Daily Objectives Students will Be able to explain diversification Compare the relationship between risk amp return U nderstand that in order to achieve long term financial goals some form of investment planning is necessary ID: 929100
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Slide1
Financial planning
Intro to Investing
Slide2Daily Objectives
Students will…
Be able to explain diversification
Compare the relationship between risk &
return
U
nderstand
that in order to achieve long term financial goals, some form of investment planning is necessary.
D
ifferentiate
between the various types of investment options
B
e
able to list pros and cons of various investment options
Slide3Saving to Investing
Once you have built up an emergency fund, switch your goals from saving to investing.
An emergency fund is usually
6 months of expenses.
Slide4What is Investing?
Purchase of assets with the goal of increasing
future income
Focuses on
wealth accumulation
Appropriate for
long-term
goals
Slide5The Risk of Inflation
The
safest
investments are ones
that
seek
to
preserve
your money
,
like CDs
or money market funds.
While they may be important in
your overall financial plan,
you need
to be aware
of inflation risk.
Inflation is like an
invisible tax
that erodes
the purchasing power of any investment
.
To maintain an
investment’s purchasing
power, its
total return must
keep pace
with the inflation rate.
Slide6Savings vs. Investing
Savings
Investing
Objective
Short-term needs
Long-term growth
Products
Savings account, money-
market account, CD
Stocks, bonds, mutual funds
Risks
None if FDIC insured;
inflation risk
Varies
Source of Return
Interest paid on money deposited
Interest,
dividends, capital gains and losses
Key Benefit
Safe
and accessible
Returns outpace inflation over the long term
Key
Drawbacks
Returns historically
have not out-paced inflation over the long term
Risk of losing money if securities
decline in value
Slide7What You Need to Know
There are many ways to invest your money. Before you invest, think about these factors:
Safety
–
How
risky is it?
Liquidity
–
Can
you easily get your money out of the investment?
Return on the investment
–
What's
your earning potential?
Slide8K.I.S.S.
Keep
I
t
S
imple
Silly/Stupid
Most systems work better if they are less complex.
How does this apply to investing
?
You should never invest in anything that you do not understand.
Slide9Risk vs. Return
Risk:
the potential that an investment may
fail to pay the expected return
As risk goes up, potential return goes up
As risk
goes
down, potential return goes down
Slide10Investment Philosophy
Investment Philosophy
-
an individual’s general approach to investment
risk
Varies based on age, values, amount of money, goals, etc.
Slide11Investment Categories
Conservative
Taking on
less risk
Used when an individual has a
short time frame
until retirement.
Moderate
Taking on some risk
Used when an individual has a
moderate time frame
until retirement
.
Aggressive
Taking on
high risk
Used when an individual has a long time frame until retirement.
Slide12What level of risk?
Bob is saving for a
down payment on a house. He expects to have the full down payment in six months. What level of risk would you recommend for Bob? Why?
Bob should seek low risk savings
tools because there is not enough time to invest. (Shorter time frames carry more risk.)
Slide13What level of risk?
Alicia just graduated from college and began her first job. She would like to buy a condo and believes that she could save enough for the down payment in about five years.
What level of risk would you recommend for
Alicia?
Why?
Moderate risk because of the moderate time frame.
Slide14What level of risk?
Maria is 16 and has earned some extra money at her summer job. She does not need the money in the near future. She wants to put the money into a brokerage account and let it grow over time.
What level of risk would you recommend for Alicia? Why?
High risk (Aggressive) because of the long time frame.
Slide15A
grouping of financial assets such as stocks, bonds, mutual funds, index funds, and cash
equivalents.
An investment notebook
Portfolio
Slide16Four Basic Rules For Investors
Invest on a regular basis over a long period of time.
Dollar Cost Averaging-
buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price.
More shares are purchased when prices are low, and fewer shares are bought when prices are high.
Slide17Dollar Cost Averaging Continued
Excellent way to guard against paying too much for stocks in a volatile (unstable) market. Here’s how it works:
You invest exactly the same dollar amount at regular intervals into a specific investment vehicle or vehicles.
This method actually averages out the price you pay for your shares, and puts time, your money and the market all on your side, regardless of what your stock or the market does over the short term.
The
Time Value of Money
and the
Rule of 72
are also great tools for planning/researching investments!!
Slide18Four Basic Rules . . .
Reinvest earnings
This includes dividends, interest, capital gains
This will compound the profit made on investments.
Invest
in the common stock of good quality growth companies.
