Introduction to Investing
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Transcript of Introduction to Investing
Introduction to Investing
Take Charge of Your FinancesFamily Economics and Financial
Education
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 2Funded 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.G1Saving vs.
InvestingSavings is for short-term goals and emergencies
Investing is for long-term goals, such as college or retirement.
Remember: The purpose
of savings is
to develop financial security.
You should have 3 – 6 months of salary in savings BEFORE
you start investing.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 3Funded 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.G1
What is Investing?• The 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 – June 2010 – Investing Unit – Introduction to Investing – Slide 4Funded 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.G1Rate of Return
• Return is money that you earn from your investment.
• The Rate of Return is the total return on an investment expressed as a percentage of the amount of money invested.
Total Retur
n
Amount of
Money Invest
ed
Rate of
Return
Investments
usually earn
higher rates of return than
savings tools.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 5Funded 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.G1What is Mandy’s
Rate of Return?Mandy saved $2,200 in a
money market deposit account. After one year, she
has a return of $110. What is Mandy’s rate of return?
$110 $2,200
.05 = 5%
Mandy’s rate of return on investment is 5%
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 6Funded 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.G1What is Derek’s
Rate of Return?Derek invested $900. When he withdrew his money from the investment, he had a total of
$1,050. What is Derek’s rate of return?
$150 $900.167
= 16.7
%
Derek’s rate of return on investment is 16.7%
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 7Funded 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.G1
RiskPOTENTIA
L RETURN
RISK
Risk• The uncertainty regarding the outcome
of a situation or eventInvestment Risk• The possibility that an investment will
fail to pay the expected return or fail to pay a return at all
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 8Funded 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.G1Financial Risk
Pyramid
Wealth Accumulati
on- Investments
Financial Security- Savings Tools
SpeculationIncreasing
potential for higher returnsIncreasing risk
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 9Funded 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.G1
InflationInflation
The rise in the general level of prices
Inflation RiskThe danger that money won’t be worth
as much in the future as it is today
Inflation risk should not be a concern with savings since the
goal of savings is to provide current financial security
The rate of return on an investment should be
higher than the rate of inflation.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 10Funded 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.G1Investment
PhilosophyEach individual has a tolerance level for the
amount of risk they are willing to take on
Investment PhilosophyAn individual’s general
approach to investment risk
The greater the risk a person is willing to
make on an investment, the greater
the potential return will
be.
Generally divided into three categories: conservative, moderate, and aggressive
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 11Funded 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.G1Types of
Investment ToolsStocks Bonds
Mutual Funds
Index Funds
Real Estate
Speculative
Investments
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 12Funded 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.G1
Stocks• Stock–A share of ownership in a
company• Stockholder or shareholder–Owner of the stock
Usually a stockholder owns a very small part
of a company.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 13Funded 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.G1
Return on StocksThere are two ways people
can make money on stocks:
1. Dividends–Dividends are the share of
profits distributed in cash to stockholders
2. Market Price– The current price that a
buyer is willing to pay for stock
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 14Funded 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.G1
Return on Stocks• If stock is sold for a market
price higher than what was paid, stockholder will receive a return (make money).
• If stock is sold for a market price lower than what was paid, stockholder will lose money
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 15Funded 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.G1
Stock Markets• Stocks are bought and sold
on stock markets by people called brokers.
• The main stock markets in the U.S. are:–New York Stock Exchange
(NYSE)–NASDAQ
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 16Funded 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.G1
Stock Activity• We are going to learn about
stocks using McDonald’s as an example.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 17Funded 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.G1Bonds
• Bonds are loans.• A company or government will
borrow money from investors by issuing bonds.
• Example: The Crazy Hat Co. wants to build a new distribution center in Louisville, KY which will cost $7,000,000. They can issue 7,000 bonds at $1,000 each.
7,000 x $1,000 = $7,000,000
Bonds are less risky
than stocks but do not have the
potential to earn as
much as a stock.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 18Funded 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.G1Bonds
• The company or government pays annual interest to the investor until the maturity date is reached– The maturity date is the specified
time in the future when the principal is repaid to the bondholder.
• Bonds issued by a company are called corporate bonds.
• Bonds issued by a government are called:– Treasury bonds (federal
government) –Municipal bonds (local
governments)
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 19Funded 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.G1Example
• The Crazy Hat Co. issues $1,000 bonds that pay 4.5% interest with a maturity date of 11/22/2012 (2 years from today).
• You buy the bond for $1,000.• Each year you will receive a
payment of $1,000 x .045 = $45• On 11/22/2012, you will also get
your $1,000 back.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 20Funded 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.G1
Stocks vs. Bonds• Stocks are equity.• The stockholder actually owns a
piece of the company.• Equity is the value of the company.• For example, if a company has
10 million shares of stock, and each share is worth $5, then the company’s equity is:
10,000,000 x $5 = $50,000,000
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 21Funded 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.G1Stocks vs. Bonds
• Bonds are debt.• Debt means the bondholder
has lent money to the company that the company will repay with interest.
