Saving and Investment Basics for Financial Growth

1. CHAPTER 19 Saving & Investment Strategies

2. 19-1 Saving & Investment Planning SAVING AND INVESTMENT BASICS Savings and Investment Activities Saving– the storage of money for future use. (ideally save 10% of your income) Investing– using your savings to earn more money.

3. 19-1 Saving & Investment Planning SAVING AND INVESTMENT BASICS Determine Investment Goals Two major financial goals: income and growth Current income: people who want income for current living expenses. Long-term growth: those who desire financial security in the future.

4. 19-1 Saving & Investment Planning SAVING AND INVESTMENT BASICS The Growth of Saving Interest: the money you receive for letting others use your money.

5. 19-1 Saving & Investment Planning SAVING AND INVESTMENT BASICS The Growth of Saving Compound Interest: earning interest on previously earned interest. It is computed on the amount saved plus the interest previously earned.

6. "Would you rather have one million dollars, or start with one penny and double your savings each day for four weeks?"

7. 19-1 Saving & Investment Planning

8. 19-1 Saving & Investment Planning SAVING AND INVESTMENT CHOICES Savings Plans Savings Account – pays interest while keeping money safe. The average savings account has a measly 0.06% APY (annual percentage yield, or interest), and many of the nation's biggest banks pay rates as low as 0.01%. Certificate of Deposit – allows you to earn a higher interest rate, requires a minimum deposit for a specified period. Penalties are assessed if the money is withdrawn early.

10. 19-1 Saving & Investment Planning SAVING AND INVESTMENT CHOICES Savings Plans Money Market Account – pays a variable interest rate based on various government and corporate securities. MMA do not require long-term deposited. • Earnings are usually higher than regular savings accounts, but lower than long-term CDs. • Current Rates

11. 19-1 Saving & Investment Planning SAVING AND INVESTMENT CHOICES Securities Stock Investments – a stock purchase, is made directly or indirectly through mutual funds. • Capital gain – when a stock increases in value and is them sold for more than its original cost. • Capital loss – when an investment is sold for less than its original cost.

12. 19-1 Saving & Investment Planning SAVING AND INVESTMENT CHOICES Securities Bond Investments – lending money for use by businesses and governments. Bonds represent debt. Mutual Funds – money from many investors is used to invest in a variety of securities.

13. 19-1 Saving & Investment Planning SAVING AND INVESTMENT CHOICES Alternative Investments Real Estate – purchase property for rental income, buy vacant property in hopes that value will increase. Commodities – grain, livestock, precious metals, currency. (anticipation of higher market prices in the near future) VERY RISKY Collectibles – Old coins, works of art, antique furniture (hopes that their value will increase)

14. 19-1 Saving & Investment Planning EVALUATING SAVINGS AND INVESTMENTS Safety and Risk Federal Deposit Insurance Corporation • Each depositor insured to at least $250,000 per insured bank

15. 19-1 Saving & Investment Planning EVALUATING SAVINGS AND INVESTMENTS Potential Return • A good savings plan or investment should earn a reasonable return. • Yield – the percentage of money earned on your saving or investment over a year. (rate of return, annual yield)

17. 19-1 Saving & Investment Planning EVALUATING SAVINGS AND INVESTMENTS Liquidity • Liquidity – the ease with which an investment can be changed into cash without losing its value.

18. 19-1 Saving & Investment Planning EVALUATING SAVINGS AND INVESTMENTS Taxes • Earnings from most savings and investments are taxed. • Taxes reduce your rate of return. • Some investments have tax-exempt earnings. • 403b

19. 19-2 Stock Investments TYPES OF STOCK • Stockholder – one who buys shares of ownership in a corporation. • Dividends – if a business is profitable, it may put out part of the profits in cash to the stockholders.

