Moody's, and Fitch.

In addition to credit quality, bonds in the secondary market are priced based on their stated interest rate compared to the interest rate available in the economy. Simply stated, a bond that had the same stated interest rate as the rate in the economy would sell at face value. A bond that had a stated interest rate lower than in the economy would sell for less than face value. A bond that had an interest rate higher than that in the economy, would sell for more than face value.

Mutual Fund Information and Tools

Mutual Funds, by their very nature are rated differently from stocks and bonds. This is mainly due to the fact that mutual funds can be a mixture of both stocks and bonds. The term mutual funds actually means "many monies" because many different investors pool their money in a fund so that their combined buying power allows for much more diversification than any one of them could achieve on their own. Funds are also managed by fund managers that have expertise the average investor does not have. Funds may even specialize specifically in growth funds, income funds, money market funds, etc.

Fees are the main drawback for many mutual funds. You may have to pay funds to get into a fund or to get out of a fund. A number of organizations and media outlets hire analysts to rate funds on a variety of criteria, including fees. Some well-known organizations would be Morningstar, Kiplinger, Forbes, and The Wall Street Journal.

Choosing a mutual fund, like choosing a stock or a bond should be based on specific criteria, including:

• Identified goals and risk tolerance
• Charges and fees
• Fund manager's past results

Self-Assessment

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