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Short-Term and Long-Term Investment O p ti o n s Facilitators Manual Introduction There are a variety of different types of investments available today... there are short-term investments, long-term investments, and as many different investment strategies as there are investors. If you find yourself a bit overwhelmed by the prospect of investing and are unsure of whether you should invest in short-term or long-term plans, don't let yourself get bent out of shape. By simply taking the time to compare the benefits and drawbacks of both short-term and long-term investments, you can determine which type is best for you and your current financial needs. Remember, your first step should be defining your financial goals, and then you will be able to decide what investment strategies will better support your goals. In this module, in addition to providing you with the drawbacks and advantages of short- and long-term investments, we will provide you with pertinent information that can assist you in making decisions about your finances... both for now, and in the future. 1 Investments: Resources for Reaching the American Dream | The ASPIRA Association Module Objectives After completing this module you should be able to: Identify the saving instruments that can help you develop short-time investment Understand stocks, how they work, and how to buy and sell stocks Understand bonds, how they work, and how to buy and sell bonds Understand U.S. Securities, how they work, and how to buy and sell U.S. Securities Understand mutual funds, how they work, and how to buy and sell mutual funds Understand socially responsible investments Understand how to invest in real estate 2 Investments: Resources for Reaching the American Dream | The ASPIRA Association Recommended Time on Task by Lesson Lesson No. M5.1 M5.2 M5.3 M5.4 M5.5 M5.6 M5.7 M5.8 M5.9 Lesson Title Introduction Short-term investments vs. long-term investments: a comparison Saving instruments What is a stock? What is a bond? U.S. Treasury securities What are mutual funds? Exchange traded funds Socially responsible investments Investing in real estate Suggested Module Instructional Duration: Time Required 20 minutes 20 minutes 30 minutes 40 minutes 40minutes 30 minutes 45minutes 20 minutes 30 minutes 30 minutes 5.00 hours About This Manual This manual contains the same information provided in the instructional manual that the participants will have during the workshop. For each section, we provide specific suggestions and resources selected to help you deliver the classroom instruction. These include: teaching tips, questions to generate classroom discussion, and a module PowerPoint presentation. In addition, every section or subject has additional reference materials that provide supplementary online instructional materials and resources. These were selected to provide the facilitator more information about the subject or materials, which could be used to enhance the delivery of instruction. Before the workshop session: Before conducting the workshop, take time to familiarize yourself with the participant’s manual, exercises, additional learning resources, teaching tips, and questions to generate discussion and PowerPoint presentation. For classroom use, it is highly recommended that you secure a flip chart, color markers, projector, and laptop. Familiarize yourself with setting up the equipment and with its operation prior to the workshop. 3 Investments: Resources for Reaching the American Dream | The ASPIRA Association At the workshop: Welcome the participants. Ask them to introduce themselves and share their expectations for the program. What do they hope to get out of the workshop? Write their expectations down on a flip chart as they share. (This activity will help participants get to know each other and feel more comfortable—and will give you an idea about what they are expecting from the session.) Review the objectives of the session and the agenda. If applicable, hand out materials to participants. Using the module PowerPoint presentation, review the module objectives: Use this time to listen as well as to manage expectations about what will be accomplished during the lesson. Let participants know that their specific personal situations may not be able to be addressed directly in the lesson, but that the information should be valuable to them. Make sure to schedule breaks after 1.5 hours of instruction. Encourage participants to ask questions; try to create an interactiveparticipatory learning environment. If you do not have the answer to a question, be honest and say: ―I don’t know the answer but I will research it for you.” Be sure to follow up and explain where and how you found the answer. Do not ask participants personal questions. You do not want to make them uncomfortable or ask them to disclose personal or confidential financial information. It is strongly recommended that you always use hypothetical scenarios. Always use a flip chart to write down key concepts. At the end of the day, review the key learning concepts. 4 Investments: Resources for Reaching the American Dream | The ASPIRA Association Table of Contents Introduction ..................................................................................................................... 1 Module Objectives .......................................................................................................... 2 Recommended Time on Task by Lesson ......................................................................... 3 About This Manual ............................................................................................................ 3 Key Terms ........................................................................................................................ 8 Short-Term Investment s vs. Long-Term Investment: a Comparison ..................... 14 Lesson No. M5.1 .......................................................................................................... 14 Cash Investments Instruments – A Potential Short-Term Investment Strategy .... 17 Lesson No. M5.2 .......................................................................................................... 17 Saving Accounts ........................................................................................................ 19 What are Money Market Accounts? ......................................................................... 21 How Money Market Accounts Work? ....................................................................... 21 What happens once you have a money market account? ....................................... 22 Money Market Funds: ................................................................................................ 22 Characteristics of Money Market Funds .............................................................. 22 What are Certificates of Deposits (CDs)? ............................................................... 23 What is a Stock? ........................................................................................................... 27 Lesson No. M5.3 .......................................................................................................... 27 Introduction to Stocks: ................................................................................................. 31 Common and Preferred Stock ..................................................................................... 33 Classes of Stock .......................................................................................................... 33 Understanding Various Ways Stocks Are Described .................................................. 