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The Fundamentals of Investing

The Fundamentals of Investing. Advanced Level. Agenda. Return Unit 5 Test Overview of Topics for Remainder of Quarter Instruction Difference between Saving and Investing Long Term V alue of Investing Time Value of Money Different Types of Investments Next Time: Securities. Our Goal.

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The Fundamentals of Investing

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  1. The Fundamentals of Investing Advanced Level

  2. Agenda • Return Unit 5 Test • Overview of Topics for Remainder of Quarter • Instruction • Difference between Saving and Investing • Long Term Value of Investing • Time Value of Money • Different Types of Investments • Next Time: Securities

  3. Our Goal 50 question standardized test To complete online by 1/17/14 Makeup test the week of 1/20-1/24/14

  4. How Can You Pass the Test? • Take notes during instruction • Ask questions for clarification • Complete the EVERFI modules • Take practice quizzes and tests online • www.moneypower.org • Login ID: Pfhs46 • Password: hS3200

  5. Topic Overview • Unit 6: Saving and Investing • Purpose of Investing • Markets for Investing • Investment Products • Investment Strategies

  6. Topic Overview (continued) • Unit 7: Money Management/Financial Planning • Wills/Estate Planning • Housing • Renting vs. Owning • Long-term Planning • Financing Higher Education • Retirement

  7. Saving • Savings Accounts • Interest-Bearing Account at Bank/Credit Union • Money Market Accounts • Similar to savings accounts • Have higher minimum balances • Offer higher rates of interest, limited withdrawals • Certificates of Deposit (CDs) • Time Deposit (6 months, 1 year, 5 years or more) • http://www.youtube.com/watch?v=fB2Ui1HDX98

  8. Investments Investments -assets purchased with the goal of providing additional income from the asset itself but with the risk of loss

  9. All Investments Have Some Risk Investments have the potential for higher returns

  10. Investments are Important to Building Net Worth Savings Tools = Monetary Assets (liquid – quickly and easily converted to cash) Investment Tools = Investment Assets (may not be easily converted to cash or penalties charged to access the funds early) Investments are less liquid than savings tools

  11. Investments Help Accomplish Long Term Goals Higher Education Retirement Buying a House It is recommended that at least 10% of net income is dedicated to savings and investments each time income is received

  12. Review: Saving vs. Investing What types of feelings result from saving and investing?

  13. Rate of Return Total return on investment expressed as a percentage of the amount of money saved

  14. What is Ashley’s Rate of Return? Ashley’s rate of return on investment is 5% Ashley saved $2,200 in a money market deposit account. After one year, she has a return of $110. What is Ashley’s rate of return?

  15. Inflation Inflation Risk The danger that money won’t be worth as much in the future as it is today Strive to have the rate of return on investment be higher than the rate of inflation How does inflation relate to investing? Inflation Rise in the general level of prices

  16. Types of Investment Tools

  17. Stocks vs. Bonds http://www.investopedia.com/video/play/stocks-versus-bonds/ • Bonds are debt instruments • The investor become a creditor to the company • Stocks (securities) are equity instruments • The investor becomes a partial owner of the company. Ownership comes with voting rights and a chance to share in any profits of the company

  18. Let’s Take a Look at Bonds

  19. Bond

  20. Things to Know About Bonds Issuer- the company or government that is borrowing the money Investors- people who buy the bonds (lend the money) Face Value- (par value)it is the amount paid to the holder at maturity Interest Rate- referred to as the coupon Fixed rate- bonds are usually fixed rate because the lender knows ahead of time how much interest they will be receiving Maturity Date: the date which the issuer must pay back the amount borrowed

  21. Bond Example • You purchase a bond: • face value of $1,000, • an interest rate (coupon) of 8% • maturity of 10 years • This means you'll receive: • $80 ($1,000*8%) of interest per year • a total of $800 of interest for the 10 years • When the bond matures after a decade, you'll get your $1,000 back

