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INTRO TO INVESTING

INTRO TO INVESTING. Personal Finance. What is Investing?. Purchase of assets with the goal of increasing future income Focuses on increasing wealth – more money Use for long term financial goals Rate of Return Total Return/Amount of Money Invested = ROR What is Mandy’s ROR?

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INTRO TO INVESTING

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  1. INTRO TO INVESTING Personal Finance

  2. What is Investing? • Purchase of assets with the goal of increasing future income • Focuses on increasing wealth – more money • Use for long term financial goals • Rate of Return • Total Return/Amount of Money Invested = ROR • What is Mandy’s ROR? • Money Invested = $2,200 • Total Return= $110

  3. Risk Higher Potential Return = Higher Risk • Risk: Uncertainty of the outcome of a situation or even • Investment Risk: Possibility that an investment will fail to pay to the expected return or pay any return at all ALL investment tools carry SOME level of risk

  4. Types of Investment Tools Stocks Bonds Mutual Funds Real Estate Speculative Investments

  5. Stocks A share of ownership in a company Owner of the stock Usually a stockholder owns a very small part of a company

  6. Return on Stocks Share of profits distributed in cash to stockholders Current price that a buyer is willing to pay for stock Definition If stock is sold for a market price higher than what was paid If stock is sold for a market price lower than what was paid Stockholder may or may not receive dividends- depends on company profit What is received? Stockholder will receive a return Stockholder will lose money

  7. Bonds Form of lending to a company or the government (city, state, or federal) Definition Bonds are less risky than stocks but usually do not have the potential to earn as high of a return Annual interest is paid to investor Return Once the maturity date is reached, the principal is repaid to the bondholder

  8. Mutual Funds Mutual fund- when a company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds Reduces investment risk • Make sure to research the fees charged by a mutual fund Saves investors time Fees may be high

  9. Real Estate • Any residential or commercial property or land as well as the rights accompanying that land • A family home is usually not considered an investment asset • Can be risky and more time consuming but has potential for large returns • Examples of real estate investments include rental units and commercial property

  10. Financial Risk Pyramid The risk level for specific investment tools may vary Speculative Investment Tools Futures Commercial Paper Increasing potential for higher returns Increasing risk Options Collectibles Stocks Real Estate Investment Tools Index Funds Mutual Funds Bonds Money Market Deposit Account Savings Tools Savings Bonds Certificate of Deposit Checking Account Savings Account

  11. Investment Philosophy Everyone has a tolerance level for the amount of risk they are willing to take on The greater the risk a person is willing to make on an investment, the greater the potential return will be Investment Philosophy- an individual’s general approach to investment risk Generally divided into three categories: conservative, moderate, aggressive

  12. Tax-Sheltered Investments Government tries to encourage certain types of investments by making them tax-sheltered Tax-sheltered investments- eliminate, reduce, defer, or adjust the current year tax liability • Retirement • Child/dependent care • Education expenses • Health care expenses

  13. Employer-Sponsored Investment Accounts • Type of tax-sheltered investment • Money is automatically taken out of employee’s paycheck • Employers often contribute a portion of money to the investment with no additional cost from the employee Example: Employee benefits from having double the amount of money invested! Employer contributes the same amount of money to the employee’s investment account

  14. Rule of 72 Allows a person to easily calculate when the future value of an investment will double the principal amount

  15. What Can the “Rule of 72” Determine? How many years it will take an investment to double at a given interest rate How long it will take debt to double if no payments are made How many times money (or debt) will double in a specific time period The interest rate an investment must earn to double within a specific time period

  16. “Rule of 72” FYI • Only an approximation • Interest rate must remain constant • Interest rate is not converted to a decimal • Equation does not allow for additional payments to be made to the original amount • Interest earned is reinvested • Tax deductions are not included

  17. Doug’s Certificate of Deposit Doug invested $2,500 into a Certificate of Deposit earning a 6.5% interest rate. How long will it take Doug’s investment to double? • Invested $2,500 • Interest Rate is 6.5%

  18. Jessica’s Credit Card Debt Jessica has a $2,200 balance on her credit card with an 18% interest rate. If Jessica chooses to not make any payments and does not receive late charges, how long will it take for her balance to double? • $2,200 balance on credit card • 18% interest rate

  19. Jacob’s Car Jacob currently has $5,000 to invest in a car after graduation in 4 years. What interest rate is required for him to double his investment? • $5,000 to invest • Wants investment to double in 4 years

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