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Chapters 10-12 Investments

Chapters 10-12 Investments. How Are Saving and Investing Related?. Savings is money set aside for the future. Investing is a strategy to earn more on your money than the rate of inflation. Different rates of return. 10-1 Reasons for Saving and Investing.

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Chapters 10-12 Investments

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  1. Chapters 10-12 Investments

  2. How Are Saving and Investing Related? • Savingsis money set aside for the future. • Investing is a strategy to earn more on your money than the rate of inflation. • Different rates of return 10-1 Reasons for Saving and Investing Slide 2

  3. How Are Saving and Investing Related? • High versus low risk • Rate of return • Liquidity • Emergency funds • Financial security Slide 3

  4. How Is Risk Related to Return? • The higher the risk, the greater your possible return. • Risk-free investments are guaranteed by the government—U.S. savings bonds, Treasury bills. • Return on Investment (ROI) is the amount that savings or investments grow expressed as a percentage. 10-2 Principles of Saving and Investing Slide 4

  5. What Types of Risk Do Investors Face? • Inflation risk • Industry risk • Political risk • Stock risk Investment riskis the potential for change in the value of an investment. 10-2 Principles of Saving and Investing Slide 5

  6. How Do Saving and Investing Meet Personal Goals? • Short-Term Goals • Emergency fund • Vacation planning • Medium-Term Goals • Buying a car • Paying for college • Planning a wedding • Long-Term Goals • Providing for a family • Buying a house Less than 2 years 2-5 years More than 5 years 10-1 Reasons for Saving and Investing Slide 6

  7. How Does Investing Prepare You for Retirement and Beyond? • Retirement is the period of time when you are not working but are able to meet expenses. • Sources of income include: • Retirement plans • Social security • Savings • Investments 10-1 Reasons for Saving and Investing Slide 7

  8. Investment Growth Over Time 10-1 Reasons for Saving and Investing Slide 8

  9. Textbook page 321 #’s: 1-16 (skip 2 and 3) Slide 9

  10. What Are Systematic Saving and Investing Strategies? • Systematic saving involves regularly setting aside cash to achieve goals. • Systematic investing is a planned approach to making investments on a regular basis. 10-3 Strategies for Saving and Investing Slide 10

  11. What Are Systematic Saving and Investing Strategies? • Market timing involves buying and selling stocks based on what the market is expected to do. • Investment tracking involves making investment choices by following stock prices over time. • Dollar-cost averaging investing the same amount of money regularly regardless of the market conditions 10-3 Strategies for Saving and Investing Slide 11

  12. How Can You Reduce Investment Risk? 10-3 Strategies for Saving and Investing Slide 12

  13. How Can You Maximize Investment Return? • A bull market exists when stock prices are steadily increasing. • Usually followed by profit-taking. • Common for the past 20 years. 10-3 Strategies for Saving and Investing Slide 13

  14. How Can You Maximize Investment Return? • A bear market exists when prices are steadily decreasing. • Good time to buy stocks that are considered sound investments. (prices are lower) 10-3 Strategies for Saving and Investing Slide 14

  15. Tracking a Stock’s Price • Common investment strategy • Choose a large corporation you are interested in • Find its stock symbol • Example: Walmart is WMT • Find the close price for yesterday • Record the date and price • Track every class period in this unit Slide 15

  16. Low Risk Choices Slide 16

  17. What Are Low-Risk Savings Options? • Liquid savings include cash or investments that can be changed into cash quickly. • Savings and checking accounts are liquid. • Illiquidinvestments cannot be converted to cash quickly or without a penalty. 11-1 Low-Risk Choices Slide 17

  18. What Are Low-Risk Savings Options? • Savings accounts • Money market accounts • Certificates of deposit • Money set aside for specific length of time at a fixed interest rate • Withdrawal penalties • Special Features 11-1 Low-Risk Choices Slide 18

  19. What Are Low-Risk Savings Options? • Life insurance savings plans • Borrow against the policy’s cash value • Not insured • Not liquid • Brokerage accounts • An account at an investment company • Clearing account: money is used to buy and sell investments • Not insured • Liquid 11-1 Low-Risk Choices Slide 19

  20. What Are Low-Risk Investing Options? Bonds • A bond is a loan that a buyer makes to a bond issuer. • Government and corporations issue bonds. • The face value is the amount the bondholder will be repaid on the maturity date. • The maturity date is the date the borrowed money must be repaid. • Coupon rate – fixed rate of interest that is paid semiannually for the life of the bond 11-1 Low-Risk Choices Slide 20