These are companies with established, consistent growth track records for at least 5 years.
Slide19Four Basic Rules . . .
Diversify your portfolio to reduce overall risk.
Diversification-
Spreading out your money in multiple investments
Choose different high risk vs. low risk investments
Invest some of your money in stocks,
real estate, buy
some bonds, mutual funds, or
CDs
Slide20Career Spotlight: Financial Planner
A financial planner is an advisor who helps people make investment decisions to meet stated goals.
Work for brokerage firms and at financial institutions
Investors provide the financial planners with data about assets owned, debts owed, income earned and their financial goals, the planner considers the info and suggests options that will help meet the investor’s
goals
Slide21Slide22Activity:
Article, ‘
How To Pick Stocks
’
Slide23Activity:
What Do All The Numbers Mean?
Slide24Unit 8
Types of Stock
Financial Planning
Slide25Stocks
Stock: share of ownership in a company, also called a share
Stockholder: owner of the stock, also called a shareholder
Slide26Why Companies Issue Stock
When a company would like to grow, it issues stocks to raise funds and pay for ongoing business activities.
Research better ways to make things
Create new products
Improve the products they have
Hire more employees
Enlarge or modernize their buildings
It is popular because:
The company does not have to repay the money
Paying dividends is optional
Dividends are distributions of earnings paid to stockholders
Slide27Stocks
Buying stock can be risky, since while the price of the stock may go up, it may also go down.
If the company goes bankrupt, then you could potentially lose all the money you invested in the stock.
Purchasing stock is
t
aking
a
risk, in the hope of making money on your investment
,
with no guarantee that you will make money.
What type of stock?
Slide29Common Stock
Pays a variable dividend (a piece of company profits, paid per share that you hold)
Gives stockholder voting rights
The primary stock of a corporation
Slide30What type of stock?
Slide31Preferred Stock
Pays a fixed dividend
No voting rights
Earn the dividend no matter how the company is doing
Less risky than common stock
In the event the company fails, preferred stockholders get paid ahead of common stockholders
Harder to locate information about them and also harder to purchase than common stock
Slide32What type of stock?
-
Income Stocks
Has a consistent history of paying high dividends
People tend to choose income stocks in order to receive these certain dividends
Lower levels of volatility
Often it is a more mature company that fits the category
Slide34What type of stock?
Slide35Growth Stock
Does not pay a dividend
The company reinvests this money in itself to keep it growing and expanding
Earnings expected to grow at an above average rate
Technology stocks are often growth stocks
Usually a long term investment
Slide36What type of stock?
Slide37Blue Chip Stock
A well established and financially sound company with a record of profitability
Safe, stable, and moderate returns
IBM and Coca-Cola are examples
Slide38MMM
AXP
KO
GE
GM
HD
XOM
JNJ
MCD
WMT
DIS
TICKERS- Can you name?
Stock Symbol-
a group of letters standing for a particular stock, mutual fund, or other security. Also called a ticker symbol or stock abbreviation.
Stock Symbol
Slide39Slide40Green Chip Stocks
Typically refers to stocks from renewable and alternative energy companies, or those companies whose products produce a social impact
Fair amount of risk involved
Solar, wind, biofuel, efficient vehicles, smart grid technologies
Slide41What type of stock?
Slide42Penny Stocks
From companies that may not have a long track record of performance
Often times the term refers to stocks that sell for under $5
High risk as you are speculating about the performance of a company with no solid history
Slide43What type of stock?
Slide44Value Stock
Stock that trades at a lower price than the company’s reputation, earnings outlook, or financial situation seem to merit
A good stock at a great price
Slide45What type of stock?
Slide46Defensive Stock
Remains stable and pays dividends during economic decline
Not subject to the ups and downs of the business cycles
Demand for these products remains consistent
Utilities, Drugs, Foods, Health Care
Slide47What type of stock?
Slide48Cyclical Stock
Do well when the economy is stable or growing, but do poor during recessions
Travel related companies, manufacturing, housing, automobile
Opposite of defensive stock
Slide49What type of stock?
Slide50International Stock
Those stocks that are traded in foreign markets such as the Nikkei in Japan or the Hang Seng in China
Could be foreign companies, or US based companies that trade in those markets as well
Investors may consider these as foreign markets may perform better than domestic ones
Slide51What type of stock?
Slide52Caps (Capitalization)
Capitalization level is probably the most common level of differentiation among individual stocks. Capitalization is basically the total dollar value of all outstanding shares of stock for a particular company.