34 1. Market Capitalization ............................................................................................ 34 2. Industry and Sector .............................................................................................. 35 3. Defensive and Cyclical ......................................................................................... 35 4. Growth and Value ................................................................................................. 36 Volatility .................................................................................................................... 37 Stock Splits ............................................................................................................... 38 How are Stock Prices Determined? ......................................................................... 38 Why the stock market goes up and down? – Market Risks .................................. 39 How to Buy and Sell Stocks ..................................................................................... 40 What are Stock Dividends? ...................................................................................... 41 A practical example of stock dividends: ...................................................................... 42 What are Shareholder Meetings?............................................................................. 42 What is a Bond? ............................................................................................................ 45 Lesson No. M5.4 .......................................................................................................... 45 Why Would Anyone Invest in Bonds? ......................................................................... 48 Types of Bonds .......................................................................................................... 49 Corporate Bonds .................................................................................................... 49 State and Municipal Bonds ................................................................................... 49 Questions to Ask When Preparing to Buy or Sell Bonds ............................................ 49 What is the maturity of the bond? ............................................................................ 50 Does it have early redemption features such as a call date? .................................. 50 What is the credit quality? What is the rating? Is it insured? ................................... 50 5 Investments: Resources for Reaching the American Dream | The ASPIRA Association What is the interest rate, or coupon, of the bond? ................................................... 51 What is the price? ..................................................................................................... 51 What is the tax status? ............................................................................................. 51 What will the actual yield be after my broker has taken out his/her commission and fees? ......................................................................................................................... 51 What is this bond’s credit rating and ―directional outlook‖? ..................................... 52 Are there any call features or other unique features on this prospective bond? ..... 52 What is the transaction type for this bond? .............................................................. 52 U.S. Treasury Securities ............................................................................................... 54 Lesson No. M5.5 .......................................................................................................... 54 Treasury Securities and Inflation ............................................................................. 59 Purchase of U.S. Treasury Securities ..................................................................... 60 What are Mutual Funds? .............................................................................................. 61 Lesson No. M5.6 .......................................................................................................... 61 Important Aspects of Mutual Funds ............................................................................. 67 How Mutual Funds Work - What They Are .................................................................. 67 Advantages and Disadvantages of Mutual Funds ....................................................... 69 Different Types of Funds ............................................................................................. 70 Money Market Funds ................................................................................................ 70 Bond Funds .............................................................................................................. 71 Stock Funds .............................................................................................................. 71 How to Buy and Sell Shares ........................................................................................ 72 How Funds Can Earn Money for You .......................................................................... 73 Factors to Consider When Developing your Long-Term Investment Strategy Based on Mutual Funds ............................................................................................................... 73 Degrees of Risk ........................................................................................................ 74 Fees and Expenses .................................................................................................. 74 Shareholder Fees ..................................................................................................... 74 Annual Fund Operating Expenses ........................................................................... 75 Classes of Funds ......................................................................................................... 77 Tax Consequences ...................................................................................................... 78 Avoiding Common Pitfalls ............................................................................................ 78 Sources of Information ............................................................................................. 78 Looking Beyond a Fund's Name .............................................................................. 82 Bank Products versus Mutual Funds ....................................................................... 82 Exchange Traded Funds .............................................................................................. 83 Lesson No. M5.7 .......................................................................................................... 83 Advantages of Exchange Traded Funds ................................................................. 85 Disadvantages of ETFs ............................................................................................. 85 When and how to use ETFs ..................................................................................... 86 Socially Responsible Investments: Where Financial and Ethical Criteria Meets .. 88 Lesson No. M5.8 .......................................................................................................... 88 How SRI Works? ........................................................................................................ 89 Does Socially Responsible Investments Negatively Impacts Your Return? ...... 90 Investing in Real Estate ................................................................................................ 