Transcript Unit 4 Saving and Investing

Unit 4 Saving and Investing
1. Compare consumer choices for saving and investing.
2. Explain the relationship be tween saving and investing.
3. Examine reasons for saving and investing, e.g., time value of money.
4. Compare the risk, return, liquidity, manageability, and tax aspects of investment
alternatives.
5. Demonstrate how to buy and sell investments.
6. Analyze factors affecting the rate of return on investments (e.g., Rule of 72, simple
interest, compound interest).
7. Evaluate sources of investment information.
8. Examine how agencies that regulate financial markets protect investors.
9. Demonstrate how to evaluate advisors’ credentials and how to select professional
advisors and their services.
Savings Plans
• Regular Savings Accounts – often called passbook
accounts
• Little or no minimum balance
• Withdraw money on demand
• Called share accounts at credit unions
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Very liquid
Compounds interest
Flexible amounts and withdrawal times
FDIC Insured
Savings Plans
• Money is left on deposit for a stated period of time (term) at a
specific rate of return
• Maturity Date – the date the money becomes available to you
• Three key limitations:
• Time specification-Your money is on deposit for 1 month to 5
years
• There is a penalty for taking your money before the maturity date
• Amount specification-You must deposit a minimum amount
• FDIC insured
Certificates of Deposit (CD)
• Check for the best rate
• Consider the economy—if rates are high you may want to
buy long-term
• Do not “roll-over” at maturity without checking rates
• When do you need the money
• Consider different CD’s at different rates and maturity
dates
CD Investment Strategies
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Minimum balance required
Rates fluctuate monthly as market changes
Penalty if you fall below minimum balance
Limited amount of checks can be written each month
Money Market Accounts
• Series EE Savings Bond
• Buy at reduced rate, interest rate and time determine maturity date
• If cashed after less than 5 years—there is a 3-month penalty of
interest
• Continues to earn interest for 30 years
• Interest is tax-exempt from state and local taxes
• Federal taxes are paid when bond is cashed in
• If used for higher education, there are no taxes on interest
U.S. Savings Bond
• Rate of Return – the percentage of increase in the value of your
savings
• Compounding – interest is earned on both the principal and
previously earned interest
• Can be compounded every day, month, quarter or year
Evaluating Savings Plans
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Inflation – compare earning rate with inflation rate
Tax Consideration – tax-exempt or tax-deferred savings
Liquidity – can I get to my money
Restrictions and fees – fees and/or service charges
Evaluating Savings Plans
Financial institutions must inform you of:
• Fees on deposit accounts
• Interest rate
• Annual percentage yield (APY) – based on stated annual
interest rate and the frequency of compounding
• Terms and conditions of the savings plan
Truth in Savings
Investments
• Pay YOURSELF FIRST!
• EMERGENCY FUND – A savings account
that you can access quickly to pay for
unexpected expenses or emergencies.
• Often thought to be 3 – 8 months of
expenditures—very liquid
FINANCIAL GOALS
Take advantage of 401K or 403B plans employer often matches
 Elective Savings Programs
 Special Savings Effort
 Gifts, inheritances and windfalls
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FINANCIAL GOALS
Investment Growth & Liquidity
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Time Value of Money – increase in an
amount of money due to interest earned
over time
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Rule of 72 – divide the number 72 by your
interest rate amount to find out how long
it will take to double your investment
◦ Example: Invest $1,000 at 6%
 =72 / 6 = 12 years to double your amount to
$2,000
 =72 /12 years = 6, you would need 6% interest to
double your investment to $2,000 in 12 years
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Retained Earnings – profits that a
company reinvests, usually for expansion
or to conduct research and development.
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Investment Liquidity – the ability to buy
or sell an investment quickly without
substantially reducing its value.