Slide53Related Calculations
If you want to know how many shares of stock a company has, take the Market Cap and divide by the stock price
If you want to calculate their Market Cap, take the number of outstanding shares of stock and multiply by the current stock price
Slide54Market Cap Example - Chipotle
$13,420,000,000 (market cap) divided by $454 (share price) = 29,559,471 shares of Chipotle stock.
29,559,471 shares X $454 is roughly $13.42 Billion (market cap)
Slide55Caps (Capitalization)
Large Caps
- usually some of the larger, well-known companies, and typically they have a capitalization of $5 Billion dollars or more.
Mid Caps
- has been established for a decent amount of time and as such it will be known by a fair number of people, and capitalization of $1B - $5B
Small Caps
- companies most are unfamiliar with and they are usually not followed to a great extent by analysts or individual investors, capitalization of less than $1B
Slide56Market Cap
Large cap stocks
are safer and can produce slow to steady gains. These are the big companies we all know.
Mid cap stocks
are a little bit riskier. They give you exposure to mid size companies, some of which we already know. Domino’s Pizza is an example. These companies could still grow larger, adding value to your portfolio.
Slide57Market Cap
Small caps
are smaller, less recognizable companies. They are riskier as they generally aren’t as reported on or invested in as much as the major players.
But big companies had to start out small. These small caps could show significant growth and therefore make you money.
It can be challenging to do all the necessary research to find a great small cap company for the future.
Slide58Diversification!!!!
You should have a variety of these types of stocks in your portfolio (collection of assets).
You should have some safety (large cap, blue chip, income) along with some risk (mid and small cap, international, growth)
The younger you are, the more risk you can and should take.
Why?
Slide59Other Vocab
Dividend – part of the corporation’s profit paid to its shareholders
Capital Gains – the increase in value of a stock above the price initially paid for it.
Slide60Go Over Article:
How To Pick Stocks
Slide61Go Over Activity:
What Do All The Numbers Mean?
Slide62Stocks,
Part 2
Slide63What Affects Stock Price?
The Company & Its Fundamentals
Interest Rates
The Market
And many, many other factors
Slide64The Company
When a company performs well, the stock is attractive to investors.
Investors consider
earning potential
as well as the amount of
debt
.
If a company is in good financial standing the stock may continue to rise.
Slide65Interest Rates
When interest rates are
low
people may look to
more profitable
places to put their money.
As interest rates
rise
people tend to move money into
safer
investments.
If interest rates fall below inflation people buy more stock, and stock prices may rise.
Slide66The Market
The marketplace determines a company’s ability to sell its product or service.
If a company’s products are in a popular industry and are selling well, stocks may rise.
If demand drops off, stock prices may decrease.
Slide67Other Terms
Bull Market – prolonged period of rising stock prices and investor optimism
Slide68Other Terms
Bear Market – prolonged period of falling stock prices and investor pessimism.
Tend to be short and savage
A drop in value by 20% or more in several indices over a two month period may indicate the entering of a bear market.
Slide69Stock Exchange
A
stock exchange
is a form of exchange which provides services for stock brokers and traders to trade stocks, bonds, and other securities.
The New York Stock Exchange (NYSE)
Hybrid market combining floor-based and electronic trading
Large companies such as Coca Cola, Wal
-M
art and McDonalds
NASDAQ
Computer based trading system
Tech companies such as Cisco, Dell, Intel, Microsoft and Oracle
American Stock Exchange (AMEX)
Smaller stock exchange
Small cap stocks
Ex. Small companies specializing in energy, metal, oil, etc.
Slide70On the Floor of the NYSE
Slide71Stock Indexes
An index is a benchmark that investors use to judge performance of their investments.
The most widely used index is the Dow Jones Industrial Average.
DJIA is an average of the price movements of 30 major stocks listed on the NYSE.
Provides a general overview of what stock prices are doing in the market as a whole.
Slide72Slide73How the Dow is calculated
The Dow is a weighted index that is calculated by dividing the sum of the prices of the 30 component stocks by a number called the
DJIA Divisor.
The current value of the Dow Divisor is
0.14602128057775
Every $1 change in price of a stock within the average results in a 6.85 (
1
/
0.14602128057775
) change in the DJIA.
