Mastering Savings and Investments: Your Path to Financial Success

Chapter 14 – Savings & Investing Mr. Singh

Saving vs Investing • Saving – The money you put aside for future use • When you deposit money in a savings account it collects interest (Ex. 2%) • Investing – using your savings to earn extra income. • Advantage – Investments yield a higher rate of return and can grow or exceed the rate of inflation • Disadvantage – Very risky and not guaranteed

Saving vs Investing • You may want to develop a savings plan • Putting money aside to reach your financial goal • Why save? • May have an emergency (Sickness therefor can’t work, accident) • Many financial experts say you should have 3-6 months salary in case you lose your job • Some people have short and long term goals Maybe they want to buy a car (long term) ot a TV (short term)

Saving vs Investing • Some people just want a sense of security and satisfaction • Maybe they want extra income for retirement • People who are free from financial worries tend to be happier

Selecting a savings plan • You want to select a plan that has the best benefits letting you earn interest while keeping your money safe • How does the account work? • When you deposit money, you’re lending the institution your money so they can lend it to other customers • The financial institutions pays you interest – money you receive over time for letting others borrow your money

Selecting a savings plan • Interest – is a percentage of the original investment : this is called rate of return or yield • Example: Suppose you deposit $1000. If the interest on the account is 5% (rate of return of 5% a year), how much interest would you earn by the end of the year? • Answer: $50 ($1000 x 0.05 = $50) • 5%  rate of return or yield

Earnings and Yield • In the example we just did, interest was calculated yearly • Sometimes interest can be calculated daily, weekly or monthly. • The more often interest is paid, the greater the return • Simple Interest – calculated only on the principal (the amount you deposited) • Compound Interest – calculated on the principal plusany interest you earned

Calculating Simple Interest • Eg. $1000 at 5% simple interest earns $50 every year • +$50 in the second year (Total: $1100) • +$50 in the third year (Total: $1150) • +$50 in the fourth year (Total: $1200) • +etc.

Calculating Compound Interest • E.g. $1000 at 5% compound interest earns $50 in the first year • +$52.50 in the second year (total $1102.50) • +$55.13 in the third year (total $1157.63) • +$57.88 in the fourth year (total $1215.60)

Common forms of investment • Investments give you a greater return than savings • Investments include: • Government or Corporate Bonds • Buying stocks in corporations • Mutual Funds • Acquiring Real Estate • Investing in collectables Investments vary with risk. The ones with the highest return normally carry the most risk

Common forms of investment • Good investors diversify their investments • This means they spread their money across several types of investments. • If you have a small amount of savings you probably want the less risky investments. • If you have a lot of money, you may be in a better position for a more risky investment

Canada Savings Bonds • CSB – Loans that you give the government • A bond is a piece of paper that the government tries to sell to generate revenue • You can purchase these bonds and not only will the government repay you the value of the bond but you get interest as well. • Maturity Date – printed on the bond and this date represents when the bond is due and is paid.

Canada Savings Bonds • Advantages to purchasing a bond: • Guaranteed by the government of Canada • Highly liquid – they can be cashed out anytime • Face Value – this is the cost of the bond. • You can purchase bonds for as little as $100 • You can even have it come out of your pay cheque for convenience • You can purchase bonds at all major financial institutions including banks and credit unions

Corporate Bonds • Sometimes businesses need more money to increase their production, expand their operations or introduce new products • How do they do that? They sell securities • Securities are corporate bonds and shares of stock • Almost the same idea as Savings bonds. Instead of loaning money to the government they’re loaning it to corporations

Corporate Bonds • A bond – a piece of paper that promises to repay the money borrowed + interest on a future date • Bondholders receive interest payments every year • If a bondholder wants their money back earlier then the maturity date, they can sell to other investors at the current value or market value • Market price may be higher or lower then the bond value. Just depends on what people will pay

Investing in Stocks • When you invest in stocks – you gain ownership – you become a part owner aka shareholder • Companies sell shares to raise money so they can expand and grow • As a shareholder, you get a piece of the profits through dividends. • Stock prices go up and down. These prices are influenced by supply and demand

Investing in Stocks • When the demand for and prices of most stocks are high – bull market • If the offers to sell stocks exceed the orders to buy stocks = prices will fall - bear market • Companies issues 2 different types of stocks • Common Shares • Preferred Shares

Common Stock • Most available type of stock • When someone has a common stock, they have a voice in the operation of the business • Shareholders have the right to attend meetings and vote on company matters • If a company makes a profit, common shareholders will share in that profit after bondholders and preferred shareholders have been paid.

Preferred Stock • These shareholders can paid first if the company makes profit • These dividends are at a set rate which is normally higher than common shares • Less risk to own these type of stock since dividends are fixed • These shareholders have no voting rights

Companies • Companies that have a long record of regular dividend payments and stable growth are called blue chip companies • Ex. Bell Canada • Growth companies reinvest their profits into the company rather than paying shareholder dividends

Other Exchanges • Popular ones in the US are • New York Stock Exchange • NASDAQ (National Association of Securities Dealers Automated Quotations)

The Stock Exchange • This is where investors buy and sell stocks • Stockbrokers spend most of their time at The Toronto Stock Exchange (TSX) which handles the most trading volume of any Canadian stock market • About $5 Billion in shares are traded daily • TSX generates profit in 3 ways – • Collects brokerage fees • Collect fees from list companies • Sell stock data

Buying and Selling Stocks • Many stocks are brought and sold through stockbrokers and investment dealers • They are licensed and charge a fee or commission for their services • Clients inform stockbrokers what they want to sell or buy for. • You can also use online investing which bypasses using a financial planner but a lot more work

Stock Quotations • We have 2 prices • Bid price is the highest price anyone Is willing to pay for a stock • Ask price is the lowest selling price that another investor is willing to accept for a stock

Mutual Funds • If you don’t have time to invest in stocks because you don’t have time to monitor the stock market, you can invest in mutual funds • Mutual fund is a pool of money from many investors that is set up and managed by an investment company • The company buys and sells securities of other corporations • Because you have professionals basically investing your money for you, you have to pay a higher fee

Mutual Funds Cont’d • Mutual funds managers select investments from many different companies at the same time • This spreads the risk over a large number of securities • If one fails, others might do well to balance the loss

Real Estate • Investing in land or houses or anything attached to land • For most people, buying a home is the biggest investment in their life • People buy homes to rent out so they have extra income coming in • When buying a home you need to consider all the expenses – mortgage, taxes, insurance etc.

Collectibles • Ever collected baseball cards, pictures, etc. • Any personal item of interest that can increase over time is a collectible • A collectible will only increase in value if it becomes rare or hard to find – basically demand exceeding supply • Remember there is no interest or dividends so you’ll only see the true value of the item when you sell it

Mastering Savings and Investments: Your Path to Financial Success