Unit
4
Ownership Investments
1. What is the major difference in ownership and loanership investments? List the characteristics of ownership, or equity, investments. (See pages 4-1, 4-2, and 4-3)
2. Given the positive correlation, or relationship, between risk and rate of return, explain the relative earnings of ownership and loanership, or lending, investments. (See page 4-2)
3. What is one of the biggest risks associated with common stock ownership? (See page
4-2)
4. Both corporations and consumers make choices about dividends. What are those choices? (See page 4-2)
5. When reinvesting dividends to purchase additional shares, why must you pay income taxes on this “income” when no money was received? (See pages 4-2 and 4-3)
6. Why is it important to learn about a company and its industry? What sources of information might be helpful? (See page 4-3)
7. What information can be gleaned from the prospectus and annual report for a stock you are considering? (See pages 4-3 and 4-4)
8. Where would you get a prospectus or annual report? (See pages 4-3 and 4-4)
9. List and briefly describe the five major indexes commonly used to report on stock market activity. (See page 4-4)
10. What does beta measure? Why is it an important to know when considering different stock purchases? (See page 4-4)
11. Explain the terms earnings per share and price/earnings ratio. (See pages 4-3, 4-4 and
4-5)
12. Explain dollar-cost averaging and a buy and hold strategy. Do these investment strategies work in opposition to each other or do they complement each other? (See page 4-5)
13. What is the difference between a bull and bear market? (See page 4-5)
14. There are several ways to invest in real estate. List and briefly describe each. (See pages 4-6 and 4-7)
15. What factors contribute to the higher risk associated with real estate as an investment? (See pages 4-6 and 4-7)
16. Describe an equity unit investment trust (UIT). What are the advantages and disadvantages of this investment? (See pages 4-7 and 4-8)
17. What is a mutual fund? Review the list of ten categories, or options, for equity mutual funds. Identify three investment objectives or classifying characteristics that could be used to group the ten options listed. (See page 4-8)
18. List the advantages and disadvantages of investing in collectibles. (See pages 4-8 and
4-9)
19. What are some of the caveats to remember when purchasing a business, starting your own business, or purchasing a business franchise as an investment? (See page 4-9)
20. Commodities, like collectibles, require an investor who is knowledgeable of the product, the associated markets, the buyers, and the high risk and potential for loss. And, like collectibles, the expert advice often is “just don’t do it.” Why? (See pages 4-8 and 4-9)
21. What is the “Rule of Three” in reference to investing? (See page 4-10)
22. In addition to consulting a broker or other financial professional to buy or sell equities, name three other approaches. (See page 4-10)
23. Successful investors build a portfolio on the critical tenet of diversification. Which of the equity investments discussed in this unit offer “immediate” diversification? (See pages 4-6, 4-7, and 4-8)
Because Internet sites change frequently, the uniform resource locator (URL) for the specific tool or page is not given below. Instead, the URL for the site, and instructions for navigating within the site are provided. It is our hope that this method will encourage you to explore and learn from the site, and more importantly, avoid the message: “Error: Site Not Found.”
Disclaimer: References to commercial sites are not an endorsement of the company or the financial products or services offered. These sites are included only because of their educational value; sites provided by competing companies may offer similar benefit. We encourage you to explore other sites of your choice.
1. Equities, as well as other securities, can be purchased on credit. This strategy, although risky, is called buying on the margin. Consult investment books or Internet sites to learn more about margin accounts. The following sites might be useful resources:
www.Fool.com The Motley Fool Website
investor.msn.com Microsoft Investor
www.aaii.org American Association of Individual Investors
2. A number of Internet sites are included throughout this unit. Visit them to learn more about investing, a company prospectus, buying a home, and REITs. Or, for additional resources, review the list of Internet references in Unit 9.
3. As noted in this unit, there are nine major stock exchanges. Listed below, find the name and location for each. Should you live or travel near one of the exchanges, plan a visit to observe the trading.
New York Stock Exchange (NYSE) New York
American Stock Exchange (AMEX) New York
Pacific Stock Exchange Los Angeles and San Francisco
Chicago Stock Exchange Chicago
Philadelphia Exchange Philadelphia and Miami
Cincinnati Stock Exchange Cincinnati
Intermountain Stock Exchange Salt Lake City
Spokane Stock Exchange Spokane
Boston Stock Exchange Boston
You can also learn more by visiting one of the exchange Internet sites or the NASDAQ site:
For example, at the New York Stock Exchange Internet site you can follow a simulated stock transaction to learn more about buying and selling stock.
4. Visit one or more of the following Internet sites to learn more about companies and their stock. Pick companies that are well known, household names as well as lesser-known companies. For each, research the beta, earnings per share, and P/E ratio. In addition, visit the websites noted in the unit to find a prospectus for the companies you researched.
www.cfonews.com/ Corporate Financials Online
http://moneycentral.msn.com Microsoft’s Money Central
www.zacks.com Zacks Investment Research reports stock earnings estimates
http://investor.stockpoint.com Investors Edge
5. Assume you have been asked to debate the statement “a home is generally the single largest asset that most people own.” Prepare brief arguments to support and deny this statement. In preparing your argument, consider the following. If a 20 year old, who would likely not be in the market for a home purchase, started investing $15 a month at 12%, by the age of 70, the nest egg would be worth approximately $585,00. On average, would this be less than or greater than the value of his or her home?
6 Although discussed in greater detail in Units 8 and 9, the following websites may be informative as you consider options for your own equity investments:
www.netstockdirect.com to learn more about DPPs
www.better-investing.org to learn more about investment clubs from the
National Association of Investors Corporation
7. For some, online trading has become as addictive, and problematic, as gambling. Both can lead to bankruptcy and disrupt normal work and home life. One compulsive online trader reported making between 5 and 100 trades per day. To learn more, or to identify sources of help, contact the following:
www.gamblersanonymous.org Gamblers Anonymous (or call 213-386-8789)
www.ncpgambling.org for referrals of mental health practitioners certified as gambling counselors or call 800-522-4700
www.ccpg.org Connecticut Council on Problem Gambling