1 Compare consumer choices for saving and investing 2 Explain the relationship be tween saving and investing 3 Examine reasons for saving and investing eg time value of money ID: 322279
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Slide1
Unit 4 Saving and Investing
1. 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. Slide2
Savings PlansSlide3
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
InsuredSlide4
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 insuredSlide5
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 datesSlide6
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 monthSlide7
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
interestSlide8
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 yearSlide9
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 chargesSlide10
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 planSlide11
InvestmentsSlide12
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 liquidSlide13
FINANCIAL GOALS
Take advantage of 401K or 403B plans - employer often matches
Elective Savings Programs
Special Savings Effort
Gifts, inheritances and windfallsSlide14
Investment Growth & Liquidity
Time 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 yearsSlide15
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.Slide16
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)Slide17
5 COMPONENTS OF RISK
Inflation
Interest Rate
Business Failure
Financial Market
Global InvestmentSlide18
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 booksSlide19Slide20
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.Slide21
Savings & Investing Options
SAVINGS ACCOUNTS/CDs
REAL ESTATE
COLLECTIBLES
SECURITIES
BONDS
MUTUAL FUNDS
OPTIONS
COMMODITIES
STOCKSSlide22
REAL ESTATE
Resale for profit
Rental IncomeSlide23
COLLECTIBLES
Coins
Stamps
Beanie Babies
Sports cardsSlide24
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 interestSlide25
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. Slide26
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.Slide27
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 productSlide28
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 peopleSlide29Slide30
WHY BUY STOCK
To gain larger returns than they can get from more conservative investments such as savings accounts or government bonds.Slide31
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. Slide32
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 splitsSlide33
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 Slide34
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 offersSlide35
Preferred Stock
Preferred stock
– a type of stock that gives the owner the following advantage:
Cash dividends
before
common
stockholders
Attracts more conservative investors
Receive dividends first so often purchased if steady income is desired
Not considered a good investment for most
peopleSlide36
Blue-Chip Stocks
A safe investment that generally attracts conservative investors
Strongest and most respected companies
Stable earnings
Consistent dividendsSlide37
Income Stock
Pays higher-than-average dividends compared to other stocks
Examples:
Dow Chemical
Bristol-Myers Squibb
Gas and Electric companiesSlide38
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 AirlinesSlide39
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 improvesSlide40
Defensive Stocks
A stock that remains stable during declines in the economy
Steady income even when economy declinesSlide41
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)Slide42
Penny Stocks
Typically sell for less than $1 a share
Issued by new companies whose sales are very unsteady
Prices go up and down wildly—hard to track
Can be riskySlide43
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 stocksSlide44
SEC
Securities & Exchange Commission
- regulatory agency of the stock market and prevents corporate abusesSlide45
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 stocksSlide46
Sources for Evaluating Stocks
Newspapers in the financial section
Wall Street Journal
The Internet
Stock Advisory Services
Corporate News Publications
Barron’s
Smart MoneySlide47
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 planSlide48
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 investmentsSlide49
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 investmentsSlide50
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 neededSlide51
Certification of Financial Planners
CFP – Certified Financial Planner
ChFC – Chartered Financial Consultant
Check the credentials before working with a plannerSlide52
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 lossesSlide53
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 priceSlide54
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
LineSlide55
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.