Slide74Dow Jones History
(Older Chart through about 2013)
Slide75More recent
dow jones history
Slide76Other Indexes
NASDAQ – National Association of Securities Dealers Automated Quotations
Lists approximately 3300 companies from 37 countries
Trades about 2 billion shares per day
Slide77Other Indexes
S&P 500
Standard & Poor’s (a financial services company)
Weighted index of the prices of 500 large cap companies
Large publicly held companies that trade in NYSE or NASDAQ
Slide78S&P 500 History
Slide79Earnings Per Share
A corporation’s after-tax earnings (PROFIT) divided by the number of common stock shares outstanding (in the hands of its investors).
Stockholders use EPS as a measure of profitability.
Important to look at EPS over time (year to year, etc.)
Slide80Other Things to Consider
P/E Ratio – Price to Earnings Ratio
Formula to calculate = Share price divided by EPS
A company with a share price of $100 and an EPS of 2 has a P/E Ratio of 50.
Higher P/E ratios are considered riskier
Most valuable when comparing P/E ratios within the same industry (
WalMart
to Target, etc.)
Slide81P/E Ratio
The P/E ratio gives the investor a better understanding of the company’s value
Basically with the PE Ratio, you are calculating how many dollars you are paying for each dollar of a company's earnings.
If a stock has a high PE Ratio, then it could be overpriced. If a stock has a low PE Ratio, it could be a underpriced.
Slide82Other Things to Consider
Financial Standings
Income Statement
- The purpose of the income statement is to show whether the company made or lost money during the period being reported
Balance Sheet
- often described as a "snapshot of a company's financial condition"
Statement of Cash Flow
- useful in determining the short-term viability of a company, particularly its ability to pay bills
Slide83Slide84Slide85AKA THE PROFIT!!!
Slide86Other Things to Consider
Analyst Opinion and Estimates
Stock analysts offer their opinion on whether it’s a good time to buy or sell.
They will also try and estimate a company’s EPS, Revenue, Growth, etc.
Remember, sometimes analysts are wrong!
Slide87Finish and Hand In
Webquest
Activity:
What Do All The Numbers Mean?
Slide88Activity:
News and Stock Prices
Slide89Mutual Funds
Unit 8Financial Planning
Slide90What are mutual funds?
An investment that is made up of a
pool of money collected from many investors
for the purpose of investing in securities such as
stocks, bonds
, and other similar assets.
A mutual fund’s portfolio, or collection of assets, is structured and maintained to match its investment objectives, which is stated in its
prospectus (legal document that provides details about an investment)
Slide91A mutual fund can make money two ways:
A security can pay dividends or interest to the fund
A security can rise in value
A fund can also lose money and drop in value
Slide92Why invest in mutual funds?
They are operated by
money managers
, so you get professional knowledge, insight, and decision making .
Mutual funds offer
diversification
. They are made up different stocks, bonds, real estate, etc.
Through mutual funds you may be able to get diversification cheaper than you could if investing in
individual stocks
.
There are tons of funds to choose from to match the level of
risk
you are willing to accept.
Slide93What are the drawbacks?
Require an
initial deposit
which can be several hundred to several thousand dollars.
There are many
fees
associated with a mutual fund and its professional management.
Tax issues
– no control over when profits and losses are taken and the corresponding taxes associated with that.
Some
liquidity
issues – only traded once per day
Slide94Mutual Fund Vocabulary
Net Asset Value (NAV) – the mutual fund’s
price per share
. It’s calculated by the total value of all the securities in the portfolio, less any liabilities, divided by the number of outstanding shares.
Capital Gains
– profits made from the sale of an investment
Load
– a sales fee
Slide95Mutual Fund Fees and Related Terms
Front End Load
– a fee charged when shares are purchased
Back End Load
– a fee charged when shares are sold
Expense Ratio
– ongoing expenses of the mutual fund. Typically includes:
Hiring expenses
Administration expenses
12B-1 fee
– fee charged to advertise and promote the fund
Slide96Types of Funds
Equity
fund – investment predominantly made up of different stocks
Fixed-income
fund – made up of predominantly bonds
Money market
fund – made up of short term, safe investments
Slide97Types of Funds
Balanced
fund – relatively even split between stocks and bonds
Specialty
fund – focuses on a specific segment of economy
Index
fund – follows performance and makeup of an index (S&P 500, etc.)
Slide98Unit 8: Investing
BONDS
Slide99Bonds are a form of
debt.
Bonds
are
loans, or IOUs
, but you serve as the
bank
.
You
loan your money to a
company, a city, the government
– and they promise to pay you back in
full plus interest
What is a bond?
Slide100Corporate
– from a company
Treasury
– from the federal government
Municipal
– from state and local governments
Types of bonds
Slide101If you own stock, you are part
owner of a company.
