Phase+4

C**PHASE 4: DISCOVER INVESTMENTS**

The goals you have for the future, being in your own home or retiring at age 50, will not be achieved if you can not pay for it. Befor you think about how you will achieve your goals for the future, you must be sure your personal finances are in good shape.
 * Balance. Spend less money than you earn
 * Insurance. Should have enough insurnace to cover financial losses from accidents, medical emergency, or theft
 * Emergency Fund. Start an **emergency fund**, money that you can access quickly for an immediate need, to help you pay for unexpected events, such as not being able to work. You should have enough saved to cover living expenses for three to nine months.
 * Have access to other sources of cash, such as line of credit (loan)

To fulfill your goals for the future you need to get started now. Some ways you can save are by Pay yourself first, Taking advantage of employer-sponsored retirement plans and Having a savings program. By investing now, you will be able to fulfill your goals in the future.

Many people think they are too young or have small amounts of money to start investing, but that is false. The sooner you start the more you will make because of interest or dividends earned on that investment. A small amount will not take long to grow because of the time vaule of money.

Deciding where to invest, look at risk factors. There is safety and risk in the financial world. **Safety** means that the chance of losing your money in an investment is fairly small. A safe investment earns a very low rate of return. **Risk** indicates that you cannot be certain about the outcome of your investment. **Speculative** investment is a high risk investment made in the hope of earning a relatively large profit in a short time, but you could lose most or all of your money you invested. There are five components of the risk factor:
 * 1) **Inflation Risk.** When inflation rate is high, you take risk that the return from your investment will not keep up with the inflation rate. Due to that, you lose buying power.
 * Inflation Rate - Interest Rate = Loss of Buying Power (%)
 * Original Price of Investment X Loss of Buying Power (%) = Loss of Buying Power ($)
 * (Original Price of Investment X Inflation Rate) + Original Price of Investment = Current Price of Investment
 * 1) **Interest Rate Risk.** If your investment gives you a fixed rate of return, the value of your investment (bonds) will go down if the interest rate increases. But if the interest rate decreases, your investment will go up in value.
 * 2) **Business Failure Risk.** If the company you invested (stocks, bonds) in make lower profits, this can mean lower dividends or maybe none at all. If the company declares bankruptcy, your investmtents may become worthless.
 * 3) **Financial Market Risk.** The state of the overall financial market can decrease the value of a stock even though the company is financially healthy. Social and political conditions can affect the financial market.
 * 4) **Global Investment Risk.** Due to the different currencies in other countries, it may be hard to find out the true financial conditions of companies there. Currency exchange rate may also affect the return of your investment, because you will be paid dividends in that countries currency and you will have to convert those currency into US dollars.

