INVESTING IN THE FUTURE
Question 1:
Discuss the role of investing in personal financial planning.
It has been gathered from the case that Sam Johnson is a hard working guy and he has defined some financial goals for himself. He is about forty years of age, enjoys a great job and ensures that he pays his bill on time. He plans to retire at the age of sixty and he wishes to have enough savings so that he could send his young kids to college when they grow up. In order to ensure that he has ample amount in his savings before retirement, he has opened up a savings account in which he adds one hundred and fifty dollars a month and pays less than one percent of interest. But he thinks he needs to have more savings and for that, he must know about personal financial planning. Financial planning is based entirely on investing and understanding liabilities. Before getting on with developing a financial plan, one has to have clear short term and long terms goals in mind so that planning can be carried out strategically. Once the goals are determined, the financial plan can be devised. Financial plans are usually flexible which means that they can undergo change or modifications depending upon the personal and external circumstances. Sam must also take into account the fact that financial goals and plans are based on realistic assumptions which derived from small term and long-term goals such as retirement planning. Nowadays, people whether they belong to middle class or the rich class seeks the assistance of financial advisors on matters of savings and investments. These advisors are specialized in the area of financial planning and they make certain to offer valuable suggestions to their clients. Sam must contact a financial expert and be honest about disclosing his salary and personal assets. The advisor would then evaluate his assets and savings and recommend where and how he could invest his savings to gain profits and interests. The financial planner usually makes certain that the investment is carried out in a broad fashion so that the chances of risks can be minimized and saving ratio could be elevated.
2) Discuss three attributes of three different stocks that would be a good choice for Sam’s financial profile based on your Internet research.
After reviewing Sam’s financial profile and carrying out a good degree of internet research, we have come to the conclusion that there are possibly three different stocks namely;
Preferred Stocks
Unlisted Stocks
Common Stocks
Common stocks are the stocks which are offered by the company to its stakeholders. Common stocks are a good type of investment as they represent some form of ownership in the company. When people purchase stocks of the company, they are entitled to get some profit in the form of dividends as defined by the profits of the respective company. This means that if the company makes large profits, the customers get to have mode dividends and vice versa. A drawback of common stocks is that when a company defaults or goes bankrupt, common stock holders are paid at the end or sometimes they do not get paid at all so the investment can get a bit risky.
Preferred Stocks
Preferred stocks are quite different than common stocks. In preferred stocks, the degree of ownership in the company is high, however, the stockholders are not given the voting rights. Unlike common stocks, where the profits offered to the stockholders vary as the profits earned by the company in a specific period vary, the case of preferred stocks is quite different. In preferred stocks, the stockholders are given a fixed amount of dividend which does not undergo any variation. One advantage of investing in preferred stocks is that when a company goes bankrupt, the holders of preferred stocks get paid off at priority so the chances of facing losses are minimized.
Unlisted Stocks
There is a category of stocks which cannot be traded. Usually, companies offer stocks to the employees or partners and do not involve external parties. This is usually done to distribute ownership to specified number of stock holders. This type of investment in stocks is carried out to define the voting rights of the company.
3) Analyze the advantages and disadvantages (i.e. risks and rewards) that Sam should be aware of when investing in stocks, bonds, and mutual funds.
Advantages and Disadvantages of Investing in Stocks
There could be several advantages of investing in stocks such as stocks provide a person some degree of ownership equity. The rate of return is also high as it increases with the profits of the company. There are no legal liabilities on the stockholder from the company. Moreover, the stocks can be traded easily which makes it an ideal investment form. On the other hand, if the company faces bankruptcy, stockholders get paid off at the end which makes them stand at a loss. Also, the ownership attained as a result of buying stocks is limited which means the stockholder is deprived of voting rights. The investment in stocks could get risky too because if the company is not making good profits then it is certain that the dividends amount would go down (Siegel & Coxe, 2002).
Advantages and Disadvantages of Investing in Bonds
Whenever companies or government bodies are in need of money to find essential projects, they issue bonds. Keim & Stambaugh (1986) mentioned that bonds are basically means of borrowing money from the public and in return for this favor, the company or government offers a specific rate of interest to them after the bond reaches maturity. Investing in bonds is considered as the safest form of investment because there are no risks involved. People who want to invest safe cannot find a choice better than bonds. Some bonds such as municipal bonds are exempted from tax which makes it more convenient for the public to invest in bonds. Like other investments, bonds do not need to be monitored. There are certain disadvantages associated with bonds. For instance, the interest rate offered by investing in bonds is fixed and sometimes less than offered by other investments tools such as stocks and mutual funds. When a company goes bankrupt, the investors are not paid off which makes them lose their principal investment as well as the interest amount.
Advantages and Disadvantages of Investing in Mutual Funds
The possible advantages of investing in mutual funds include the benefits of diversity. Mutual fund involves investment from different investors which saves it from the risk of losses. Mutual funds can be purchased in installments which make it convenient for middle-income investors to increase their savings. Mutual funds are professionally managed by experienced and qualified investors or companies so people with busy schedule free themselves from the hassle of monitoring the investment. Professionals also communicate to the clients about new investment opportunities. Another advantage of mutual funds lies in its liquidity. Whenever someone wants to get out of mutual funds, he can sell his stocks at the stock market and get money in exchange immediately. There are some disadvantages of investing in mutual funds too. For instance, if a person invests in mutual funds, he does not get any interest as he might be obtaining while investing in stocks and bonds. Since mutual funds are professionally managed so the selling, buying and profit generation completely depends on the skills, knowledge and experienced the external agent. If he is capable enough to manage the funds, then the results will be fruitful and vice versa.
4) Discuss the manner in which mutual fund are usually used, and examine the key reasons why, based on Sam’s profile, mutual funds would be a suitable investment vehicle for him based on your internet research.
Based on Sam’s profile, it can be decided that mutual funds would make a suitable investment for him for several reasons. Financial requirements are quite likely to grow over time just like Sam wishes to send his kids to college and have some money saved with him before he retires. Sam must choose to invest in mutual funds. Mutual funds work by collecting money from various investors and then invest it in diverse projects. The investors then receive the decided amount of profit in relation to their investment. There are no minimum funding requirements for investing in mutual funds and larger investments can also be broken down into installments so if Sam thinks he cannot invest a big saving amount in mutual funds, he can always opt for installments. The risks of investment can be minimized in the case of mutual funds because the money gets invested in various projects so if one project does not yield profits, it can be covered up by the profits of other projects thus making the investment quite stable (Frankel & Schwing, 2015). Mutual funds offer liquidity which means Sam can easily have his funds back whenever he wants.
References
Frankel, T., & Schwing, A. T. (2015). The regulation of money managers: mutual funds and advisers. Wolters Kluwer Law & Business.
Keim, D. B., & Stambaugh, R. F. (1986). Predicting returns in the stock and bond markets. Journal of financial Economics, 17(2), 357-390.
Siegel, J. J., & Coxe, D. G. (2002). Stocks for the long run (Vol. 3). New York: McGraw-Hill.
