WARM UP 9/23/16

When is the appropriate time to shift

from saving to investing?

Why should it be this way?

Happy National
Checkers Day!

HHS

I can determine strategies for saving and

investing.
I can compare the level of risk and the
potential rate of return of various
investment alternatives.

BY THE END OF CLASS

HOMEWORK
Intro to Investments (Green)
Stock Tracker

AGENDA
Warm-Up
Investing 101
How the Stock Market Works
Reading a Stock Table
Pick your own

WHAT DO YOU THINK?

Is it possible to work as an unskilled laborer and have

$500,000 in assets? Why or why not?

Lets find out.

SAVING AND INVESTING

Once an appropriate amount of
liquid assets are reached

Rememb
er: The
purpose of
savings is
to develop
financial
security

Recommend refocusing goals

from saving to investing

WHAT IS INVESTING?
Purchase of assets with the goal of increasing

future income
Focuses on wealth accumulation
Appropriate for long-term goals

What are
examples of
long-term
goals that
can be
accomplish
ed by
investing?

RATE OF RETURN
Total return on investment expressed as a
percentage of the amount of money invested

Remembe
r: Return is
the profit
or income
generated
by savings
and
investing

Total
Retur
n

Amoun
t of
Money
Invest
ed

Rate
of
Retur
n

Investments usually earn

higher rates of return
than savings tools

WHAT IS MANDYS RATE OF

RETURN?
Mandy saved $2,200 in a money market deposit
account. After one year, she has a return of
$110. What is Mandys rate of return?

$110

$2,20
0

.05 =
5%

Mandys rate of return on

investment is 5%

WHAT IS DEREKS RATE OF

RETURN?
Derek invested $900. When he withdrew his money
from the investment, he had a total of $1,050. What is
Dereks rate of return?

$150

$900

.167
=
16.7
%

Dereks rate of return on

investment is 16.7%

RISK
POTENTIAL
RETURN

RISK

Risk- uncertainty regarding the

outcome of a situation or event
What is the
risk level of
savings
tools?

Investment Risk- possibility that

an investment will fail to pay
the expected return or fail to
pay a return at all

All investment tools carry some level of ri

INFLATION
Inflation
Rise in the general level of prices

Strive to
have the
rate of
return on
investment
be higher
than the
rate of
inflation

Inflation Risk
The danger that money wont be worth
as much in the future as it is today

Inflation risk is usually not a

concern with savings since the
goal of savings is to provide
current financial security

TYPES OF INVESTMENT TOOLS

Stocks

Bonds

Mutual
Funds

Index
Funds

Real
Estate

Speculati
ve
Investme
nts

STOCKS
Stock

A share of
ownership
in a
company
Usually a
stockholder
owns a very
small part
of a
company

Stockholde
r or
shareholde
r
Owner

of
the stock

RETURN ON STOCKS
Dividend
s
Share of profits
Definition distributed in
cash to
stockholders
Stockholder
may or may
What is
not receive
received?
dividendsdepends on
company
profit

Market Price
Current price that a
buyer is willing to
pay for stock
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
will receive a
return

Stockholder
will lose
money

BONDS
Definitio
n

Bonds are
less risky
than stocks
but usually
do not have
the
potential to
earn as
high of a

Return

Form of lending to a
company or the
government (city,
state, or federal)
Annual interest is
paid to investor
Once the maturity
date is reached, the
principal is repaid to
the bondholder

MUTUAL FUNDS
Advanta
when a
ge
company combines
the funds of many
Reduces
different investors
investmen
and then invests
t risk
that money in a
Saves
Make sure diversified portfolio investors
to research of stocks and
time
the fees
bonds
Mutual fund-

charged by
a mutual
fund

Disadvant
age

Fees may
be high

INDEX FUND

Index

A group of
similar stocks
and bondsStandard and
Poor 500 A mutual
Index fund that
Fund invests in the
stocks and
bonds that
make up an
index

INDEX FUND
Advanta
ge

Disadvanta
ge

High
diversificati
on
What is the
difference
between a
mutual fund
and an
index fund?