Where should you invest? Well, there are diffeerent types of investments with different rates of return, risk, and security. There are stocks, bonds, mutual funds, and real estate. Invest in the ones that meet your needs, and help you reach your goals for the future. Examples of stocks, bonds, mutual funds, and real estate are:
 * **Stocks.** A corporation gets its equity capital (money) from its stock holders, who become owners when they buy shares of stock in the company.
 * **Common stock** is stock that provides the most basic form of corporate ownership, and it entitles you to voting privileges. It provides with a source of income if the company pays dividends. You also gain growth potential if the dollar value of the stock increases, or if the company splits its stocks.
 * **Preferred stock** is stock that gives the owner the advantage of receiveing cash dividends before common stockholders receive any. If the company is having financial problems, preferred stockholders will receive dividends before common stockholdersa and if the company fails, preferred stockholders also have the right to receive any assets that are left before common stockholders receive anything.
 * **Blue-Chip stock** is considered a safe investment, have a history of stable earnings, and consistency in the payment of dividends.
 * **Income stock** pays higher-than-average dividends.
 * **Growth stock** issued by a corporation whose potential earnings may be higher than an average earning perdicted for all the firms in the country. These stocks generally do not pay dividends.
 * **Cyclical stock** has a market value that tends to reflect the state of the economy. When the economy is improving, stock value increases. When the economy is declining, stock value decreases.
 * **Defensive stock** is a stock that remains stable during declines in the economy.
 * **Large cap stock** is a stock of a corporation that has issued a large number of shares of stock and has a large amount of capitaliztion. **Capitalization** is the total amount of stocks and bonds issuded by a corporation. These stocks are secure.
 * **Small cap stock** is a stock issued by a corporation with a capitalization of $150 million or less. These stocks are high risk investments.
 * **Penny stock** typically sells for less than $1 a share (it can sell for as much as $10 a share). These stocks are very risky.
 * **Corporate Bonds.** A corporation's written pledge to repay a specified amount of money, along with interest. You are lending money to a corporation for a certain period of time.
 * Annual or semiannual interest is paid by the corporation from the date you buy the bond till its maturity date.
 * **Debenture** is a bond that is backed only by the reputation of the issuing corporation rather than by its specific assets.
 * **Mortgage bond** is a bond that is backed by assets of the corporation. This is a safer bond but earns less interest.
 * **Subordinated debenure** is an unsecured bond that gives bondholders a claim to interest payments and assets of the corporation only after all other bondholders have been paid. Earn the highest interst rate.
 * **Convertible bond** is a bond that an investor can trade for shares of the corporation's common stock. Lowest interest rate.
 * **Registered bond** is a bond registered in the owner's name by the company that issues the bond. Only the owner can collect money from the bond. Interest checks are mailed directly to the bondholder.
 * **Registered coupon bond** is a bond that is registered in the owner's name for the face value only and not for the interest. Only the owner can collect the face value. Anyone who holds the coupon, that comes with the bond, can collect the interest payments.
 * **Bearer bond** is a bond that is not registered in the investor's name. The owner must present coupons in order to collect interest payments.
 * **Zero-coupon bond** is a bond that provides no interest payments and is redeemed for its face value at maturity. It is sold at a price far below its face value.
 * **Government Bonds.** A written pledge of a government or muncipality to reapy a specified sum of money with interest. You are lending money to the government or muncipality for a certain period of time.
 * **Treasury bills** are discounted securities. The amount you actually pay is less than the full face value. It reaches maturity in 13, 26, or 52 weeks.
 * **Treasury notes** reaches maturity in 1 to 10 years. It receives higher interest rate.
 * **Treasury bonds** reach maturity in 10 to 30 years. It receives hight interest rate, due to the lenght in maturity date.
 * **U.S. savings bond** are series called Series EE bonds. The price is half its face value. The bond can be redeemed anytime from 6 months to 30 years after purchase. Interest that is earned is not taxed until you cash in the bond.
 * **Mutual Funds.** An investment in which investors pool their money to buy stocks, bonds, and other securities based on the selections of professional managers who work for an investment company. If one of the stocks or other securities does poorly, the loss can be made up by the gains in another stock or security in the fund. Dividends are earned for investing.
 * **Closed-end fund** is a fund with a fixed number of shares that are issued by an investment company when the fund is first organized.
 * **Open-end fund** is a mutual fund with an unlimited number of shares that are issued and redeemed by an investment company at the investors' request.
 * **Load fund** is a mutual fund in which you pay a commission every time you purchase shares.
 * **No-load fund** is a fund in which no commission is paid by the investor.
 * **Real Estate.** Investing in real estate may be to have the property increase in value so you can sell it at a profit or to receive rental income. When investing in real estate, you need to find out if the property is priced competitvely with similar properites. Also know what kind of financing is available and how much the taxes will be. Real estate investments are good because the value of land mostly appreciates and there is smally amount of risk of losing money.
 * Advantage of investing in you home is that it is tax deductable. Also, it is a way of income.
 * Before buying, ask questions: Why are the present owners selling? Is the property in good conditon? What is the condition of other properties in the area? Is there a chance that the property will decrease in value and that you will lose money?
 * When selling, ask questions: Can you find an interested buyer? Can the buyer get the necessary financing to buy the property?
 * Advantages: Protection against inflation and easy investment.
 * Disadvantages: Iliquidity (cannot be easily converted to cash) and down fall in the economy can mean decrease in value.

When investing, REMEMBER NOT TO PLACE ALL YOUR EGGS IN THE SAME BASKET. DO NOT INVEST ALL YOUR MONEY IN THE SAME COMPANY OR CORPORATION. Investing all your money in the same company can turn out to be very risky. If the company is in bad financial condition, you will not gain but rather you will lose your money. Diversify your investments**.** Diversification is the process of spreading your assets among several different types of investments to lessen risk. By diversifying your investments, if one investment is doing poorly and the other investments are doing well, the loss of one investment will be made up by the gains of other investments.

To become a successful investor, you must develop a plan and execute it.
 * 1) Establish investment goals
 * 2) Decide how much money you will need in order to reach those goals by a specific date
 * 3) Determine the amount of money you have to invest
 * 4) List all the invetments you want to evaluate
 * Interent, newspapers, news programs, business periodicals, corporate reports, and financial planners are sources from where you can gather information
 * 1) Evaluate the risk and potential return for each investment on your list
 * You may want to consult a professional. A **financial planner** is a specialist who is trained to offer specific financial help and advise.
 * 1) Reduce the list of possible investments to a reasonable number
 * 2) Choose at least two investments to give you some diversity
 * 3) Recheck and improve periodically

After investing your money in investments, you must monitor the value of your investments, and keep accurate and current records. This will help you decide whether its the right time to sell or buy more stocks, bonds, or other investments.