Investment Growth & Liquidity
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Safety and risk
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Safe investment – low return (chance of
losing your money is fairly small)
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Speculative Investment – high risk
investment that might earn a large profit
in a short time (large return on
investment, but you may lose all you
invest)
◦ Return on investment will be DIRECTLY
related to the risk you take
INVESTMENT DECISIONS
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Inflation
Interest Rate
Business Failure
Financial Market
Global Investment
5 COMPONENTS OF RISK
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• Varying risk:
SAFE:
• Government Bonds
• Savings Accounts
• Certificates of
Deposit
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• High Risk:
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Stocks
Corporate bonds
Mutual Funds
Real Estate
Commodities
Options
Precious Metals and gems
Collectibles; coins, stamps, comic
books
INVESTMENT RISKS
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A collection of all investments held by an
individual
◦ Should be diverse
◦ Diversification-the process of spreading your
assets among several different types of
investments to reduce risk.
Investment Portfolio
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SAVINGS ACCOUNTS/CDs
REAL ESTATE
COLLECTIBLES
SECURITIES
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BONDS
MUTUAL FUNDS
OPTIONS
COMMODITIES
STOCKS
Savings & Investing Options
Resale for profit
 Rental Income
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REAL ESTATE
Coins
 Stamps
 Beanie Babies
 Sports cards
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COLLECTIBLES
A bond is lending money to a corporation
or government entity for a period of time
 Corporate Bond – a written pledge to
repay a specific amount of money along
with interest
 Government Bond – a written pledge of a
government or a municipality such as a
city to repay a specific sum of money with
interest
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BONDS
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A mutual fund is an investment in which
investors pool their money to buy stocks,
bonds, and other securities selected by
professional managers who work for an
investment company.
MUTUAL FUNDS
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Contract between a buyer and a seller
that gives the buyer the right to buy a
particular asset at a later date for an
agreed upon price
◦ Example: Buyer agrees on the option to buy
100 shares of stock XYZ for $5 in the future.
The stock’s value on that particular date turns
out to be $10. If the buyer exercises his right
to buy at $5, then his stock value is much
greater than what he actually paid for it.
OPTIONS
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Something for which there is a demand
but there is no difference in quality, no
matter who produces it
◦ Resources such as agricultural products or
minerals
◦ Petroleum (gasoline), Paper, Milk, Rice, Gold,
Silver
◦ Price based on market as a whole, not on
quality of product
COMMODITIES
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Equity capital – money that a business
gets from its owners to operate; unit of
ownership in a company
◦ Public corporations- sell their stocks openly on
the stock market
◦ Private corporations- (closely held) only issue
stock to a small group of people
STOCKS
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To gain larger returns than they can get
from more conservative investments such
as savings accounts or government
bonds.
WHY BUY STOCK
You are not guaranteed what you paid for
each share
 Current value is determined by how much
another investor will pay for share –
supply and demand
 A corporation does not have to pay
dividends.
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FACTORS TO CONSIDER WHEN
INVESTING IN STOCK
A form of Equity – to make money you
buy low, sell high – so you make money
through appreciation of stock value. The
price is how much a buyer is willing to
pay.
