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The Fundamentals of Investing. Advanced Level. Agenda. Return Unit 5 Test Overview of Topics for Remainder of Quarter Instruction Difference between Saving and Investing Long Term V alue of Investing Time Value of Money Different Types of Investments Next Time: Securities. Our Goal.

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agenda
Agenda
  • Return Unit 5 Test
  • Overview of Topics for Remainder of Quarter
  • Instruction
    • Difference between Saving and Investing
    • Long Term Value of Investing
    • Time Value of Money
    • Different Types of Investments
    • Next Time: Securities
our goal
Our Goal

50 question standardized test

To complete online by 1/17/14

Makeup test the week of 1/20-1/24/14

how can you pass the test
How Can You Pass the Test?
  • Take notes during instruction
  • Ask questions for clarification
  • Complete the EVERFI modules
  • Take practice quizzes and tests online
    • www.moneypower.org
      • Login ID: Pfhs46
      • Password: hS3200
topic overview
Topic Overview
  • Unit 6: Saving and Investing
    • Purpose of Investing
    • Markets for Investing
    • Investment Products
    • Investment Strategies
topic overview continued
Topic Overview (continued)
  • Unit 7: Money Management/Financial Planning
    • Wills/Estate Planning
    • Housing
      • Renting vs. Owning
    • Long-term Planning
      • Financing Higher Education
      • Retirement
saving
Saving
  • Savings Accounts
    • Interest-Bearing Account at Bank/Credit Union
  • Money Market Accounts
    • Similar to savings accounts
    • Have higher minimum balances
    • Offer higher rates of interest, limited withdrawals
  • Certificates of Deposit (CDs)
    • Time Deposit (6 months, 1 year, 5 years or more)
  • http://www.youtube.com/watch?v=fB2Ui1HDX98
investments
Investments

Investments -assets purchased with the goal of providing additional income from the asset itself but with the risk of loss

all investments have some risk
All Investments Have Some Risk

Investments have the potential for higher returns

investments are important to building net worth
Investments are Important to Building Net Worth

Savings Tools = Monetary Assets

(liquid – quickly and easily converted to cash)

Investment Tools = Investment Assets

(may not be easily converted to cash or penalties charged to access the funds early)

Investments are less liquid than savings tools

investments help accomplish long t erm goals
Investments Help Accomplish Long Term Goals

Higher

Education

Retirement

Buying a House

It is recommended that at least 10% of net income is dedicated to savings and investments each time income is received

slide12

Review: Saving vs. Investing

What types of feelings result from saving and investing?

rate of return
Rate of Return

Total return on investment expressed as a percentage of the amount of money saved

what is ashley s rate of return
What is Ashley’s Rate of Return?

Ashley’s rate of return on investment is 5%

Ashley saved $2,200 in a money market deposit account. After one year, she has a return of $110. What is Ashley’s rate of return?

inflation
Inflation

Inflation Risk

The danger that money won’t be worth as much in the future as it is today

Strive to have the rate of return on investment be higher than the rate of inflation

How does inflation relate to investing?

Inflation

Rise in the general level of prices

stocks vs b onds
Stocks vs. Bonds

http://www.investopedia.com/video/play/stocks-versus-bonds/

  • Bonds are debt instruments
    • The investor become a creditor to the company
  • Stocks (securities) are equity instruments
    • The investor becomes a partial owner of the company. Ownership comes with voting rights and a chance to share in any profits of the company
things to know about bonds
Things to Know About Bonds

Issuer- the company or government that is borrowing the money

Investors- people who buy the bonds (lend the money)

Face Value- (par value)it is the amount paid to the holder at maturity

Interest Rate- referred to as the coupon

Fixed rate- bonds are usually fixed rate because the lender knows

ahead of time how much interest they will be receiving

Maturity Date: the date which the issuer must pay back the

amount borrowed

bond example
Bond Example
  • You purchase a bond:
  • face value of $1,000,
  • an interest rate (coupon) of 8%
  • maturity of 10 years
  • This means you'll receive:
  • $80 ($1,000*8%) of interest per year
  • a total of $800 of interest for the 10 years
  • When the bond matures after a decade, you'll get your $1,000 back
municipal bonds
Municipal Bonds
  • Are issued by local governments and their agencies
    • Cities, states, school districts
  • Interest on these bonds are often exempt from federal income tax (possibly state income tax as well)
    • Example: Series EE Savings Bonds from the US government
stock
Stock
  • Owner of the stock
  • A share of ownership in a company

Usually a stockholder owns a very small part of a company

how does a stock increase value
How does a stock increase value?

Panera Bread stock was issued on June 10, 1991

The price per share on June 10, 1992 was $13.00

On December 6, 2013 the price per share was $176.63

slide25

If I bought 100 shares at $13.00/share, I own a small piece of Panera Bread Co. My stock that day (6/10/91) is valued at $1,300.00.