91 Lesson No. M5.9 .......................................................................................................... 91 6 Investments: Resources for Reaching the American Dream | The ASPIRA Association Real Estate Investment Strategies ........................................................................... 93 Basic Rental Properties ......................................................................................... 93 Real Estate Investment Groups ............................................................................ 94 Real Estate Trading ................................................................................................ 95 REITs........................................................................................................................ 95 Leverage .................................................................................................................. 96 Issues to Consider When Investing In Real Estate ................................................ 96 Additional Learning Resources ................................................................................. 100 7 Investments: Resources for Reaching the American Dream | The ASPIRA Association Key Terms Articles of Incorporation: The Articles of Incorporation are the basic document filed with the appropriate government agency, the Secretary of State, for the incorporation of a business. Articles of Incorporation is the most common name for this instrument, but it may also be called a Certificate of Incorporation (the state of Delaware uses this term), Certificate of Organization, or Certificate of Formation. The actual name will vary from state to state. Buy-and-Hold: Passive investment strategy in which an investor buys stocks and holds them for a long period of time, regardless of fluctuations in the market. An investor who employs a buy-and-hold strategy actively selects stocks, but once in a position, is not concerned with short-term price movements and technical indicators. Conventional investing wisdom tells us that with a long time horizon, equities render a higher return than other asset classes such as bonds. There is, however, a debate over whether a buy-and-hold strategy is superior to an active investing strategy. A buy-and-hold strategy has tax benefits, however, because long-term investments tend to be taxed at a lower rate than short-term investments. Capital Preservation: Capital preservation is a strategy for protecting the money you have available to invest by choosing insured accounts or fixed-income investments that promise return of principal. The downside of capital preservation over the long term is that by avoiding the potential risks of equity investing, you exposure yourself to inflation risk. Cash Dividend: A dividend paid in the form of cash, usually by check. Cash Flow: An accounting statement - the statement of cash flows – that shows the amount of cash generated and used by a company in a given period, calculated by adding noncash charges (such as depreciation) to net income after taxes. Cash flow can be attributed to a specific project, or to a business as a whole. Cash flow can be used as an indication of a company's financial strength. Collective Investment: A collective investment scheme is a way of investing money with other people to participate in a wider range of investments than may be feasible for 8 Investments: Resources for Reaching the American Dream | The ASPIRA Association an individual investor and to share the costs of doing so. Commercial Paper: Debt instruments that are issued by established corporations to meet short-term financing needs. Such instruments are unsecured and have maturities ranging from 2 to 270 days. Commercial paper is rated by Standard & Poor's. CPA: Stands for Certified Public Accountant. A special designation given to an accountant who has passed a national uniform examination and has met other certifying requirements; CPA certificates are issued and monitored by state boards of accountancy or similar agencies. Day Trader: Stock trader who holds positions in securities for a very short time (from minutes to hours) and makes numerous trades each day. Most trades are entered and closed out within the same day. Default Risk: The risk that companies or individuals will be unable to pay the contractual interest or principal on their debt obligations. In other words, this is the risk that an investor will not get paid. Deposit Brokers: Investment specialists who act as agents for small banks and trust companies, insurance companies, and sometimes mutual fund companies. Dividend: A taxable payment declared by a company's board of directors and given to its shareholders out of the company's current or retained earnings, usually quarterly. Dividends are usually given as cash (cash dividend), but they can also take the form of stock (stock dividend) or other property. Dividends provide an incentive to own stock in stable companies even if they are not experiencing much growth. Companies are not required to pay dividends. The companies that offer dividends are most often companies that have progressed beyond the growth phase, and no longer benefit sufficiently by reinvesting their profits, so they usually choose to pay them out to their shareholders; also called payout. Federal Deposit Insurance Corporation (FDIC): The U.S. government agency insuring deposits in the U.S. against bank failure. The FDIC was created in 1933 to maintain public confidence and encourage stability in the financial system through the promotion of sound 9 Investments: Resources for Reaching the American Dream | The ASPIRA Association banking practices. The FDIC will insure deposits of up to $250,000 per depositor, per insured bank. Floor Brokers: There are two main types: Commission brokers, employed by brokerage houses, buy and sell securities on the floor for the general public. Independent floor brokers work for themselves. They execute orders for brokerages without full-time commission brokers or for overly busy brokers. Fund Manager: Refers to both a firm that provides investment management services and an individual(s) who directs 'fund management' decisions. Hedge: In finance, a hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment. The term is a shortened form of "hedging your bets," a gambling term. Typical hedgers purchase a security that the investor thinks will increase in value, and combine this with a "short sell" of a related security or securities in case the market as a whole goes down in value. Interest: The charge for the privilege of borrowing money, typically expressed as an annual percentage rate. Leverage: The amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is considered to be highly leveraged. Leverage helps both the investor and the firm to invest or operate. However, it comes with greater risk. If an investor uses leverage to make an investment and the investment moves against the investor, his or her loss is much greater than it would've been if the investment had not been leveraged - leverage magnifies both gains and losses. In the business world, a company can use leverage to try to generate shareholder wealth, but if it fails to do so, the interest expense and credit risk of default destroys shareholder value. Limit Order: An order to buy or sell a security at a price specified by the client. The order can be executed only at the specified price or better. It sets the maximum price the client is willing to pay as a buyer, and the minimum price he is willing to accept as a seller. Line of Credit: An arrangement between a financial institution (usually a bank) and a customer establishing a maximum loan balance that the bank will permit the 10