1.12.1.

G
1

Introduction to
Investing

"Take Charge of Your

Finances" Advanced Level
 1.12.1.G

Saving and
1

Investing
Once an appropriate amount of
liquid assets are reached

Rememb
er: The
purpose
of Recommend refocusing
savings is
to
goals from saving to
develop investing
financial Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 2

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1

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? Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 3
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 1.12.1.G
1

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 Investments usually earn
by savings higher rates of return
and
investing
than savings tools
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 4
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 1.12.1.G

What is Mandys
1

Rate of Return?
Mandy saved $2,200 in a
money market deposit account.
After one year, she has a return
of $244. What is Mandys rate
of return?

Mandys rate of return on

investment is 5%
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 5
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 1.12.1.G

What is Dereks
1

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?

Dereks rate of return on

investment is 16.7%
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 6
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1

Risk
POTENTIAL
RETURN
RISK

Risk- uncertainty regarding the

outcome of a situation or
event
What is the
risk level of
savings
Investment Risk- possibility that
tools? an investment will fail to pay
the expected return or fail to
All investment tools carry some level of r
pay a return at all
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 7
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 1.12.1.G
1

Inflation
Inflation
Rise in the general level of prices

Inflation Risk
The danger that money wont be
Strive to
have the
worth as much in the future as
rate of it is today
return on Inflation risk is usually not a
investment concern with savings since the
be higher
than the goal of savings is to provide
rate of current financial security
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 8
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inflation
 1.12.1.G

Types of
1

Investment Tools

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 9
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 1.12.1.G
1

Stocks

A share of
Owner of
ownership
the stock
in a
company
Usually a
stockholder
owns a very
small part
of a
company
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 10
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 1.12.1.G
1

Return on Stocks

Share of profits Current price that a

Definition distributed in buyer is willing to
cash to pay for stock
stockholders
If stock is sold If stock is sold
Stockholder for a market for a market
may or may price higher price lower
What is than what was than what
not receive
received? dividends-
paid was paid
Stockholder Stockholder
depends on will receive a will lose
company return money
profit
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 11
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 1.12.1.G
1

Bonds
Form of lending to a
Definitio company or the
n government (city,
state, or federal)
Annual interest is
paid to investor
Bonds are
Return
less risky Once the maturity
than stocks
but usually
date is reached, the
do not have principal is repaid to
the the bondholder
potential to
earn as Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 12
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high of a
 1.12.1.G
1

Mutual Funds
Mutual fund-
when a company
combines the Reduces
funds of many
investmen
different
t risk
investors and
then invests that Saves Fees may
Make sure investors
money in a be high
to research
diversified time
the fees
charged by portfolio of
a mutual stocks and bonds
fund
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 13
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 1.12.1.G
1

Index Fund
A group of
similar stocks
and bonds-
Standard and
Poor 500 A mutual
fund that
invests in the
stocks and
bonds that
make up an
index
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 14
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 1.12.1.G
1

Index Fund

High
diversifica
tion
Usually Still
What is the
charge charge
difference
between a lower fees fees
mutual fund than
and an mutual
index fund? funds
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 15
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 1.12.1.G
1

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
Examples of asset
real estate Can be risky and more time
investments
include consuming but has potential
rental units for large returns
and
commercial
property Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 16
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 1.12.1.G

Speculative
1

Investments

Commercial Collectibles
Futures Options
Paper

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 17
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 Financial Risk 1.12.1.G
1

Pyramid
The risk level for specific investment
tools may vary
Speculati
Futures
ve
Commerc
Increasing ial Paper Investme
potential OptionsCollectibl nt Tools
for higher Stocks es
Real
returns Mutu Investm Estate
Index
Increasing al ent Tools Funds
risk FundsBonds
Money
Market Certific Savings Savings
CheckingSavings
AccountAccount
Deposit ate of Bonds Tools
Account Deposit
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 18
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 1.12.1.G

Investment
1

Philosophy
Everyone has a tolerance level for the
amount of risk they are willing to take on

Investment Philosophy- an
The greater individuals general approach
the risk a to investment risk
person is
willing to
make on an Generally divided into three
investment, categories: conservative, moderate,
the greater aggressive
the
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 19
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 1.12.1.G

Portfolio
1

Diversification
Portfolio Diversification- reduces
risk by spreading investment
money among a wide array of
investment tools
Creates a collection of
investments that will provide
an acceptable return with an
Referred to acceptable exposure to risk
as Building
a Portfolio
Assists with investment
risk reduction
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 20
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 1.12.1.G