• Common stock – a unit of ownership of a
company, it entitles the owner or
stockholder to:
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voting privileges
growth profits
maybe dividends
Stock splits
Common Stock
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Dividends – Profit can be paid to
shareholders as dividends or be used to
“grow” the business
 May be a specific amount of money or percentage of
par value (assigned dollar value printed on the stock
certificate that does not change with market price)
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Stock Splits – divided into twice the
number worth half as much
◦ When stock value is higher than “ideal range”
◦ Considered a positive sign to business growth
Common Stock (Cont)
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Shareholder meeting – required to be held
one per year
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Right to vote - one vote for each share
they own
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Preemptive right – current stockholder
have first right to buy any new stock a
corporation offers
Common Stock (Cont)
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Preferred stock – a type of stock that
gives the owner the following advantage:
◦ Cash dividends before common stockholders
Attracts more conservative investors
 Receive dividends first so often purchased
if steady income is desired
 Not considered a good investment for
most people
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Preferred Stock
A safe investment that generally attracts
conservative investors
 Strongest and most respected companies
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◦ Stable earnings
◦ Consistent dividends
Blue-Chip Stocks
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Pays higher-than-average dividends
compared to other stocks
◦ Examples:
 Dow Chemical
 Bristol-Myers Squibb
 Gas and Electric companies
Income Stock
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A corporation whose potential earnings
may be higher than the average earnings
predicted for industry
◦ Examples in early 2000’s:
 Home Depot
 Southwest Airlines
Growth Stock
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Market value tends to reflect the state of
the economy
◦ Economy up, market value up
◦ Economy down, market value down
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Buy on a downturn of the economy to ride
as the economy improves
Cyclical Stocks
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A stock that remains stable during
declines in the economy
◦ Steady income even when economy declines
Defensive Stocks
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Capitalization- total amount of stocks and
bonds issued by a company
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Large-cap stocks- corporation issued a
large number of shares
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Small-cap stocks- stock issued by a
company with less than $500 million
capitalization (higher risk)
CAP STOCKS
Typically sell for less than $1 a share
 Issued by new companies whose sales are
very unsteady
 Prices go up and down wildly—hard to
track
 Can be risky
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Penny Stocks
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NYSE – New York Stock Exchange - The
largest stock exchange in the world by
dollar value and has 2,764 listed
companies.
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NASDAQ - National Association of
Securities Dealers Automated Quotations
– the largest electronic screen-based
trading market in the United States
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AMEX - American Stock Exchange – small
to mid-sized stocks
Stock Exchanges
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Securities & Exchange Commissionregulatory agency of the stock market
and prevents corporate abuses
SEC
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Bull Market –when investors are optimistic
about the economy and buy stocks
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Bear Market – when investors are
pessimistic about the economy and sell
stocks
Market Conditions
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Newspapers in the financial section
◦ Wall Street Journal
The Internet
 Stock Advisory Services
 Corporate News Publications
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◦ Barron’s
◦ Smart Money
Sources for Evaluating Stocks
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FINANCIAL PLANNER – a specialist who is
trained to offer specific financial help and
advice
◦ Decision is based on:
 Income level
 Willingness to make your own plan
PERSONAL INVESTMENT PLAN
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Fee-only planners – charge an hourly rate
or percent of the value of the investments
they manage
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Fee-offset planners – charge an hourly
rate but reduce it with commissions they
make through your investments
FINANCIAL PLANNERS
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Fee and commission planners – fixed fee
for a financial plan and earn commission
from products they sell
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Commission only planners- earn through
commissions they make on sales of
insurance, mutual funds and other
investments
FINANCIAL PLANNERS
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Should provide the following services:
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Assess current financial position
Offer written plan with recommendations
Discuss plan and answer questions
Keep track of your progress
Guide you to other financial experts and
services as needed
FINANCIAL PLANNERS
CFP – Certified Financial Planner
 ChFC – Chartered Financial Consultant
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Check the credentials before working with
a planner
Certification of Financial Planners
Evaluate investment – research before
investing
 Monitor investment – track the value of
the investments
 Keep accurate records – to notice increase
in profits or to reduce losses
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Managing your Investments
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Consider tax consequences
◦ Tax-exempt – income not taxed (gov’t bonds)
◦ Tax-deferred – income that is taxed at a later
date (IRA’s, 401K’s)
◦ Capital Gain – profit from the sale of an asset;
taxed on how long the asset was owned
◦ Capital Loss – sale of an investment for less
than its purchase price
Managing your Investments
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Internet
Newspapers and News Programs
Business Publications
Government Publications
Corporate Reports
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Investor Services:
• Prospectus – a document that discloses information
about a company’s earning, assets and liabilities, its
products or services, and its management
• Free newsletters mailed to clients
• Examples: Moody’s Investment Service or Value
Line
SOURCES OF INVESTMENT
INFORMATION
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Statistical Averages
◦ Dow Jones Industrial Average- average that
consists of 30 of the largest and most widely
held public companies
◦ Standard & Poor’s Stock Index -the stocks of
500 corporations, all of which are from the US.
SOURCES OF INVESTMENT
INFORMATION