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Introduction to Investing

Introduction to Investing. Year 9 Commerce Option. Your task. 1. You are to brainstorm and prepare a mind map of all you know about investing

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Introduction to Investing

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  1. Introduction to Investing Year 9 Commerce Option

  2. Your task 1. You are to brainstorm and prepare a mind map of all you know about investing 2. Write a description of your life when you are age 60 noting occupation (or past occupation), assets, income level and lifestyle. Include how you might have achieved this standard of living. Highlight the importance of investing. TONIGHT: Interview parents about their investing history – take home the syllabus and show what you will be doing. If you are a boarder you can email or call parents over next week

  3. Investment Decisions • What is an Investment? • Why do businesses and individuals invest?

  4. What is Investment? • Money spent to gain a profitable return • Why do businesses and individuals invest? • Businesses invest in machinery, factories and their workers to increase profit levels • Individuals invest their savings to reach a particular goal

  5. Who is this person? What kind of investor?

  6. The World's Billionaires#1 Warren Buffett03.05.08, 6:00 PM ET • Age: 77 Fortune: self made Source: Berkshire Hathaway Net Worth: $62.0 bilCountry Of Citizenship: United States Residence: Omaha, Nebraska , United States, North AmericaIndustry: InvestmentsMarital Status: widowed, remarried, 3 children Education: University of Nebraska Lincoln, Bachelor of Arts / Science Columbia University, Master of Science America's most beloved investor is now the world's richest man. Soared past friend and bridge partner Bill Gates as shares of Berkshire Hathaway climbed 25% since the middle of last July. Son of Nebraska politician delivered newspapers as a boy. Filed first tax return at age 13, claiming $35 deduction for bicycle. Studied under value investing guru Benjamin Graham at Columbia. Took over textile firm Berkshire Hathaway 1965. Today holding company invested in insurance (Geico, General Re), jewelry (Borsheim's), utilities (MidAmerican Energy), food (Dairy Queen, See's Candies). Also has noncontrolling stakes in Anheuser-Busch, Coca-Cola, Wells Fargo. Insurance operations flourished in 2007. "That party is over. It's a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008." The Oracle of Omaha issued a challenge to members of The Forbes 400 in October; said he would donate $1 million to charity if the collective group of richest Americans would admit they pay less taxes, as a percentage of income, than their secretaries. Had long promised to give away his fortune posthumously. Irrevocably earmarked the majority of his Berkshire shares to charity in 2006, mostly to the Bill & Melinda Gates Foundation. Gift was valued at $31 billion on day of announcement; donation will far exceed that sum so long as Berkshire shares continue to rise.

  7. Financing Investment • Finance comes from 2 main sources: • 1. SAVINGS • income from your job • profits from your investment portfolio • 2. BORROWINGS • loan from the bank • loan from parents/friends/”venture capitalist” As the syllabus states…identify a range of ways to finance investment: how could you finance a car when you go to uni for example?

  8. Individual investing vs business investment • individual investing (saving to create wealth, enhance income, retirement preparation) • business investment (productive capacity and profit generation) • Can you think of examples of both?

  9. SAVING VS BORROWING Create a list of the pros and cons of both?

  10. WEALTH AND INCOME • Are you able to clearly distinguish between the concepts of wealth and income? • Wealth: Your worth. The value of all your assets. • Income: Money you earn as well as interest you earn on that money or capital gains on any investments. • What is the relationship between these two concepts? • INFLATION: The price of living increases. To control inflation or ‘curb’ inflation the Reserve Bank of Australia will raise the Interest Rate

