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Whats a Stock?

A stock (also known as an equity or a share) is a portion of the ownership of a corporation. A share of stock gives its owner a stake in the company and its profits. If a corporation has issued 100 shares of stock in total, then each share represents a 1% ownership in the company.

Theres no disputing the long-term results of the stock market. During the past 20 years, stocks have outperformed other major asset classes. Equities can also help protect purchasing power; they have the greatest potential for outpacing inflation. While past performance does not guarantee future results, you may stand the best chance of reaping the rewards of stocks if you keep your money invested over a long period of time.

Inflation Takes a Bite Out of Your Returns

Annual Returns for 25-Year Period

Ended December 31, 2013

Past performance does not guarantee future results.

Figures shown indicate past performance and do not guarantee future returns, nor are they intended to illustrate performance for any Franklin Templeton fund. For illustrative purposes only; not representative of the past or future performance of any Franklin, Templeton or Mutual Series fund. For current performance of any Franklin Templeton fund, please see the Price and Performance section.

Stocks generally have high potential returns but tend to be the most volatile. Their prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. In general, the bond market is volatile and bonds incur interest rate risk. As interest rates rise, bond prices usually fall, and vice versa. Cash equivalent instruments are considered to be low risk as they offer the most stability, but they have very little long-term growth potential.

Source: 2014 Morningstar. Stocks are represented by the S&P 500 Index, bonds by the Ibbotson Associates SBBI Long Term Corporate Index, cash equivalents by the P&R 90 day U.S. T-Bill Index, and inflation by the Consumer Price Index, U.S. Bureau of Labor Statistics. Indexes are unmanaged and unavailable for direct investment.

Rewards of Long-Term Investing

Looking at an index like the S&P 500, we find that time has helped tame, although not eliminate, price fluctuations. During one-year periods from 1929 through 2013, the stock market jumped by up to 53.99% and fell by as much as -43.34%. When we evaluate 20-year periods, however, we find that the worst average annual total return was a positive 3.11%.

Historical Returns from Stocks

Source: 2014 Morningstar. Past performance does not guarantee future results. Stock performance is represented by the unmanaged S&P 500 Index, which includes reinvested dividends. An individual cannot invest directly in an index.

Equity Mutual Funds

With thousands of publicly traded common stocks in the U.S. alone, making investment decisions on your own can be overwhelming. One way to simplify investing in the stock market is through an equity mutual fund.

The mutual fund concept is simple: A number of people who share the same financial objective pool their money and have it invested and managed by professional portfolio managers. Equity mutual funds, for example, invest this pooled money in common stocks of public companies, generally with long-term capital appreciation as a primary goal.

Characteristics of Equity Mutual Funds

Diversification. Equity mutual funds allow you to spread your money across a larger number of securities than you probably could on your own. This diversification dramatically reduces the risk of any one companys losses adversely affecting your investment as a whole.

Professional management. Professional money managers closely monitor the securities markets and individual companies, buying and selling securities as they see opportunities arise. Few individual investors can devote time or resources to daily management of a sizable portfolio or stay up to date on the thousands of securities available in the financial markets.

Liquidity. You may sell some or all of your mutual fund shares at any time and receive their current value (net asset value). The value may be more or less than your original cost, which may include a sales charge.

Convenience. Mutual funds offer shareholders many services that make investing easier. You may buy or sell shares each business day, automatically add to or withdraw from your account each month, and have income dividends and capital gains paid out to you or automatically reinvested.

Front-end, and in some cases back-end, sales loads, management fees, Rule 12b-1 fees and other expenses are associated with Franklin Templeton mutual fund investments. Investors returns are reduced by these fees and expenses. Funds are offered through prospectuses.

A few words about risk. All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.

Diversification does not guarantee a profit or protect against a loss.

Types of Equity Mutual Funds

Some funds that invest for capital appreciation are broad-based, investing in a wide range of companies and industries. Others have a narrower focus, and may invest in companies of a certain size, such as small- or mid-cap funds, or in specific sectors like technology or utilities.

Growth-style Mutual Funds

Potential earnings growth. Generally, managers of growth-style equity mutual funds look to buy companies with strong competitive positions or expanding market opportunities. Companies with these characteristics are often poised for above-average profits or earnings growth. Although profits can be paid out to shareholders, many growth companies reinvest the money back into the company to further strengthen its competitive position or expand into new markets.

Long-term growth trends. Growth managers also look for companies that are well positioned to capitalize on long-term growth trends that may drive earnings higher.

Return potential. Growth-style investing tends to be more aggressive than value- style investing and could potentially offer stronger performance during healthy economic environments.

How risky are growth funds? Growth stocks can be volatile and typically are associated with a higher level of risk. Because these stocks often trade at higher valuations, if a company experiences a setback or if earnings don’t meet expectations, the companys stock price has the potential to take a harder fall.

Value-style Mutual Funds

Bargains. Generally, managers of value-style equity mutual funds look to buy companies that are trading below their intrinsic value, but whose true worth they believe will eventually be recognized. These securities typically have low prices relative to earnings or book value, and often have a higher dividend yield.

Overlooked opportunities. Value managers search for opportunities that have been overlooked by the market, perhaps because an industry is out of favor. Additional opportunities may arise if a stock is temporarily depressed due to market overreaction or a missed earnings target.

Lower volatility. Since value stocks sell at a discount, they generally experience less volatility than growth stocks and could potentially offer stronger performance during slower-growth environments.

How risky are value stocks? Just because a stock is cheap, doesnt mean its a good value. A value stock may remain undervalued by the market for a long period of time. For example, investors may fail to recognize the company’s value and bid up the price as expected, or the outlook for a company may deteriorate.

Sector Mutual Funds

High return potential. A sector fund concentrates on a particular market sector or group of industries, such as biotechnology, natural resources, utilities or real estate. Sector funds allow investors to participate in industry sectors with strong growth prospects without having to select individual stocks.

How risky are sector funds? Because of their concentrated investing focus, sector funds carry more risk than a generalized fund that diversifies its investments in the broader market. Sector funds are generally best used as a complement to a well-diversified portfolio. Sectors react differently during economic expansion and contractions. Adding investments from different sectors may help you take advantage of the rotating economic cycles.

Type of Equity Fund