Assets and Investments

Assets and Investments Things of worth or how to make more money with money!

Assets and Investments • What is an asset? • What is an investment? • Big Three Asset Classes:

Stocks • Stock is the • The stock of a corporation/company is partitioned into shares that are started at the time of business formation. • A share represents a Ex.) Apple has 927,100,000 shares and to buy one share, the current price is $397.77.

Stock Market Data http://money.cnn.com/data/markets Google Finance is a great website to look at the price of company shares! https://www.google.com/finance?cid=22568

Stocks – Trading • Stocks are traded (purchased and sold) on various exchanges around the world. • The two primary American stock markets — • In order for a companies stock to be sold on an exchange, the company must be public meaning the purchase of shares is open to the everyday investor. (McDonalds) • Private companies may have stock but it is not for sale on an exchange but traded between private individuals. (Subway)

Stocks - Purchasing • Prices for shares are determined by • Generally, the price should reflect the value of the company in terms of assets and earnings but that isn’t always the case • Shares cannot be purchase directly by an investor. - Shares can be purchased

Stocks - Appreciation • Market Appreciation • Dividend • Note: Some people take this money and spend it. Most smart investors will use that money to buy more of the same stock. • Note: Not all companies give out a dividend. • Apple, for example, didn’t issue a dividend until after the death of Steve Jobs

Let’s look at how dividend’s work… The following website was found on Google finance and we are looking at Gap Company stocks… https://www.google.com/financeq=gap&ei=bXh5UeitHaGeiQKlRg

Stocks • Value of the Stock Market • Total Value of the US Stock Market $ • Total Value of the Global Stock Market $ • Tracking the Stock Market • Stocks are tracked according to an index • A stock index is a statistical compilation of represented stocks • Famous Stock Indices include the Dow Jones Industrial Average (DJIA), S&P 500, and Nasdaq Composite. http://money.cnn.com/data/markets

How to track the stock market… • Dow Jones Industrial Average (DJIA) – tracks 30 of largest and most influential companies in the US. http://finance.yahoo.com/q/cp?s=%5EDJI • S&P 500 – tracks the 500 leading publicly traded companies in the US economy. http://en.wikipedia.org/wiki/List_of_S%26P_500_companies • Nasdaq Composite – Tracks the majority of stock traded on the NASDAQ exchange (over 3000 stocks) http://money.cnn.com/data/markets/nasdaq/

Bond • A bond is generally a loan to an entity (generally a company or government) for a defined period of time at a set interest rate • Companies and governments issue bonds to fund their day-to-day operations or to finance specific projects. • When you buy a bond, you are loaning your money for a certain period of time to the issuer, be it General Electric or Uncle Sam. • The holder of the bond purchases it for a set price and the issuer pay the holder a set amount at a regular period until the bond is paid in full • In return, bond holders get back the loan amount plus interest payments.

Different Types of Bonds: • Treasuries • U.S. Governments bonds sold by the treasury department in order to pay for governmental projects. • The money paid out for a Treasury is essentially a loan to the government. As with any loan, repayment of principal is accompanied by a fixed interest rate. • These bonds are guaranteed by the ‘full faith and credit’ of the U.S. government, meaning that they are extremely low risk (since the government can simply print money to pay back the loan). • Treasuries make interest payments semi-annually and the income that holders receive is only taxed at the federal level.

Types of Treasuries: • Treasury Notes • A marketable U.S. government debt security with a fixed interest rate and a maturity between one and 10 years. Treasury notes can be bought either directly from the U.S. government or through a bank. • Treasury Bills • A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations of $1,000 up to a maximum purchase of $5 million and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks). • Treasury Bonds • A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest payments semi-annually and the income that holders receive is only taxed at the federal level.

Different Types of Bonds Continued… • Municipal Bonds • Municipal bonds are debt obligations issued by states, cities, counties and other governmental entities, which use the money to build schools, highways, sewer systems, and many other projects. • Corporate Bonds • Corporate bonds are debt obligations, or IOUs, issued by private and public corporations. They are typically issued in multiples of $1,000 and/or $5,000. Companies use the funds they raise from selling bonds for a variety of purposes, from building facilities to purchasing equipment to expanding their business.

