Review Questions

1. What are the basic prerequisites, or requirements, that you should meet prior to starting an investment program? (See page 8-1)

2. List, and briefly explain, three sources of “free” money or financial gains available when contributing to a tax-deferred employer retirement plan. (See page 8-2)

3. Under what conditions might you consider investing in an IRA? (See pages 8-2 and 8-3)

4. Name three strategies for acquiring stocks with small dollar purchase amounts. What restrictions, or limitations, on purchases might apply? (See page 8-3)

5. Compare and contrast a dividend reinvestment plan (DRIP) and a direct-purchase plan (DPP) for stock. (See page 8-4)

6. List the options for fixed-income investments for small dollar investors. For each, cite a major caveat, or warning, that applies as well as relevant tax considerations. (See pages 8-4, 8-5, and 8-6)

7. What is a unit investment trust (UIT)? Typically, what combinations of securities might be purchased in a UIT? (See page 8-7)

8. Both UITs and mutual funds offer investors relatively low-cost access to a portfolio of securities beyond their individual investment capacity. What is a mutual fund and how does it operate? (See page 8-8)

9. Mutual funds typically require a minimum amount to open an account. What exceptions to these rules might allow an investor to open an account with a smaller amount? (See pages 8-7 and 8-8)

10. What is the benefit of a “hybrid” fund? List, and briefly describe, three types of “hybrid” mutual funds that combine asset categories (stocks, bonds, cash) into one account. (See page 8-9)

11. How is a “fund of funds” different from an index fund? What is the benefit for the small dollar investor? (See pages 8-9 and 8-10)

12. Should the small dollar investor attempt to follow, or just ignore, portfolio diversification and dollar cost averaging strategies? (See pages 8-3, 8-4, and 8-10)

Just Do It!! Acting on What You Learned

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. Minimum required amounts to open a mutual fund account or to make subsequent purchases vary with individual mutual fund companies. Buying one unit of a UIT requires a minimum investment of $1,000 plus commissions. Treasury securities require a minimum of $1,000 plus sales charges, if applicable. Review the suggestions in Unit 3 and develop an action plan that you, or members of your household, can support to accumulate the funds needed to open an investment account. Waiting for the necessary “lump sum” might be a long wait; start saving today to accumulate the minimum you need.

2. To identify companies that offer a DPP, call the Direct Stock Purchase Plan Clearinghouse at (800) 774-4417 or visit their website at www.netstockdirect.com. A number of large, well-known companies offer such plans. Once you have identified the companies, select a few and visit their websites or call for additional information on the operation of the individual plans. Although these plans offer advantages for the small dollar investor, don’t forget the need for diversification to reduce investment risk

3. If you already own shares of stock but have not been actively purchasing additional shares, use the resources listed in Unit 8 to determine if the company offers a DRIP or DPP. What steps are required to initiate a plan to acquire more shares? Is this strategy consistent with your long-term investment objective?

4. Inquire with your bank to determine the charges for purchasing Treasury securities. Another option is to visit the nearest Federal Reserve Bank to make a purchase. If you are unaware of the location, visit the website at www.publicdebt.treas.gov or contact the Bureau of the Public Debt at (202) 874-4000. The “Treasury Direct” program offers a third, and no cost, option for purchasing Treasury securities. Use the phone number or website above to learn more about this program.

5. You may have several options for purchasing Series EE and I bonds—at your local bank, through your employer with a payroll savings plan, through the U.S. Savings Bonds EasySaver™ Plan using checking or savings account debits, or directly on the Internet. Visit the website at www.publicdebt.treas.gov to learn more, or call 800-US-BONDS to check the current rates paid on Series EE and I bonds.

6. To learn more about index funds and their performance, visit the Internet site www.indexfunds.com. Once you have identified a few index funds, visit the websites for the mutual fund companies to review information and the prospectus for each of the index funds. What is the minimum amount to open and maintain an account? What exceptions, if any, are available for opening an account with less than the minimum?

7. Using the National Association of Investors Corporation (NAIC) stock groupings of 12 industry sectors, identify companies that fit each category and use library or Internet resources to research and choose one stock for each category. See Unit 11 for help identifying reference books and commercial databases available at the library for researching and analyzing stocks. See Unit 9 for help identifying Internet resources for researching and analyzing stocks. Based on your research, calculate the cost for your mock portfolio. Track the performance over time as you continue to learn more about the selected companies. How did you feel about your hypothetical gains and losses?

Notes