20. 19-2 Stock Investments TYPES OF STOCK Preferred Stock • Has priority over common stock in the payment of dividends. • Investing in preferred stock is less risky • Preferred stockholders generally have no voting rights

21. 19-2 Stock Investments TYPES OF STOCK Common Stock • Represents general ownership in a corporation and a right to share in its profits • Common stock holders are invited to the annual meeting of the corporation (entitled to one vote per share owned)

22. 19-2 Stock Investments STOCK TRANSACTIONS Using a Stockbroker • Stockbroker – a licensed specialist in the buying and selling of stocks and bonds. • Commission – a fee charged by brokers for services • Full-service broker – provides information about securities (work for brokerage houses) • Discount broker – places orders and offers limited research and other services (charge lower commissions)

23. 19-2 Stock Investments STOCK TRANSACTIONS Online Investing • You serve as your own financial planner • Transactions are usually less expensive • Inexperience in making investment trading decisions can result in a large financial loss

24. 19-2 Stock Investments STOCK TRANSACTIONS Stock Exchanges • A business organization that accommodates the buying and selling of securities. • New York Stock Exchange • The American Stock Exchange (NY) • Regional Stock Exchange (Boston, Chicago, Philadelphia, San Francisco) • 170 Stock Exchanges in operation worldwide

25. 19-2 Stock Investments STOCK TRANSACTIONS Changing Stock Values • The Market value of a stock is the price at which share of stock can be bought and sold in the stock market. • Stock Index – measurement of investment values. • The Dow Jones Industrial Average (30 of the largest U.S. companies) • Standard & Poor’s (S&P) – based on stock values of 500 major companies.

26. 19-2 Stock Investments STOCK SELECTION Stock Information Sources • Moody’s Handbook of Common Stocks, Value Line, S&P’s Encyclopedia of Stocks • Provide data about net worth, debt, sales revenue, profits, dividend history, future prospects • U.S. Securities & Exchange Commission (SEC) oversees the financial markets . • Requires all companies that issue publicly traded securities to electronically fin detailed reports.

27. 19-2 Stock Investments STOCK SELECTION Stock Information Sources • Moody’s Handbook of Common Stocks, Value Line, S&P’s Encyclopedia of Stocks • Provide data about net worth, debt, sales revenue, profits, dividend history, future prospects • U.S. Securities & Exchange Commission (SEC) oversees the financial markets. • Requires all companies that issue publicly traded securities to electronically fin detailed reports.

28. 19-2 Stock Investments STOCK SELECTION Economic Factors • Inflation – higher prices can result in lower spending by consumers, reducing company profits • Interest rates – as the cost of money changes, company profits can increase or decline • Consumer spending – profits of companies that sell products and services to households are directly affected by buying habits • Employment – as people obtain or lose jobs, the amount of money they have for spending wil affect company profits

29. 19-2 Stock Investments STOCK SELECTION Company Factors • Has the company been profitable over a period of years • Have the company’s managers made good business decisions • Does the company have growth potential in coming years • Does the company have an unusually large amount of debt • How does the company compare with others in its industry

30. 19-3 Bonds & Mutual Funds GOVERNMENT BONDS • A bond is a certificate representing a promise to pay a definite amount of money at a stated interest rate on a specific due date. • The due date is also called the maturity date. • When you buy a bond, you are lending money to the organization selling the bond. You become a creditor of the organization.

31. 19-3 Bonds & Mutual Funds GOVERNMENT BONDS Municipal Bonds • Municipal Bonds (munis) – bonds issued by local and state governments. • Interest is exempt from federal and most state income taxes. • Used to build parks, schools, roads, etc.

32. 19-3 Bonds & Mutual Funds GOVERNMENT BONDS U.S. Savings Bonds • Good for people with small amounts of money to invest (safe investment) • Sold in denominations ranging from $50 - $10,000. • A Series EE bond is bought a half its face value. • The length of time the bond is held determines the amount of interest. • Interest is exempt from state and local taxes. • Interest is exempt from Federal tax if used for college.

33. 19-3 Bonds & Mutual Funds GOVERNMENT BONDS Other Federal Securities • T-Bills – short-term borrowing with maturities from 91 days to one year. • T-Notes – maturities from 1-10 years. • T-Bonds – long-term borrowing, with a maturity of up to 30 years.

