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9.1 Investing basics

9.1 Investing basics . Goals: Explain the relationship between risk and return when investing. Describe how to evaluate the level of risk you should accept when investing. Section 9.1- Investing Basics. Investing Risk Return Diversification. Key Terms. Deposit in a savings account

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9.1 Investing basics

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  1. 9.1 Investing basics

  2. Goals: • Explain the relationship between risk and return when investing. • Describe how to evaluate the level of risk you should accept when investing. Section 9.1- Investing Basics

  3. Investing Risk Return Diversification Key Terms

  4. Deposit in a savings account • Buying a car • Putting money under your mattress • Which one of these is an investment? • Depositing in a savings account- WHY?? What is Investing?

  5. Investing is saving in a way that earns income. • Let’s name all the examples of investments that we can think of! • If you compare all of these investment options what conclusion can you draw? • Some investments are riskier than others What is investing?

  6. The chance that an investment will decrease in value is risk. • FDIC savings account vs. putting money into a business • The income you earn on an investment is called your return. Risk and Rate of return

  7. Your rate of return is measured as a percentage of the amount invested. • Suppose you invest $1000 in a new coffee shop business. At the end of one year, you receive $100 as your share of the company’s profit. • What is your return? • $100 • What is your rate of return? • 10% Calculating your rate of return

  8. The general rule of investing is “the higher the potential rate of return, the greater the risk.” Rate of return High Risk High Evaluate your risks

  9. For some investment options, the risk may be greater than you are willing to accept. If this is the case, you should choose not to invest no matter how high the possible rate of return. When you invest in something other than an insured account, you are not just risking your potential earnings. You could lose the amount you invested as well. Evaluate your risk

  10. Suppose you bought 200 shares of stock at $2.50 per share last year. The corporation paid $0.15 dividend per share for the year. At the end of the year, you sold the stock for $3.00 per share. What was the total return on investment if you disregard fees? What rate of return did you earn on your initial investment? DO NOW

  11. Have you ever heard the saying “don’t put all your eggs in one basket”? What does this mean and how does it apply to investing? When investing you should not put all your money in one place. If that investment fails, you lose all of your money. How can you limit risk when investing?

  12. A better choice is to distribute your money among a variety of investments. Investing in various businesses with different levels of risk is called diversification. • When you diversify, you reduce your overall risk of loss. • For example if one investment goes badly, the others might do well and you can still end up with a good overall return. Limit risk through diversification

  13. During your life span, when is a better time to take risks? • When you are younger as you have many income-earning years left and more time to recover from any losses. • If you are older and have most of the money you will need for retirement you may not need or want to take risks. • DON’T MAKE RISKY INVESTMENTS WITH MONEY YOU CANNOT AFFORD TO LOSE! Understanding risk

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