Buying and Selling

1

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

Complete Offer Only Offer no advice

investment investment complete to investors
transactions advice and investment but charge 40-
one-on-one transactions 60% less
attention
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 21
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from a broker
 1.12.1.G
1

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
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 22
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 1.12.1.G

Tax-Sheltered
1

Investments
Government tries to encourage
certain types of investments by
making them tax-sheltered

Tax-
sheltered Retirement
investments- Child/dependent
Tax-
sheltered eliminate, care
investmen reduce, Education expenses
ts are defer, or Health care
usually adjust the expenses
not tax-
current year
free! Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 23

tax liability
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 When are taxes for tax- 1.12.1.G
1

sheltered investments
usually paid?

O
R
What is the
benefit of a
tax-
sheltered
investment There are often limits to the
if taxes still
have to be amount that can be invested
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 24
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 1.12.1.G
1

Employer-Sponsored
Investment Accounts
Type of tax-sheltered
investment
Money is automatically taken
out of employees paycheck
Employers often contribute a
Example: portion of money to the
investment
Employer
with no additional
Employee
cost from thethe
contributes employee
benefits from
same amount of having double
money to the the amount of
employees money
investment invested!
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 25
account
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 1.12.1.G

Advantages to
1

Employer-Sponsored
Investments
Makes
Reduce
investin
s tax
g
liability
It is
recommend
automa
ed that a
Possibility for
tic
person
utilize these employer to
investment
tools as
match
much as investment
possible if Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 26
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
 1.12.1.G
1

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

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 27
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 1.12.1.G
1

Albert Einstein
Credited for
discovering the
mathematical
equation for
compounding
interest, thus the
Rule of 72. At 10%
It is the greatest
mathematical
interest rate, money
discovery of all time. doubles every 7.2
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 28
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 1.12.1.G

What Can the Rule

1

of 72 Determine?
How many years How long it
it will take an will take debt
investment to to double if
double at a no payments
given interest are made
rate
The interest rate How many
an investment times money
must earn to (or debt) will
double within a double in a
specific time specific time
period period
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 29
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 1.12.1.G
1

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
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 30

reinvested
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 1.12.1.G

Dougs Certificate
1

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%

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 31
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 1.12.1.G

Jessicas Credit
1

Card
Jessica has Debt
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
$2,200 balancebalance to double?
on credit card
18% interest rate

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 32
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 1.12.1.G
1

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

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 33
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 1.12.1.G
1

Rhondas Treasury Note

Rhonda is 22 years old and would like to invest
$2,500 into a U.S. Treasury Note earning 7.5%
interest. How many times will Rhondas
investment double before she withdraws it at
age 70?
Age Investment
72 = 9.6 years 22 $2,500
7.5% to double 31.6 $5,000
investment 41.2 $10,000
50.8 $20,000
60.4 $40,000
70 $80,000
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 34
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 1.12.1.G
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Another Example
$500 invested at age 18
7% interest
How many times will investment double
before age 65?
Age Investment
72 =10.2 years 18 $500
7% to double 28.2 $1,000
investment
38.4 $2,000
48.6 $4,000
58.8 $8,000
69 $16,000
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 35
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 1.12.1.G
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Taxes
A person can choose to invest
into two types of accounts:
Taxable Account taxes
charged to earned interest
Tax Deferred Account
taxes are not paid until the
individual withdraws the
money from the investment

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 36
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 1.12.1.G
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Taxes Example
George is in the 33% tax bracket.
He would like to invest $100,000.
George is comparing two
accounts that have a 6% interest
rate. The first is a taxable
account charging interest earned.
The second account is tax
deferred until he withdraws the
money. Which account should
George invest his money into?

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 37
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 1.12.1.G
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Effects of taxes
Taxable Account
Tax Deferred Earning 4% after taxes
Account
72 =18 years
72 = 12 years
4% to double
6% to double investment
investment
Years Taxable Tax
Deferre
d
12 $200,0
00
18 $200,0
00
24 $400,0
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 38
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 1.12.1.G
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Conclusion
The Rule of 72 can tell a person:
How many years it will take an
investment to double at a given interest
rate using compounding interest;
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.

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 39
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 1.12.1.G
1

Summary
What is the
How can a
relationship
person
between risk
reduce
and return?
investment
What are the Whorisk?
should a
person contact
six main to purchase
investment investment
tools? tools?

What is a tax-
What is the
sheltered
Rule of 72?
investment?
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 40
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