Panera has grown into a larger company and has made a profit over the years.

If I sell my 100 shares on Dec. 6, 2013, when they are trading for $176.63/share, I will receive $17,663.00 (100 x 176.63).

returns
Returns
  • The money an investor makes on a stock is called a return.
    • Capital Gains
    • Dividends
slide28

Some stocks also pay a dividend which is a payment made by a corporation to its shareholders, usually as a distribution of profits.

slide30

Capital gains are included in income for tax purposes. Long-term capital gains are taxed at a lower rate than short-term capital gains

The money I have made from the sale of my stock is called a capital gain.

slide32

A stock splitis a decision by the company's board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders.

For example, in a 2-for-1 stock split, every  Panera shareholder with one stock is given an additional share. Therefore I would now have 200 shares of Panera stock, but they will be worth half of the current market price

where does an investor purchase a stock or a bond
Where does an investor purchase a stock or a bond?

Abroker is an individual or party (brokerage firm) that arranges transactions between a buyer and a seller for a commission when the deal is executed.

brokerage firms
Brokerage Firms
  • Full Service Brokers
    • Provide a wide variety of services
      • Advice, retirement planning and tax tips
    • Charge higher fees
    • Examples: Morgan Stanley and Merrill Lynch
  • Discount Brokers
    • Charge a reduced commission
    • Do not provide investment advice
    • Examples: Charles Schwab and TD Ameritrade
buying on margin
Buying on Margin
  • Purchase shares for your account on margin
    • You are borrowing a percentage of the purchase from the broker
    • That means you owe them money
  • Margin Call
    • Broker calls for you to pay back all of the money you owe them
    • If you cannot pay, they keep the stock
where does an investor purchase a stock or a bond online
Where does an investor purchase a stock or a bond online?

Using an Online Broker-The act of placing buy/sell orders for financial securities with the use of a brokerage's internet-based proprietary.

real estate
Real Estate

Ownership of residential or commercial property or land

Real estate can be time consuming but the potential for returns is high

speculative investments
Speculative Investments
  • Type of return depends on the investment
  • Options
  • Futures
  • Collectibles
mutual funds
Mutual Funds

When a company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds

mutual funds1
Mutual Funds

Reduces investment risk

Fees may be high

Saves investors time

ariana has 150 to invest option 1 stock
Ariana has $150 to InvestOption 1 - Stock

Ariana invests in one company’s stock

Company C has had a bad year and their market price drops significantly.

Ariana may lose her $150 investment

ariana has 150 to invest option 2 mutual fund
Ariana Has $150 to InvestOption 2 – Mutual Fund
  • Market price of companies C and F decreased
  • Market price increased for all other companies
  • Ariana has reduced her investment risk and may still earn money
lending vs owning
Lending vs. Owning

When investing, consumers either lend money to the company/organization or they own the asset

Examples

Returns

knowledge of the general risk level helps manage risk
Knowledge of the General Risk Level Helps Manage Risk

Owning

Lending

Type of return

Type of Investment

  • Decreasedinflation risk

Increasedpotential for high returns

Increasedinvestment risk

characteristics of investment tools
Characteristics of Investment Tools

Order cards from lowest to highest

Investment Risk

Order cards from lowest to highest

Potential Returns

Order cards from lowest to highest

Inflation Risk

investment philosophy
Investment Philosophy

If someone was an aggressive investor, what types of investment tools would they primarily have in their portfolio?

portfolio diversification
Portfolio Diversification

Investing in a mutual fund is an automatic form of portfolio diversification

stock exchange
Stock Exchange

Investments are purchased from a stock exchange

(except for real estate and some speculative investments)

brokerage firms1
Brokerage Firms

Brokerage firms facilitate the buying and selling of investments on the stock exchange

discount brokerage firm fees
Discount Brokerage Firm Fees

Will usually charge a fee for completing a buy/sell transaction

  • Additional fees may include:

Total fees are often lower, but an individual must have the knowledge and time to monitor their investments

full service brokerage firm fees
Full-Service Brokerage Firm Fees

Financial advisors are compensated for the time and knowledge they provide investors.

Most charge fees using one of these methods.

In addition to fees, financial advisors may earn commissions paid by the company.

choosing a brokerage firm
Choosing a Brokerage Firm

Important to research the financial advisor and firm he/she works for

tax advantaged investments
Tax-Advantaged Investments

Savings and investments are a form of unearned income and therefore subject to income tax

Tax-advantaged investments reduce, defer or adjust the current year tax liability

  • Most common:
  • Retirement
  • Education

Government encourages people to invest in certain types of investments

retirement accounts
Retirement Accounts

The trade-off to tax advantages is most accounts have penalties if money is withdrawn early

There are many other types of plans available