  22. Municipal Bonds • Are issued by local governments and their agencies • Cities, states, school districts • Interest on these bonds are often exempt from federal income tax (possibly state income tax as well) • Example: Series EE Savings Bonds from the US government

  23. Stock • Owner of the stock • A share of ownership in a company Usually a stockholder owns a very small part of a company

  24. How does a stock increase value? Panera Bread stock was issued on June 10, 1991 The price per share on June 10, 1992 was $13.00 On December 6, 2013 the price per share was $176.63

  25. If I bought 100 shares at $13.00/share, I own a small piece of Panera Bread Co. My stock that day (6/10/91) is valued at $1,300.00. Panera has grown into a larger company and has made a profit over the years. If I sell my 100 shares on Dec. 6, 2013, when they are trading for $176.63/share, I will receive $17,663.00 (100 x 176.63).

  26. I held the stock from 1991 to 2013, 22 years. So I made a gain of $16,363!

  27. Returns • The money an investor makes on a stock is called a return. • Capital Gains • Dividends

  28. Some stocks also pay a dividend which is a payment made by a corporation to its shareholders, usually as a distribution of profits.

  29. Stock Returns - Dividends

  30. Capital gains are included in income for tax purposes. Long-term capital gains are taxed at a lower rate than short-term capital gains The money I have made from the sale of my stock is called a capital gain.

  31. Stock Returns – Capital Gains/Losses

  32. A stock splitis a decision by the company's board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders. For example, in a 2-for-1 stock split, every  Panera shareholder with one stock is given an additional share. Therefore I would now have 200 shares of Panera stock, but they will be worth half of the current market price

  33. Where does an investor purchase a stock or a bond? Abroker is an individual or party (brokerage firm) that arranges transactions between a buyer and a seller for a commission when the deal is executed.

  34. Brokerage Firms • Full Service Brokers • Provide a wide variety of services • Advice, retirement planning and tax tips • Charge higher fees • Examples: Morgan Stanley and Merrill Lynch • Discount Brokers • Charge a reduced commission • Do not provide investment advice • Examples: Charles Schwab and TD Ameritrade

  35. Buying on Margin • Purchase shares for your account on margin • You are borrowing a percentage of the purchase from the broker • That means you owe them money • Margin Call • Broker calls for you to pay back all of the money you owe them • If you cannot pay, they keep the stock

  36. Where does an investor purchase a stock or a bond online? Using an Online Broker-The act of placing buy/sell orders for financial securities with the use of a brokerage's internet-based proprietary.

  37. Real Estate Ownership of residential or commercial property or land Real estate can be time consuming but the potential for returns is high

  38. Speculative Investments • Type of return depends on the investment • Options • Futures • Collectibles

  39. Mutual Funds When a company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds

  40. Mutual Funds Reduces investment risk Fees may be high Saves investors time

  41. Ariana has $150 to InvestOption 1 - Stock Ariana invests in one company’s stock Company C has had a bad year and their market price drops significantly. Ariana may lose her $150 investment

  42. Ariana Has $150 to InvestOption 2 – Mutual Fund • Market price of companies C and F decreased • Market price increased for all other companies • Ariana has reduced her investment risk and may still earn money

  43. Index Fund

  44. Lending vs. Owning When investing, consumers either lend money to the company/organization or they own the asset Examples Returns

  45. Knowledge of the General Risk Level Helps Manage Risk Owning Lending Type of return Type of Investment • Decreasedinflation risk Increasedpotential for high returns Increasedinvestment risk

  46. Characteristics of Investment Tools Order cards from lowest to highest Investment Risk Order cards from lowest to highest Potential Returns Order cards from lowest to highest Inflation Risk

  47. Investment Philosophy If someone was an aggressive investor, what types of investment tools would they primarily have in their portfolio?

  48. Portfolio Diversification Investing in a mutual fund is an automatic form of portfolio diversification

  49. Stock Exchange Investments are purchased from a stock exchange (except for real estate and some speculative investments)

  50. Brokerage Firms Brokerage firms facilitate the buying and selling of investments on the stock exchange

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