If you own bonds, you are a
creditor
.
Returns from bonds are generally
lower
than stocks.
This is because they are generally
safer
and more
stable
.
Bonds as an investment
Slide102Face value
– how much the bondholder will receive at maturity. Also called
par value
.
Maturity
– the length of time before face/par value is returned to the investor.
Coupon
– the interest rate that the bond pays; usually a
fixed
rate payable at specific intervals of time.
Important bond Vocabulary
Slide103Like stocks, bonds can be bought, sold, and traded.
Some bonds can be sold for more or less than their face values.
These are then said to be sold at premiums or discounts.
Important bond Vocabulary
Slide104When interest rates in the market
decrease, bonds with higher interest rates are in
demand
.
Investors who want these bonds have to pay a price
higher
than the face value.
Premium Bonds
Slide105When interest rates in the market
rise, a bond’s fixed interest rate becomes
less
attractive to investors.
To get investors to purchase these bonds, the prices must be
reduced
below face value.
Discounted Bonds
Slide106Municipal bonds can be as short as 1-3 years, but often times have maturity dates over 10 years.
Corporate bonds are similar in their maturity dates.
Treasury Bonds mature
in 30 years.
Time Frames
Slide107Municipal – thousands of dollars
Corporate – generally purchased in multiples of $1000
Treasury – purchased in multiples of $100
Required Investment
Slide108You will be researching this info and answering related questions on the worksheet.
Interest Rates
Slide109Retirement Accounts
Unit 8: Investing
Slide110THE FACTS
An increasing number of people will spend as
much
time in retirement as they did working
once you reach age
65
, you have a
50 percent
chance
of living to
age 90
and a
1-in-4
chance of reaching
100
You’ll need 70-80% of your pre-retirement income to live comfortably during retirement
Slide111Things to consider as you approach Retirement
the safety of your
investments- risk
preserving your
wealth- how will you continue to make money?
asset
allocation- where is your money being invested?
Slide112401k
An employee retirement plan
Contributions from paycheck
before taxes
, which helps
lower
taxable income
Employee
chooses investments based upon employer’s plan & options
Slide113401k Example
An employee earns $2000 for the pay period. Because they didn’t contribute to a 401k, they are taxed on the full $2000 of income.
An employee earns $2000 for the pay period, but puts aside $500 in their 401k account. This amount comes out before taxes so the taxable portion of their income is $1500.
Slide114401k
401k plans are made up of investments including
stocks, bonds, mutual funds, real estate, etc.
Each plan will have
its own portfolio
of different investments and
risk levels
An employee can only select from the 401k plans that their employer provides
Slide115Key Information
You can contribute a maximum of
$18,500/year
as of 2018. If you are over 50 you can contribute more.
You can not access this money until you reach the age of
59 ½.
If you take money out sooner, you will pay taxes and a
10%
penalty.
Slide116Key Information
Many employers will
match your contributions
up to a certain percent of your income.
For example, if I contribute 8% of my income to my 401k and my employer may match up to 5% of my income, my total retirement contribution works out to be 13% of my income per year.
Each company has its own policy regarding matching (If they offer it at all)
.
Employers are not required to match your contributions.
Slide117Key Information
This employer match is not yours right away. You generally must wait a period of
approximately 5 years
before you gain control of these contributions. This is called
“being vested”.
If I leave my job before those five years are up,
I keep my contributions
, but lose my employer’s.
Slide118IRAs
Individual Retirement Account
Allows individuals to set aside additional money towards retirement
Can be set up through
banks, investment companies, etc.
Slide119IRAs
Like a 401k, each IRA plan is made up of its own set of
securities like stocks and bonds
.
Each financial institution has its own set of plans to choose from.
There are
riskier
plans (more stocks) to more
conservative
plans (more bonds).
Slide120Traditional IRA
Money is contributed
pre-tax
(like a 401k)
This investment grows
“tax-deferred”,
meaning you don’t pay taxes on the growth in value of the investment
When you take money out of the account,
you will pay taxes
Slide121ROTH IRA
Contributions are not
tax deductible
(opposite of Traditional IRA and 401k)
Qualified
withdrawals are made tax-free
, so you don’t pay taxes on the account when you reach retirement.
Slide122Key Information (both IRA types)
You cannot access this money until
59 ½
If you take money out sooner you face a
10%
penalty
You can have both a 401k and an IRA account
Max. contributions (2018): $
5,500/year
$6,500 (over 50)
Slide123Activity: Retirement Account Exploration