  11. From SMH “Wealth” Building wealth July 13, 2011Be the first to comment Question:  We are in our early 30's and looking to begin building our wealth. Our home is valued at around $680,000 with a remaining mortgage of $170,000. Our gross incomes are $75,000 and $110,000 and we have cash in an offset account and a small share portfolio to the value of $120,000. We are interested in investing in blue chip Australian stocks or LICs. Should we use our own funds or borrow? And if borrowing, whose name should the investment be in? Is there an alternative to a margin loan? Answer:  Your goal should be to maximise your deductible interest and minimise your non deductible interest. Accumulating money in the offset account is giving you flexibility so keep doing that, but at the same time take advice about a home equity loan to invest in quality shares. Because the loan would be secured over your home there is little chance of margin calls. If capital gains tax is not a big issue you could also consider selling some of the shares you have and using the proceeds for the offset account or a reduction in your home loan. Read more: http://www.smh.com.au/money/ask-an-expert/blogs/ask-an-expert/building-wealth-20110711-1ha2f.html#ixzz1SXTljUMc What is income and what is wealth in the above article?

  12. Celebrity daze: CEOs are not stars of sport or screen, they're just overpaid employees Read more: http://www.smh.com.au/business/celebrity-daze-ceos-are-not-stars-of-sport-or-screen-theyre-just-overpaid-employees-20100208-nncm.html#ixzz1SXUVeD6c

  13. Miners, property magnates top rich listUpdated May 26, 2010 16:33:00 Photo: Westfield boss Frank Lowy topped the BRW Rich 200 list for the first time.Map: Australia Shopping centre magnate Frank Lowy has been named the richest person in Australia in 2010, bumping Anthony Pratt, the son of late cardboard king Richard Pratt, off the top spot • http://www.abc.net.au/news/2010-05-26/miners-property-magnates-top-rich-list/842366

  14. What companies would you invest in..personal finance continuation YOUR TASK: Try and come up with 5 companies you think would be good to invest in and answer the following questions on the companies: • What is the company and its core business • How many employees does the company have • How long has it been running • What is the company worthy: market capitalisation • Why do you believe this company is a good investment?

  15. From : The Khan AcademyReturn on capital : Introduction to return on capital and cost of capital. Using these concepts to decide where to invest. http://www.khanacademy.org/video/return-on-capital?playlist=Finance

  16. NEWS ARTICLE ON investing • Go to SMH or The Australian online and find an article from “Business” or “Money” sections that interests you about some aspect of investing. • - it must relate somehow to part of the “investing” part of the syllabus! • You are to do the following: 1: Summarise the article 2: look up and define any financial terminology mentioned in the article 3:Explain why you chose the article Include title of article and date and publication and link to the article

  17. Fixed VS variable interest rates Define what a fixed interest rate is and when is a good time to opt for a fixed rate on a loan? A fixed interest rate is a set or fixed rate on your loan repayments for a fixed period of time. A good time to opt for a fixed rate is when interest rates are LOW. What is a variable interest rate and when may this be a better option than a fixed interest rate?

  18. Distinguish between fixed and variable interest rates on borrowed funds

  19. DEBATE ‘Businesses should only consider the law when making decisions’

  20. The majority of businesses want to be seen as responsible corporate citizens. • The triple bottom line refers to the economic, environmental and social performance of a business. • Ethics are standards that define what is acceptable and unacceptable behaviour.

  21. Business ethics is the application of moral standards to business behaviour such as: – fair and honest business practices – decent workplace relations – conflict of interest situations – accurate financial management – truthful communication. A corporate code of conduct encourages ethical business behaviour.

  22. Ethical Investments • Illegal or unethical…what is the difference? • Why do businesses concern themselves with ethical issues in investment? • Why might investors want to buy ‘green’ shares?

  23. The Body Shop http://www.youtube.com/watch?v=temOt9p9IFY

  24. ENRON Financial Statements fudged: ABC radio national.

  25. SOCIAL RESPONSIBILITY • Social responsibility refers to a business’s management of the social, environmental, political and human consequences of its actions. • A socially responsible business tries to achieve two goals simultaneously: – expanding the business – providing for the greater good of society Can you think of an example?

