MCS*2100 Chapter Summaries 10-15 Inclusive - Personal Finance 5th Ed

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Marketing and Consumer Studies
MCS 2100
Rosemary Vanderhoeven

Chapter 10Fundamentals of InvestingEstablishing Investment Goals must be ospecific omeasurableotailored to your particular financial needsooriented toward the futurecould beostated in terms of money ex by December 31 2018 I will have total assets of 120000ostated in terms of particular things that are desired ex by January 1 2018 I will have accumulated enough money to purchase a second home in the mountains Helpful questionsoWhat will you use the money foroHow much money do you need to satisfy your investment goalsoHow will you obtain the moneyoHow long will it take you to obtain the moneyoHow much risk are you willing to assume in an investment programoWhat possible economic or personal conditions could alter your investment goalsoConsidering your economic circumstances are your investment goals reasonableoWhat will the consequences be if you dont reach your investment goalsFactors to consider before investingWork and learn to save to balance your budgetObtain adequate insurance protectionStart an emergency fundemergency fundan amount of money you can obtain quickly in case of immediate needHave access to other sources of cash for emergency needsGetting the money needed to start an investment programPrioritize your investment goalsHow badly do you want to achieve them and what are you willing to sacrifice What is important to you and what do you valueSuggestion to help you obtain the money you needoPay yourself firstinstead of savinginvesting what is left over after having paid everything else which is usually nothing pay your monthly bills save a reasonable amount and then use what is left over for personal expenses clothes entertainment etcoParticipate in an elective savings programmoney is withheld from you paycheque each payday and automatically deposited in a savings account or invested in a mutual fund or brokerage firm also a great way to save for an RRSP or RESP oMake a special savings effort one or two months each yearcut back to the basics for one or two months each year to obtain additional money for investment purposesoTake advantage of employersponsored retirement programsfor every dollar the employee contributes to a retirement program the employer matches it with a specified amount such as 025 or 1 oTake advantage of gifts inheritances and windfallsuse money from gifts inheritances salary increases yearend bonuses or income tax refunds to fund your investment programThe Value of LongTerm Investment Programs oTake advantage of the time value of moneythe rate of return and the length of time your money is invested mattersmall sums grow over a long period of timeFactors Affecting the Choice of Investments Safety and Risk osafety in an investment means minimal risk of loss while risk in an investment means a measure of uncertainty about the outcomeovery safe investmentsgovt savings bonds savings accounts term deposits guaranteed investment certificates and certain negotiable govt or corporate bondsospeculative investmentsa high risk investment made in the hope of earning a relatively large profit in a short timespeculative stocks real estate derivatives commodities options precious metals precious stonescollectibles etcoThe potential return on any investment should be directly related to the risk the investor assumesoRisk Tolerancethe amount of psychological pain you are willing to suffer from your investments oComponents of the Risk Factorrisk factor changes from time to timeBusiness Riskassociated with investment in common stock preferred stock and corporate bonds bad management unsuccessful products competition cause the business to be less profitable than anticipated Inflation Riska rise in the general level of prices reduces buying power inflation rate might not keep pace with inflation rateInterest Rate Riskassociated with a fixedreturn investment in preferred stocks or govtcorporate bonds the result of changes in the interest rates in the economy value of bondswhen interest rates and vice versaMarket Riskthe prices of stocks bonds and mutual funds may fluctuate because of changes in the economic environment Global Investment Riskglobal investments must be evaluated like domestic investmentswhich is difficult because reliable accounting info on foreign firms is often scarce changes in the current exchange rate may affect the return on your investment Investment Incomeinvestors sometimes purchase certain investment because the want a predicable source of income guaranteed investment certificates Canada Savings Bods Canadian Treasury Bills as well as some speculative investments
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