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Transcript of Building Bucks Savings and Investment Basics. Basics Saving – provides funds for emergencies and...
![Page 1: Building Bucks Savings and Investment Basics. Basics Saving – provides funds for emergencies and for making specific purchases in the near future Investing.](https://reader036.fdocuments.in/reader036/viewer/2022082422/56649ea15503460f94ba5325/html5/thumbnails/1.jpg)
Building Bucks
Savings and Investment Basics
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Basics
• Saving– provides funds for
emergencies and for making specific purchases in the near future
• Investing– Focuses on increasing
net worth and achieving long-term financial goals
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Investing
• Buying an investment– Putting money into an asset that generates a
return• Speculation– Not the same as an investment– Purchasing assets, equity or debt because of an
assumed value– Ex: Gold coins, baseball cards, gems
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Saving or Investment Choices
• “Lending Investments”– Savings accounts– Bonds
• “Ownership Investments”– Real-estate– Income-producing properties– Stocks• Interest rates affect your rate of return
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Risk—What’s Your Tolerance?
• Interest Rate Risk– The higher the interest
rate, the less the bond is worth
• Inflation Risk– Rising prices will erode
purchasing power
• Business Risk– Effects of good and bad
management decisions
• Financial Risk– Associated with the use
of debt by the firm
• Liquidity Risk– Inability to liquidate a
security quickly and at a fair market price
• Market Rate Risk– Associated with market
movements
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Reducing Risk
• Diversification– “Don’t put all your eggs in one basket”– Reduces risk without affecting expected return
• Asset Allocation– Investment return is associated with types of
assets you select– Investment portfolio
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Securities
• Primary Markets– New securities traded– Initial Public Offerings (IPOs) and Seasoned New
Issues• Secondary Markets– Previously issued securities traded– Stocks and bonds– Trading done through either bond dealers or
brokers
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Types of Brokers
• Full-Service Brokers– Commission based, give advice and execute trades
• Discount Brokers– Execute trades, but provide no advice, approx. ½ the
commission rate• Deep Discount Brokers– Execute trades for up to 90% less than full-service brokers
• Online Brokers– Discount or deep discount brokers trading electronically
for a flat fee
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Savings Account Basics
• Allow you to…– Put money away for future use– Protect your principal and earn interest
• Types– Regular Savings Account– Certificates of Deposit (CDs)• Highest return on savings, least amount of risk
– Money Market Account
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Bonds
• Investing– Produce steady income– If held until maturity, bonds are a safe investment
with low risk• Par Value– Face value or return at maturity
• Coupon interest rate– Percentage of par value paid out annually
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Types of Bonds
• Corporate Bonds– Allow firms to borrow
money
• Treasury and Agency Bonds– Agency bonds are
virtually risk-free with higher interest rates than Treasuries
• Municipal Bonds– Tax-exempt– Serial maturities– Not entirely risk free
• Junk Bonds– Low-rated or high-yield– Greater risk of default– Callable (issuer can call
them back and reissue at an altered interest rate)
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Investing in Stocks
• Common Stock– Purchasing a part of the
company– Possible dividends and
capital appreciation– Many are limited liability– Companies may
repurchase their own stock
• Types of Common Stock– Blue-Chip Stocks– Growth Stocks– Income Stocks– Speculative Stocks– Cyclical Stocks– Defensive Stocks
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Risk
• Common Stock– Stocks fluctuate in value
over time– Diversification reduces
risk– Investing over time can
be wise– Leverage, borrowing
money to invest, increases risk
• Preferred Stock– No fixed maturity date– If interest rate rises,
value drops– If interest rate drops,
value rises and it is called away
– No safety of bond interest payments
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Mutual Funds
• A diversified portfolio of stocks, bonds or other securities.
• Services– Automatic investment and withdrawal plans – Automatic reinvestment of interest, dividends, and capital
gains– Wiring and funds express options– Phone switching– Easy establishment of retirement plans– Check writing– Bookkeeping and help with taxes
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Investment Companies
• Open-end Investment Companies– Most popular– Can issue an unlimited number of shares
• Closed-end Investment Companies– Fixed number of shares, cannot issue new shares
• Unit Investment Trusts• Real Estate Investment Trusts
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Mutual Funds vs. Individual Stock and Bond Trading
• Mutual Funds– Professional
management of investing
– Minimal transaction costs
– May offer higher returns– Many to choose from
• Individual Stock and Bond Trading– Requires time and
expertise– Higher transaction costs– Less likely to have proper
diversification