Transcript 4.03 saving and investing

Understand the role of finance in business.
SAVING AND INVESTING.
Topics
 Saving and investing basics
 Saving and investing options
 Evaluation factors for savings and investing options
WHY BORROW MONEY?
 People borrow money to purchase large
ticket items: homes and cars.
 Businesses borrow money to operate or
expand their business: buildings, replacing
old equipment, or offering new products.
 The Governments borrow money to
improve or expand transportation, schools,
or other public services.
SAVING AND THE ECONOMY
 Saving is putting away money for future
use.
 Investing is using savings to earn more
money for future financial security.
 Saving influences the economy by making more
money available to be used by individuals, businesses,
and the government.
When the borrowed money is
spent, the demand for goods
and services is increased, which
creates more jobs and spending
for workers.
SAVING OPTIONS
 A savings account usually allows low or zero balance,
deposit or withdrawals anytime and interest to be
earned. Usually withdrawals are allowed without
penalties.
 Certificates of deposits (CDs) requires a
minimum deposit, money to remain deposited for
a period of time without penalties.
 Penalties may be assessed if money is withdrawn
before specified time.
SAVING OPTIONS
 Money market account requires a
minimum deposit and interest is
earned based on government and
corporate securities.
 Withdrawals without
penalties.
MONEY MARKET
Securities include:
Stock investments
Bond investments
Mutual funds
Exchange-traded funds.
SIMPLE INTEREST
Simple interest is calculated by
using the formula
(P=Principal, R=Rate, T=Time and
I=Interest Rate)
I=P * R * T.
COMPOUND INTEREST
 Compound interest is calculated by using the formula:
 A=P(1+r/n)nt.
 (P=, r=Annual rate of interest and n=Number of times
interest is compounded)
 A=Amount,
 P=Principal amount/the initial amount you borrow or
deposit,
 r=Annual rate of interest
 n=Number of times interest is compounded)
Savings Growth
Simple interest
$1,000 at 10%
Compound interest
$1,000 at 10%
Year 1:
Year 1:
$1,000 * .10 = $100
$1,000 + $100 = $1,100
$1,000 * .10 = $100
$1,000 + $100 = $1,100
Year 2:
Year 2:
$1,000 * .10 = $100
$1,100 + $100 = $1,200
What would the value be at
the end of year 3?
$1,100 * .10 = $110
$1,100 + $110 = $1,210
What would the value be at
the end of year 3?
Saving and Investing Basics continued
 Simple interest is the amount of money paid to saver on amount
deposited for a period of time.
 Compound interest is the amount of money paid to saver on money
deposited and interest previously earned for a period of time.
 The more times that interest is compounded the more growth of
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savings.
Simple interest is calculated by using the formula (P=Principal,
R=Rate, T=Time and I=Interest Rate)
I=P * R * T.
Compound interest is calculated by using the formula (A=Amount,
P=Principal amount/the initial amount you borrow or deposit,
r=Annual rate of interest and n=Number of times interest is
compounded)
A=P(1+r/n)nt.
Main Categories of Investing Options
 Stocks
 Bonds
 Mutual Funds and Exchange-traded Funds
 Real Estate
 Commodities
 Collectibles
STOCK INVESTMENTS
 Two main categories of stock:
 Preferred
 Common
 Preferred stock pays dividends at a set
rate. Preferred stockholders have no
voting powers
 Common stock represents general ownership in
company and sharing of profits.
STOCK INVESTMENTS
 Common stock represents general ownership in company
and sharing of profits.
 Common stockholders are invited to annual corporate
meetings and permitted to one vote per share of stock
owned.
STOCK INVESTMENTS
Common & preferred stocks are
similar: risk of loss of a investment
They differ because preferred stock
stockholders have priority in
dividend payments
BOND INVESTMENTS
 A bond is a promissory note to pay back a specified
amount of money at a stated rate on a specific
date.
 Municipal bonds are issued by local and state
governments for public service projects.
 Example: The city government needs $1.2
million to build a new medical facility.
OTHER INVESTMENTS
 Commodities include grain, livestock, and
precious metals.
 Commodity investors usually agree to buy and sell for an
amount at a specified price in the future. Examples may
include rice, cattle, and gold.
 Collectibles are items collected over time that
may increase in value. EXAMPLES: QUILTS,
SPECIALTY GUITARS
 art work, antique furniture, and autographed items.
Stock Table
A
B
52 Week
Sales
High
C
D
E
F
G
H
I
Vol
100s
High
Low
Last
Chg
6 1/2
-1/8
Low
Stock
Div
Yld
PE
12 1/8
8
AAR
.44
6.2
15
6
6 3/4
6 5/8
49 1/2
31 1/4
ACF
1.76
7.4
7
477
36 1/4
37 5/8
AMF
1.36
6.7
7
133
17 1/2
17 1/2
8
10
33 7/8
33 7/8
26 1/2
6 1/8
16
3 1/8
ARA
2
7
37
17 1/2
33
+3/4
-3/8
-1
Selecting Stock
Factors that could influence investors in selecting stock:
 Economic
 Inflation
 Interest rates
 Consumer spending
 Employment
 Company
 Dividend yield
 Price-earnings ratio
EVALUATION FACTORS
 Safety is the assurance that the money you
have invested will be returned to you.
 Risk is risking losing your investment
(money).
 Potential yield is the percentage of money earned on
your savings or investment over time.
 Usually higher risk of loss and higher yields go
together.
EVALUATION FACTORS
 Liquidity is the ease with which an
investment can be changed into
cash without losing its value.
 Taxes reduce your rate of return because what you have
earned in investments can be taxed by the government
in most cases. Some earnings may be tax-exempt.
Yield Calculations
 Yield is usually calculated in the following way:
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current value – original value = yield
original value
Current value=closing price for the day
Original price=price paid for stock
Yield=Interest earned
For example: a stock is bought at $40 and valued at $43:
$43 – $40
$40
yield = 7.5%
Yield Calculations
 Dividends also may be added to the calculation.
 For example: a stock is bought at $40 and sold at $43,
but also earned a $2 dividend during that time:
$43 + $2 – $40
$40
yield = 12.5%
Mutual Funds
 Companies’ major tasks in assisting investors of
mutual funds
 Some examples of mutual fund categories
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Aggressive-growth stock funds
Income funds
International funds
Sector funds
Bond funds
Balanced funds
Exchange-traded Fund (ETF)
An exchange-traded fund (ETF) is a portfolio of
stocks, bonds or other investments that trade on a
stock exchange like regular stock.
Warm-up 5/15/15
How much interest is earned on a balance
of $1,800 that is compounded
semiannually at a 6% interest rate for an
account maintained for one year?
A. $109.62
B. $110
C. $154
D. $175
How much interest is earned on
a balance of $1,000 for a
certificate of deposit that is
compounded at an 8% interest
rate for an account maintained
for three years?
INDICATIVE
showing, signifying, or pointing out; expre
ssive or Suggestive.
The interest he earns on this plan
is indicative of how the money
markets are doing.