• Companies must repay debt before they pay anything to stockholders.
• Therefore, bonds are less risky than stocks.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 22Funded 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.G1Portfolio
DiversificationPortfolio Diversification-
reduces risk by spreading investment money among different investment tools
Creates a collection of investments that will increase return while
reducing riskThe main goal of
diversification is to reduce risk.
Referred to as “Building a Portfolio.”
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 23Funded 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.G1
Mutual Funds• Mutual fund- invests money in a
diversified portfolio of stocks and bonds
Always research the fees
charged by a mutual
fund.
Reduces investment risk
by helping people diversify their portfolio
Fees can be high
Saves investors time
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 24Funded 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.G1How Do Mutual
Funds Work?• Individuals buy shares• The money is used to
purchase stocks, bonds, and other investments.
• Profits returned to shareholders monthly, quarterly, or semi-annually in the form of dividends.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 25Funded 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.G1
How Do Mutual Funds Work?
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 26Funded 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.G1
What is the Advantage of Investing in a Mutual Fund?
• Allows small investors to get professional account
management and diversification normally only available to large
investors.
• This allows investors with a little bit of money to be able to invest in a variety of stocks, bonds, & other
investments.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 27Funded 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.G1There are lots of different
types of mutual funds!
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 28Funded 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.G1Market Indexes
• A market index is the value of a group of stocks or other investments.
• Market indexes are intended to represent an entire stock market and thus track the market's changes over time.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 29Funded 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.G1Market Indexes
• Dow Jones Industrial Average (DJIA or “The Dow”)–30 large companies traded
on NYSE or NASDAQ• Standard & Poors 500 Index
(S&P 500)–An index of 500 large
companies selected by a committee
• Others–Russell 2000, Wilshire 5000
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 30Funded 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.G1
Index Fund• A mutual fund that was designed
to reduce fees by investing in the stocks and bonds that make up an index.
• Offers high diversification with low fees.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 31Funded 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.G1
Real Estate• Includes any residential or
commercial property or land as well as the rights accompanying that land
• A family home is 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.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 32Funded 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.G1Speculative
Investments• Have the potential for
significant fluctuations in return over a short period of time–Examples- future, options,
commercial paper, collectibles
• Recommended for people with an aggressive investment philosophy and a high level of financial security
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 33Funded 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.G1
DISCOUNT
BROKER
Buying and Selling Investments
Investors must utilize a brokerage firm that acts as a buying and selling agent
for the investor (except for when buying 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
Only complete
investment transactions
Offer no advice to investors
but charge 40-60% less
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 34Funded 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.G1
TaxationProfits earned on investments are considered to be income
Income taxes MUST be paid on this money
Includes all forms of returns: interest, dividends, and price
appreciationTaxes are due on most
investment returns in the year the income is received
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 35Funded 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.G1Employee-Sponsored
Investment Accounts• Allow employees to reduce
their tax liability and make investing automatic
• Money is automatically taken out of an employee’s paycheck
• Employers often contribute a portion of money to the investment with no additional cost from the employee
It is recommend
ed that a person
utilize these investment
tools as much as
possible if they are offered.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 36Funded 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.G1
Rule of 72Rule of 72
Allows a person to easily calculate when the future
value of an investment will double the principal amount
72Intere
st Rate
Number of years
needed to double the principal
investment
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 37Funded 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.G1
Albert EinsteinCredited for
discovering the mathematical equation for
compounding interest, thus the
“Rule of 72.” At 10% interest rate, money
doubles every 7.2 years,
T=P(I+I/N)YN
“It is the greatest mathematical
discovery of all time.”
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 38Funded 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.G1What Can the “Rule
of 72” Determine?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 – June 2010 – Investing Unit – Introduction to Investing – Slide 39Funded 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.G1
“Rule of 72” FYI• The rule is only an
approximation• The interest rate must remain
constant• The equation does not allow
for additional payments to be made to the original amount
• Interest earned is reinvested• Tax deductions are not
included within the equation
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 40Funded 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.G1Doug’s Certificate
of Deposit
• Invested $2,500• Interest Rate is 6.5%
Doug invested $2,500 into a Certificate of Deposit earning a 6.5%
interest rate. How long will it take Doug’s investment to double?
726.5% = .065
11 years to double
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 41Funded 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.G1Jessica’s Credit
Card Debt
• $2,200 balance on credit card• 18% interest rate
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
balance to double?
7218
% = .18
4 years to
double
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 42Funded 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.G1
Jacob’s Car
• $5,000 to invest• Wants investment to double in 4
years
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?
724
years
18% interest
rate
ANY QUESTIONS?