  26. SOCIAL RESPONSIBILITY Some businesses argue that making a legal profit is all that is required to act responsibly. Do you agree? • Today’s society has high expectations of business practices and greater awareness of business’s social responsibility. Why? • A sustainability report/social audit is a report that details what a business has done, and is doing, concerning the social issues that affect it.

  27. Ethical dilemma Why should investors be wary of firms that are involved in unethical practices?

  28. INVESTMENT OPTIONS What are the investment options available to us?

  29. Investment Options • Investment Accounts • Shares

  30. Investment Options • Investment Accounts • Banks and other financial intermediaries have these accounts • Egs are cash management accounts and term deposits • Shares • When you buy a share, you are a part owner of a business • You will receive an income in the form of a dividend if the business makes a profit • Use a stockbroker who specialises in Buying or selling shares • CommSec online Internet broker

  31. Investment Options • Property • Managed Funds

  32. Investment Options • Property • Usually involves buying their own home. • May involve buying additional property to add to the wealth of an individual or business • Managed Funds • Made up of a pool of money that comes from people with similar investment goals • A fund manager will invest the funds on their behalf • A professional fund manager invests money in assets such as shares or property

  33. Investment Options • Superannuation • Debentures and unsecured notes

  34. Investment Options • Superannuation • A managed fund designed to save for retirement • Employer 9% contribution • Employee contributions • Debentures and unsecured notes • Lending to a business • A debenture is a document issued by a firm when you lend it a sum of money. The debenture states the amount lent, the interest the firm will pay the period of the investment. • A debenture is relatively safe investment as debenture holders are one of the first to be repaid if a firm is liquidated • Unsecured notes are similar to a debenture except that they are one of the last to pay if the firm is liquidated. They are not as safe and consequently attract a higher rate of interest

  35. ACTIVITY You are to rank a range of investments on a grid: • Vertical axis low/high risk; horizontal axis low/high return) based on level of risk and return

  36. Risk and Return • Risk is related to return • High risk investment may have a high return, or you may lose your money • Low risk investment have a lower return, but you are less likely to lose your money A Mix of Investments • Spreading your risk is an important concept in investing • Don’t ‘put all of your eggs in one basket’ An investment portfolio is a collection of all the investments an individual has. It is generally wise to invest in as wide a variety of investment products as possible.

  37. Categories of investment 1.Growth assets: shares and property. Higher return over longer period. Volatile – prices fluctuate greatly in the short term so higher risk 2. Income or defensive assets: government bonds and term deposits, which usually provide a lower return but are lower risk – their value does not change dramatically in the short term. The price of every asset will fluctuate. This is the risk of investing – the higher the rate of return the greater the risk involved.

  38. Risk and return • A key factor in investing your money is the rate of return • This is the profit you receive on your investment as a percentage of the original investment Rate of return= profit from the investment/original investment x 100/period (years) of the investment

  39. Risk and return e.g. Kate invested $10, 000 in shares. She sold them one year later and made a profit of $1500. Her rate of return is? Rate of return= profit from the investment/original investment x 100/period (years) of the investment

  40. Risk and Return Kate invested $10, 000 in shares. She sold them one year later and made a profit of $1500. Her rate of return is? $1500/$10000x 100/1=15% So Kate’s rate of return was 15% on her investment!

  41. Risk and return QUESTION: Describe the relationship between rate or return and risk

  42. INVESTMENT PLANNING Selecting a mix of investmentsspreading the risk Use a spreadsheet to construct a hypothetical investment plan with an appropriate mix of investments

  43. Writing task Explain why the balance of an investment portfolio should change with age

  44. Advise me! You are to make recommendations on investment portfolios for a range of people at different life stages: • Young single adult • Married couple with children • ‘empty nesters’ • Retired pensioners • ... • ...

  45. Records and Monitoring • Why keep records?

  46. Records and Monitoring • Why keep records? • Keeping records when you buy shares • Keeping records when you buy property • Monitoring…to make sure that your investments are going to plan

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