Usually
charge
lower fees
than
mutual
funds

Still
charge
fees

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

SPECULATIVE INVESTMENTS
High risk investments
Have the potential for significant
fluctuations in return over a short
period of time

Futures

CommercialCollectibles
Options
Paper

FINANCIAL RISK PYRAMID

The risk level for specific investment
tools may vary
Futures

Increasing
potential
for higher
returns

Commerci
al Paper
Options Collectibl
es
Stocks
Real

Speculati
ve
Investme
nt Tools

Investm
Mutu
al
ent Tools
Increasing
FundsBonds
risk
Money
Market Certific Savings Savings
CheckingSavings
Deposit ate of
Tools
Bonds
AccountAccount
Account Deposit
Estate
Index
Funds

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

Investment Philosophy- an individuals

general approach to investment risk

Generally divided into three

categories: conservative,
moderate, aggressive

PORTFOLIO DIVERSIFICATION
Portfolio Diversification- reduces
risk by spreading investment
money among a wide array of
investment tools

Referred to
as Building
a Portfolio

Creates a collection of
investments that will provide
an acceptable return with an
acceptable exposure to risk
Assists with investment
risk reduction

BUYING AND SELLING

INVESTMENTS
Brokerage firm acts as a buying and
selling agent for an investor (except for
real estate and certain speculative
investments)

FULL SERVICE
GENERAL
BROKERAGE
FIRM

Complete
investment
transactions

Offer
investment
advice and
one-on-one
attention
from a broker

DISCOU
NT
BROKER

Only
complete
investment
transactions

Offer no advice
to investors
but charge 4060% less

TAXATION
Profits earned on
investments are unearned
income
Taxes are often owed on
unearned income
Taxes are due on most
investment returns in the year
the unearned income is
received

TAX-SHELTERED INVESTMENTS
Government tries to encourage certain
types of investments by making them taxsheltered

Taxsheltered
investmen
ts are
usually
not taxfree!

Taxsheltered
investmentseliminate,
reduce,
defer, or
adjust the
current year
tax liability

Retirement
Child/dependent
care
Education expenses
Health care
expenses

WHEN ARE TAXES FOR TAX-SHELTERED

INVESTMENTS USUALLY PAID?

What is the
benefit of a
taxsheltered
investment
if taxes still
have to be
paid?

Money is invested
and taxes are
paid

Money is invested

Money grows
untaxed with help
from
compounding
interest

Money grows
untaxed with
help from
compounding
interest

Money is
withdrawn

O
R

Money is
withdrawn and
taxes are paid

There are often limits to the

amount that can be invested

EMPLOYER-SPONSORED
INVESTMENT ACCOUNTS
Type of tax-sheltered investment
Money is automatically taken out

of employees paycheck
Employers often contribute a
portion of money to the
Example:
investment with no additional cost
employee
Employee from the Employer
Employee
contributes
7% of
paycheck to
investment
account

contributes the
same amount of
money to the
employees
investment
account

benefits from
having double
the amount of
money
invested!

ADVANTAGES TO
EMPLOYER-SPONSORED
INVESTMENTS

It is
recommend
ed that a
person
utilize these
investment
tools as
much as
possible if

Reduce
s tax
liability

Makes
investing
automatic

Possibility for
employer to
match
investment

RULE OF 72
Allows a person to easily calculate when the future
value of an investment will double the principal
amount

72

Intere
st
Rate

Number of
years needed
to double the
principal
investment

ALBERT EINSTEIN

It is the greatest
mathematical
discovery of all time.

Credited for
discovering the
mathematical
equation for
compounding
interest, thus the
Rule of 72. At 10%
interest rate, money
doubles every 7.2

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

The interest rate

an investment
must earn to
double within a
specific time
period

How many
times money
(or debt) will
double in a
specific time
period

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

DOUGS CERTIFICATE OF DEPOSIT

Doug invested $2,500 into a
Certificate of Deposit earning a 6.5%
interest rate. How long will it take
Dougs investment to double?

Invested $2,500
Interest Rate is 6.5%

72

6.5

11
years
to
double

JESSICAS 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
to double?
$2,200 balancebalance
on credit
card

18% interest rate

72

18

4 years
to
double

JACOBS 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
4
18%
72
year
interest
s
rate

SUMMARY
What is the
relationship
between risk
and return?

How can a
person
reduce
investment
Whorisk?
should a

What are the

six main
investment
tools?

person contact
to purchase
investment
tools?

What is a taxsheltered
investment?

What is the
Rule of 72?

A wonderful/semi-PC cartoon from 1952

HOW THE STOCK MARKET WO

RKS

DIFFERENT STOCK LABELS

Blue-Chip = Most stable companies,

industry leaders
Income = Stock you stand to make the
most money off of
Value = Sleeper stocks that you can
get in on for cheap and experience rapid
growth
Defensive = Staple industries (think
food, drugs, etc.) that hold their value
through recessions

MUTUAL FUNDS
Collection of companies that you invest

in as a group
Generally have something in common

More expensive buy-in

PICK YOUR OWN

Keep track of this paper!
Must pick 4 categories
Less than $5,000 total
Record the closing price each day we

have class (after 4pm)