Bonds • Most bonds are bought and sold, and resold over-the-counter. • TheOTC market consists of hundreds of financial institutions and brokerages that buy and sell over the phone or via computer networks. • Most people purchase bonds through mutual funds. • Value of the Bond Market • Total Value of the US Bond Market $37 trillion • Total Value of the Global Bond Market $93 trillion

Cash Equivalents • Cash Equivalents are investments that are highly liquid meaning they can be converted to cash with very little trouble. • Examples: U.S. government Treasury bills, bank certificates of deposit, bankers' acceptances, corporate commercial paper and other money market instruments. • Typically, cash equivalents have low interest rates. A 1% interest rate on a cash equivalent is AMAZINGLY high

Homework #5 • This assignment is to help you gain a better understanding of stocks and bonds • Using the internet, look up the stocks that are included in the DJIA, the S&P 500, and the Nasdaq Composite (Note: you can NOT use the one listed in the example) • Pick three from each and list the close price of the day, any dividend, when it is paid, the YTD appreciation, 5 year appreciation • Do some research on bonds. Besides the US Government, local government and companies, who else can issue bonds? • Is Flagstaff issuing or holding any bonds currently? • What is the current yield on the 10 year T-Note? How does this yield compare to the yield from 5 years ago? What does that mean for the US government? • Go to a bank’s website (BoA, Wells Fargo, Citi, Ally, Compass, etc) and look up their rates of cash equivalents. You should compare CD’s, Savings and Money Markets from at least 3 banks.

Interest and Investment Growth • Vocab Terms • Principle • The amount of money lent or owed • Accumulated Principle • The current balance. Generally, it is a combination of principle and the accrued interest • Interest Rate • A percentage of money owed to a lender/investor for the privilege of borrowing money • Compounding Interest • Interest paid on principle plus previously paid interest • Annuity • A stream of payments over a period of time. The payments generally collect interest during that time.

Simple Interest • Interest paid once a year, at the end of the year • Formula: • A = Accumulated Principle • P = principle • r = rate (in decimal) Note: You need to add 1 to the rate • t = time (in years) • Example • Harper lends Rocco $4,000 and the agree that Rocco pay Harper 5% interest for the next 5 years when Rocco will pay the whole amount back. Using the formula, Rocco realizes that , and he will have to pay that amount in 5 years.

Compounding Interest • Let’s look at that scenario again • Year 1: Rocco has the $4,000 and when the end of the year comes, he owes $200 in interest. Harper isn’t taking payment until after 5 years, so that interest is ADDED to Rocco’s balance. He now owes $4,200 • Year 2: This year, Rocco owes the 5% on the $4,200, not the original principle! So he owes $210 and his balance is now $4,410 • Year 3: He owes $220.50 with a new balance of $4,630.50 • Year 4: He owes $231.53 with a new balance of $4,862.03 • Year 5: In the last year, he owes $243.10 with a new balance of $5,105.13

Compounding Interest • What is happening with Rocco’s balance? It is increasing as time goes on. • Why? Because as the interest is added to his balance, he needs to pay interest on the interest he has already paid • What happens if Harper wasn’t happy with being paid interest at the end of the year but wanted to be paid every month?

Compounding Interest • A small part of the interest paid at multiple times a year with interest being paid on the principle plus previously paid interest • Formula: • n = the number of times compounded a year • Example: Harper lends Rocco $4,000 for 5 years at 5% interest compounding monthly. How much does Rocco owe after 5 years? Rocco owes $5,133.43

Compounding Interest • Compounding Interest can be used to determine how much you want to invest • Example: Harper wants to save some money in Billy Bob’s Bodacious Bank which is offering a CD at 1.25% compounding quarterly for 10 years. She would like to have $10,000 at the end of the period of time. How much does she need to invest? • Solve for P • P = $8,826.69

Annuities • Compounding interest is great IF you want to invest an amount then forget about it. What happens if you would like to make regular payments into a savings? • This is called an annuity as it is a stream of payments that are collecting interest from the time they are paid in. (Note, there is an investment vehicle called an Annuity. We are not discussing that in this class) • Formula: • C = contributions • i = interest rate in the contribution time period • n = number of contributions

Assets and Investments