Financial planning Intro to Investing - PowerPoint Presentation

Slide1

Financial planning

Intro to Investing

Slide2

Daily 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

Slide3

Saving 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.

Slide4

What is Investing?

Purchase of assets with the goal of increasing

future income

Focuses on

wealth accumulation

Appropriate for

long-term

goals

Slide5

The 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.

Slide6

Savings 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

Slide7

What 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? 

Slide8

K.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.

Slide9

Risk 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

Slide10

Investment Philosophy

Investment Philosophy

-

an individual’s general approach to investment

risk

Varies based on age, values, amount of money, goals, etc.

Slide11

Investment 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.

Slide12

What 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.)

Slide13

What 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.

Slide14

What 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.

Slide15

A 

grouping of financial assets such as stocks, bonds, mutual funds, index funds, and cash

equivalents.

An investment notebook

Portfolio

Slide16

Four 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.

Slide17

Dollar 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!!

Slide18

Four 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.

Slide19

Four 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

Slide20

Career 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

Slide21

Slide22

Activity:

Article, ‘

How To Pick Stocks

’

Slide23

Activity:

What Do All The Numbers Mean?

Slide24

Unit 8

Types of Stock

Financial Planning

Slide25

Stocks

Stock: share of ownership in a company, also called a share

Stockholder: owner of the stock, also called a shareholder

Slide26

Why 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

Slide27

Stocks

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.

 

Slide28

What type of stock?

Slide29

Common 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

Slide30

What type of stock?

Slide31

Preferred 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

Slide32

What type of stock?

-

Slide33

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

Slide34

What type of stock?

Slide35

Growth 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

Slide36

What type of stock?

Slide37

Blue 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

Slide38

MMM

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

Slide39

Slide40

Green 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

Slide41

What type of stock?

Slide42

Penny 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

Slide43

What type of stock?

Slide44

Value 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

Slide45

What type of stock?

Slide46

Defensive 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

Slide47

What type of stock?

Slide48

Cyclical 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

Slide49

What type of stock?

Slide50

International 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

Slide51

What type of stock?

Slide52

Caps (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.

Slide53

Related 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

Slide54

Market 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)

Slide55

Caps (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

Slide56

Market 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.

Slide57

Market 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.

Slide58

Diversification!!!!

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?

Slide59

Other 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.

Slide60

Go Over Article:

How To Pick Stocks

Slide61

Go Over Activity:

What Do All The Numbers Mean?

Slide62

Stocks,

Part 2

Slide63

What Affects Stock Price?

The Company & Its Fundamentals

Interest Rates

The Market

And many, many other factors

Slide64

The 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.

Slide65

Interest 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.

Slide66

The 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.

Slide67

Other Terms

Bull Market – prolonged period of rising stock prices and investor optimism

Slide68

Other 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.

Slide69

Stock 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.

Slide70

On the Floor of the NYSE

Slide71

Stock 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.

Slide72

Slide73

How 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.

Slide74

Dow Jones History

(Older Chart through about 2013)

Slide75

More recent

dow jones history

Slide76

Other Indexes

NASDAQ – National Association of Securities Dealers Automated Quotations

Lists approximately 3300 companies from 37 countries

Trades about 2 billion shares per day

Slide77

Other 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

Slide78

S&P 500 History

Slide79

Earnings 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.)

Slide80

Other 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.)

Slide81

P/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.

Slide82

Other 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

Slide83

Slide84

Slide85

AKA THE PROFIT!!!

Slide86

Other 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!

Slide87

Finish and Hand In

Webquest

Activity:

What Do All The Numbers Mean?

Slide88

Activity:

News and Stock Prices

Slide89

Mutual Funds

Unit 8Financial Planning

Slide90

What 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)

Slide91

A 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

Slide92

Why 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.

Slide93

What 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

Slide94

Mutual 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

Slide95

Mutual 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

Slide96

Types 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

Slide97

Types 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.)

Slide98

Unit 8: Investing

BONDS

Slide99

Bonds 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?

Slide100

Corporate

– from a company

Treasury

– from the federal government

Municipal

– from state and local governments

Types of bonds

Slide101

If 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

Slide102

Face 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

Slide103

Like 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

Slide104

When 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

Slide105

When 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

Slide106

Municipal 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

Slide107

Municipal – thousands of dollars

Corporate – generally purchased in multiples of $1000

Treasury – purchased in multiples of $100

Required Investment

Slide108

You will be researching this info and answering related questions on the worksheet.

Interest Rates

Slide109

Retirement Accounts

Unit 8: Investing

Slide110

THE 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

Slide111

Things 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?

Slide112

401k

An employee retirement plan

Contributions from paycheck

before taxes

, which helps

lower

taxable income

Employee

chooses investments based upon employer’s plan & options

Slide113

401k 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.

Slide114

401k

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

Slide115

Key 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.

Slide116

Key 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.

Slide117

Key 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.

Slide118

IRAs

Individual Retirement Account

Allows individuals to set aside additional money towards retirement

Can be set up through

banks, investment companies, etc.

Slide119

IRAs

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).

Slide120

Traditional 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

Slide121

ROTH 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.

Slide122

Key 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)

Slide123

Activity: Retirement Account Exploration