  21. What Are Low-Risk Investing Options? • Corporate Bonds • Callable • Convertible • Zero Coupon • Investment-grade • Speculative-grade (junk bonds) • Government Bonds • Series EE Bonds, I Series Bonds, Treasury Bills, Treasury Notes, Treasury Bonds, Municipal Bonds 11-1 Low-Risk Choices Slide 21

  22. What Are Low-Risk Investing Options? Annuities • An annuity is a contract purchased from an insurance company that guarantees a series of regular monthly payments for a set time • Not insured • Generally used as a source of retirement income 11-1 Low-Risk Choices Slide 22

  23. Medium Risk Choices Slide 23

  24. What Are Good Financial Market Investments? • A mutual fund is a professionally managed group of investments. • It is bought using a pool of money from many investors. • Indirect investing – buying shares of a fund, not a specific company • Asset allocation involves choosing a combination of funds. 11-2 Medium-Risk Choices Slide 24

  25. Asset Allocation in a Mutual Fund 11-2 Medium-Risk Choices Slide 25

  26. What Are Individual Retirement Account Options? • AnIRAallows you to deposit money into an account during your working years and withdraw it upon retirement. • Traditional IRA’s allow you to contribute pre-tax money and you do not have to pay taxes until you withdraw the money • With a Roth IRA, contributions are taxed but earnings are not 11-2 Medium-Risk Choices Slide 26

  27. What Retirement Plans Are Available through Employers? • Defined-contribution plans • 401(k) plans: tax-deferred plans for profit-seeking businesses • 403(b) plans: tax-deferred plans for government and nonprofit organizations • Defined-benefit plans • Pension plan • Retirement accounts may be portable, meaning you can take the account with you when you leave a job. (Rollover) 11-2 Medium-Risk Choices Slide 27

  28. High Risk Choices Slide 28

  29. How Can You Invest Directly in Financial Markets? • Direct investing is buying stocks and other investments directly from companies and holding them. • If you buy the stock of only one company, the risk is high because your money is invested in only one place. 11-3 High-Risk Choices Slide 29

  30. How Can You Invest Directly in Financial Markets? • Buying stocks • You become a stockholder and own shares in a company. • Common Stock: pays variable dividends and gives owners voting rights • Preferred Stock: fixed dividends but no voting rights 11-3 High-Risk Choices Slide 30

  31. How Can You Invest Directly in Financial Markets? • Futures contracts and commodities • You agree to buy or sell a commodity at a set price and date in the future. • Commodities are items that have the same value across the market with little or no difference in quality (examples: soybeans, silver, cattle) • Investment clubs • You pool your money with other people and invest together. (example: time shares) 11-3 High-Risk Choices Slide 31

  32. What Professional Advice Is Available? • A stockbroker buys and sells securities on behalf of others. • Full-service brokers • Discount brokers • Online brokers • A financial planner helps people make investment decisions to meet goals. • Banks and credit unions sell securities that they endorse. 12-1 Researching Investments and Markets Slide 32

  33. What Professional Advice Is Available? Full Service or Discount Brokers? • Discount brokers: • Charge a smaller fee • May charge extra for information • Full service brokers: • Give sound investment advice for a higher fee • When making a choice, consider: services, fees, location of nearest brokerage office, minimum deposits, etc. 12-1 Researching Investments and Markets Slide 33

  34. How Are Financial Markets Designed? • Securities exchanges are places for brokers to buy and sell securities for their clients. • Direct investing involves buying securities directly from a corporation. • Reinvesting involves getting stock dividends instead of cash dividends. 12-1 Researching Investments and Markets Slide 34

  35. How Are Stocks Bought and Sold? 1. Set up an account. • Choose your venue (full-service broker, discount broker, bank, etc.) • Provide identification. • Access your account online. • Make minimum or regular monthly deposit. 12-2 Buying and Selling Securities Slide 35

  36. How Are Stocks Bought and Sold? 2. Place transactions. • A market order is a request to buy or sell a stock at the current market price. • A limit order is a request to buy or sell a stock at a specific price. • A stop order is a request to sell a stock when it reaches a certain price. • A discretionary order allows the broker to buy or sell a stock to get the best price. 12-2 Buying and Selling Securities Slide 36

  37. Buying Patterns • Buy and hold is a plan to purchase and keep stock for the long term. • Stock turning is making regular and systematic changes in stock ownership based on trends in the economy. • Watch-and-wait investing involves making a comparative analysis of securities periodically. 12-2 Buying and Selling Securities Slide 37

  38. What Are Financial Reform Laws? • Sarbanes-Oxley (SOX) sets standards for public companies and accounting firms for the reporting of finances. • Created in response to financial scandals at large companies. • Requires improved financial reporting, audits, and accounting services. 12-3 Regulatory Agencies and Laws Slide 38

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