34. 19-3 Bonds & Mutual Funds CORPORATE BONDS Bond Components • Each bond has a face value, also called the maturity value. (the amount being borrowed) • Corporate bonds are issued for $1000 and $25,000 • Interest is paid twice a year based on the face value and the stated interest rate • On the bond’s maturity date the face value is repaid to the investor

35. 19-3 Bonds & Mutual Funds CORPORATE BONDS Bond Values • The market value of a bond varies based on changing interest rates and the credit rating of the borrowing organization. • Corporate bond prices are stated in $100s, but sold in $1,000s denominations. • Ex. A bond selling at 100 has a market value of $1,000

36. 19-3 Bonds & Mutual Funds MUTUAL FUNDS Types of Mutual Funds Many people who are interested in investing do not have the time or knowledge needed to make wise investments. • More than 60,000 different mutual funds are available to investors. • Theses funds have different objectives: • Growth stocks • High paying dividends • International stocks

37. 19-3 Bonds & Mutual Funds MUTUAL FUNDS Mutual Fund Values • Mutual fund investors own shares of the mutual funds • The values of each share is based on the total value of all investments made by the mutual fund company

38. 19-3 Bonds & Mutual Funds MUTUAL FUNDS Mutual Fund Values • Net asset value (NAV) – If the investments were worth $400,000 and 80,000 shares existed each share would be worth $5

39. 19-4 Real Estate Investments SELECTING HOUSING Real estate– land and anything that is attached to it.

40. 19-4 Real Estate Investments SELECTING HOUSING Buying A Home • Mortgage – legal document giving the lender a claim against the property if the principal, interest, or both are not paid as agreed. • Fixed-rate mortgage – one set rate for the term of the loan • Adjustable-rate mortgage – rate is raised or lowered depending on the current interest rate being charged by lenders

41. 19-4 Real Estate Investments SELECTING HOUSING Buying A Home • Mortgage – legal document giving the lender a claim against the property if the principal, interest, or both are not paid as agreed. • Fixed-rate mortgage – one set rate for the term of the loan • Adjustable-rate mortgage – rate is raised or lowered depending on the current interest rate being charged by lenders

42. 19-4 Real Estate Investments SELECTING HOUSING • Services of Real Estate Agents • Other Real Estate Professionals • Appraiser – someone trained to estimate the value of property and who can give an official report on the value

43. 19-4 Real Estate Investments Benefits of Home Ownership • Tax Benefits • Interest paid on a mortgage is included as a deductible expense • Property taxes are also deductible when computing your federal income taxes • Increased Equity • Equity – the difference between the price at which you could sell your house and the amount owed on the mortgage. • Appreciation – a general increase in the value of property that occurs over time.

44. 19-4 Real Estate Investments COSTS OF HOME OWNERSHIP • Property Taxes • Assessed value – the amount your local government determines your property to be worth for tax purposes • Market Value: $180k Assessed: 90k Tax rate: $60 per $1000 $90,000 / $1,000 X $60 = $5,400 • Interest Payments • 30-year mortgage at 8% interest would cost $164,000 • Property Insurance • Provides protection from fire, theft, accident, or other losses. • Maintenance • Upkeep – maintaining your property in good condition

45. 19-5 Other Investments COMMODITITES AND FUTURES • Commodities– include grain, livestock, and precious medals • Speculative investment – unusually high risk • Futures contract– an agreement to buy or sell an amount of a commodity at a specified price in the future

46. 19-5 Other Investments COMMODITITES AND FUTURES Commodity Exchanges • Buyers and sellers are represented by traders on the exchanges. • Chicago Board of Trade (CBOT) • Established in 1848 to provide a market for agricultural products • In 2007 merged with Chicago Mercantile Exchange to create the CME Group

47. 19-5 Other Investments COMMODITITES AND FUTURES Agricultural Commodities • Corn, soybeans, wheat • Agricultural producers sell their crops in advance of a harvest at what they believe is a good price • The futures contract buyers hope the price of the crop will go up when harvested so that they can earn a profit.

48. 19-5 Other Investments COMMODITITES AND FUTURES Gold, Silver, Precious Metals • Gold has the longest history as a monetary commodity going back to 500 BC • Since 1979, the price of gold has ranged from $1000 to $300 • Precious metals are quoted as spot prices per one troy ounce. • Money invested in precious metals does not earn interest.

49. 19-5 Other Investments COMMODITITES AND FUTURES Currency and Financial Instruments • Currencies (Dollar, Euro, Yen) and financial instruments (T-Bills and T-Notes) are traded on the futures markets. • The price of currency and financial instruments is affected by a country’s economic outlook and current interest rates. • Investors expect the prices to increase so they can sell them for a profit.

50. 19-5 Other Investments COLLECTIBLIES Items of personal interest to collectors that can increase in value in the future. Types of Collectibles • Stamps, coins, sport trading cards, antiques, rare books, toys Collectible Values • Only rate stamps, coins, art, and antiques tend to be items on which the investor can make a considerable profit.