Unit 4 Saving and Investing 1. Compare consumer choices for saving and investing. 2. Explain the...
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Transcript of Unit 4 Saving and Investing 1. Compare consumer choices for saving and investing. 2. Explain the...
Unit 4 Saving and Investing1. 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
Savings Plans
• Regular Savings Accounts – often called passbook accounts
• Little or no minimum balance• Withdraw money on demand• Called share accounts at credit unions
• Very liquid• Compounds interest• Flexible amounts and withdrawal times• FDIC Insured
Certificates of Deposit (CD)
• 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
CD Investment Strategies
• 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
Money Market Accounts
• 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
U.S. Savings Bond
• 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
Evaluating Savings Plans
• 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
• 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
Truth in Savings
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
Investments
FINANCIAL GOALS
• 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 ProgramsSpecial Savings EffortGifts, inheritances and windfalls
Investment Growth & LiquidityTime Value of Money – increase in an
amount of money due to interest earned over time
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
Investment Growth & Liquidity
Retained Earnings – profits that a company reinvests, usually for expansion or to conduct research and development.
Investment Liquidity – the ability to buy or sell an investment quickly without substantially reducing its value.
INVESTMENT DECISIONS
Safety and risk◦Return on investment will be DIRECTLY related
to the risk you take
Safe investment – low return (chance of losing your money is fairly small)
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)
5 COMPONENTS OF RISK
InflationInterest RateBusiness FailureFinancial MarketGlobal Investment
INVESTMENT RISKS
• SAFE:• Government Bonds• Savings Accounts• Certificates of
Deposit
• Varying risk:– Stocks– Corporate bonds– Mutual Funds– Real Estate
• High Risk:– Commodities– Options – Precious Metals and gems– Collectibles; coins, stamps, comic books
Investment Portfolio
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.
Savings & Investing Options
SAVINGS ACCOUNTS/CDsREAL ESTATECOLLECTIBLESSECURITIES
◦BONDS◦MUTUAL FUNDS◦OPTIONS ◦COMMODITIES◦STOCKS
REAL ESTATE
Resale for profitRental Income
COLLECTIBLES
CoinsStampsBeanie BabiesSports cards
BONDS
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
MUTUAL FUNDS
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.
OPTIONS
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.
COMMODITIES
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
STOCKS
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
WHY BUY STOCK
To gain larger returns than they can get from more conservative investments such as savings accounts or government bonds.
FACTORS TO CONSIDER WHEN INVESTING IN 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.
Common 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:• voting privileges• growth profits• maybe dividends• Stock splits
Common Stock (Cont)
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)
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)
Shareholder meeting – required to be held one per year
Right to vote - one vote for each share they own
Preemptive right – current stockholder have first right to buy any new stock a corporation offers
Preferred Stock
Preferred stock – a type of stock that gives the owner the following advantage:◦Cash dividends before common stockholders
Attracts more conservative investorsReceive dividends first so often purchased
if steady income is desiredNot considered a good investment for
most people
Blue-Chip Stocks
A safe investment that generally attracts conservative investors
Strongest and most respected companies◦Stable earnings◦Consistent dividends
Income Stock
Pays higher-than-average dividends compared to other stocks◦Examples:
Dow Chemical Bristol-Myers Squibb Gas and Electric companies
Growth Stock
A corporation whose potential earnings may be higher than the average earnings predicted for industry◦Examples in early 2000’s:
Home Depot Southwest Airlines
Cyclical Stocks
Market value tends to reflect the state of the economy ◦Economy up, market value up◦Economy down, market value down
Buy on a downturn of the economy to ride as the economy improves
Defensive Stocks
A stock that remains stable during declines in the economy◦Steady income even when economy declines
CAP STOCKS
Capitalization- total amount of stocks and bonds issued by a company
Large-cap stocks- corporation issued a large number of shares
Small-cap stocks- stock issued by a company with less than $500 million capitalization (higher risk)
Penny Stocks
Typically sell for less than $1 a shareIssued by new companies whose sales are
very unsteadyPrices go up and down wildly—hard to
trackCan be risky
Stock Exchanges
NYSE – New York Stock Exchange - The largest stock exchange in the world by dollar value and has 2,764 listed companies.
NASDAQ - National Association of Securities Dealers Automated Quotations – the largest electronic screen-based trading market in the United States
AMEX - American Stock Exchange – small to mid-sized stocks
SEC
Securities & Exchange Commission- regulatory agency of the stock market and prevents corporate abuses
Market Conditions
Bull Market –when investors are optimistic about the economy and buy stocks
Bear Market – when investors are pessimistic about the economy and sell stocks
Sources for Evaluating Stocks
Newspapers in the financial section◦Wall Street Journal
The InternetStock Advisory ServicesCorporate News Publications
◦Barron’s◦Smart Money
PERSONAL INVESTMENT PLAN
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
FINANCIAL PLANNERS
Fee-only planners – charge an hourly rate or percent of the value of the investments they manage
Fee-offset planners – charge an hourly rate but reduce it with commissions they make through your investments
FINANCIAL PLANNERS
Fee and commission planners – fixed fee for a financial plan and earn commission from products they sell
Commission only planners- earn through commissions they make on sales of insurance, mutual funds and other investments
FINANCIAL PLANNERS
Should provide the following services:◦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
Certification of Financial Planners
CFP – Certified Financial PlannerChFC – Chartered Financial Consultant
Check the credentials before working with a planner
Managing your Investments
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
Managing your Investments
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
SOURCES OF INVESTMENT INFORMATION
• Internet• Newspapers and News Programs• Business Publications• Government Publications• Corporate Reports
• Prospectus – a document that discloses information about a company’s earning, assets and liabilities, its products or services, and its management
• Investor Services:• Free newsletters mailed to clients• Examples: Moody’s Investment Service or Value Line
SOURCES OF INVESTMENT INFORMATION
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.