Prepare for your Future Chapter 13

InvestingMaking money with money

Investing = Saving

It involves risk—you can lose your $$

What is Investing? It is the process of increasing the value of

your assets. Based on the principle of Time Value of

Money! Your initial investment and any other

additions of money (payments) that you invest will increase in value over time due to interest, dividends, or capital appreciation.

When do you consider it an investment?

Putting money in the bank?

Buying a home?

Buying stocks and bonds?

Establishing a business?

Putting money in a safe deposit box?

Putting money in your piggy bank?

Interest Rate 5 yrs. 10 yrs. 15 yrs. 20 yrs.5% $5,525 $12,578 $21,578 $33,0656% 5,637 13,181 23,276 36,7867% 5,751 13,816 25,129 40,9958% 5,867 14,487 27,152 45,7629% 5,985 15,193 29,361 51,160

10% 6,105 15,937 31,772 57,25711% 6,228 16,722 34,405 64,20312% 6,353 17,548 37,279 75,052

If you invest $1,000 each year

What are some ways to invest?

Stocks

Bonds

Mutual Funds

Currency

Real Estate

Rule of 72’s

The time or the interest rate you need to double your money

72/t=int

72/int=t

Retirement Plans

IRA’sPension Plans401K 403BSEP Plans

Retirement and Other Investment

Individual Retirement Account (IRA) Do I pay taxes on

earnings? - all earnings are tax deferred until you make withdrawals from the account.

Contributions up to 100% of your compensation of $5,000, whichever is less

Penalties - None after age 59 1/2.

Roth IRA Contributions are taxed in

the year you contribute Singles who earn less than

$95,000 a year and married couples who earn less than $150,000 a year can put up to $3,000 annually.

People who expect to be in a higher tax bracket when they retire may benefit more from these accounts than from a Traditional IRA.

Penalties - None after age 59 1/2.

Where should I put my money?Retirement and Other Investment

Pension plans Less common. Workers need to take

responsibility for their own retirement savings.

Salary Reduction Plans - 401(K) & 403(B) Part of your salary is taken out before taxes

(tax-deferred) and put into a savings or investment account set up by the employer.

You are not taxed on your contributions until retirement.

Some employers match contributions.

Lower Risk/Lower Return

Medium Risk/Medium Return

Risk The chance that the

investment will decrease in value

Rate of return (measured as a %) The income that you earn

on an investment

Limit risk through diversification Distribute your money

among a variety of investments

Distribute among different levels of risk

Higher Risk/Higher Return

How to Make Investment Choices Your financial situation

Life-span goals The rate of return you need to reach your investment

goal. Ease of management of the investment The risk level of the investment

Your risk tolerance How comfortable are you with risk?

Your values Investments reflect your values

Mutual FundsAn Easy Way to Diversify Financial investment company that

manages a diversified portfolio of stocks, bonds, cash investments, and other securities on behalf of its shareholders.

One large advantage Easier to manage because the fund’s

professional fund manager does the research, selection, tracking and selling of the fund’s investments.

Dollar Cost Averaging Letting your money

work for you over time

Diversification Spreading your

money out over different investmentsEx: stocks,

bonds, mutual funds, etc.

Investing Choices

Now What? How does diversification help limit risk? How does age and financial situation affect

how you make investment decisions?

Risk/Return Pyramid for Mutual Funds

Greater Risk and Potential Return

IncomeFunds

Tax-freeFunds

Growth andIncome Funds

GrowthFunds

Lower Risk and Potential Return

•Growth fundsGrowth funds -New business- likely to -New business- likely to growgrow•Growth and income fundsGrowth and income funds -Established business – -Established business – rapidly rapidly

growinggrowing•Income fundsIncome funds

-Established firms- good -Established firms- good returnreturn

•Tax-exempt fundsTax-exempt funds-Municipal bonds- pay tax -Municipal bonds- pay tax free free interestinterest

The Stock Market

Stock

Represents ownership in a corporation

Corporate Stocks Corporations sell their stock to raise money, or

capital. Stockholder - Investor who own the corporation

because they own shares of its stock Stockbroker - Person who handles the transfer of

stocks & bonds Brokerage Firm- Company that specializes in

helping people buy and sell stocks & bonds Stock Exchange- Where orders to buy or sell are

sent and carried out. (Largest is NYSE)

Stocks Do stockholders earn returns?

Dividends Selling the stock Capital gain or loss

Do stock prices change? Yes…depending on how much people want to

buy it Large profits = high dividends Low profits = small dividends and stockholders

selling shares

Two Types of Stocks

Does not pay a fixed dividend. The dividend is determined by the corporation depending on their earnings.

Entitled to vote for members of the Board of Directors.

KEY BENEFIT - price typically increases more than with preferred stocks.

A stock that pays a FIXED dividend and carries no voting privileges for its owner.

Owners of preferred stock ALWAYS receive the same amount in dividends.

Preferred Stock is less risk than Common Stock.

If a company goes bankrupt, preferred stockholders are paid before common stockholders.

Types of Stocks Blue Chip Stock

These are stocks of the largest corporations with long, steady records of paying dividends.

Income Stock A stock with a history of

paying consistently high dividends

Growth Stocks When the stock of a

company is growing earnings and/or revenue faster than its industry or the overall market.

Such companies usually pay little or no dividends, preferring to use the income instead to finance further expansion.

Stocks

A block of stock is one hundred (100) shares.

EXAMPLE: Suppose you bought 150 shares of stock at

$2.50 per share last year. The corporation paid a $.15 dividend per share for the year. At the end of the year, you sold the stock for $3.00 per share. What was the total return on this investment if you disregard fees? What rate of return did you earn on your initial investment? 150 Shares x $2.50/share = $375 initial investment 150 shares x $.15 dividend = $22.50 total dividend 150 shares x $3.00 per share = $450 price of stock sold $450 price of stock sold - $375 initial = $75 capital gain $75 capital gain + $22.50 total dividend = $97.50 total

return $97.50 total return / $375 initial = 0.26 = 26% return

Market Value

The amount of money you can sell your investment at in the market place.

Stock Exchanges

NYSENASDAQ

American Exchange

Nikki in Japan

How to Trade on the NASDAQ NASDAQ- National Association of Securities

Dealers Automated Quotation System Electronically linked brokerage firms. Less expensive to operate Operates longer hours

Bear Market VS Bull Market A prolonged period of

falling prices, usually by 20% or more.

A prolonged period of rising prices, usually by 20% or more. Usually last longer than Bear Markets.

Dow Jones

Liquidity

Selling your assets for cashCashStocksHouses/Cars/Jewelry

Dividends

Share of the profits from a corporation

Receive dividends for each share

How are earnings made?

DividendsDividend are usually paid quarterly

Buy Low & Sell High

Advantages of Stock InvestmentsIf the market value goes up,

the gain can be considerableLiquid

Money is easily accessible

Disadvantages

If the market value goes down, the loss can be considerable

Time

Stock Line

Homework:Bring in a current issue of the newspaper.

Bonds

is an IOU, certifying that you loaned money to a government or corporation and outlining the terms of repayment

How Bonds Work

Buyer purchases bonds at a discountFixed interest rateFixed period of timeWhen matured it is redeemed for full

face value

Bond Types

CorporateMunicipalFederal Government

Corporate Bonds

Issued by a Business to raise money for a capital venture.

Higher riskBetter rates of interest

Municipal BondsState or local governments

issue bonds for the construction of buildings, roads, schools, etc.

Moderate, if any, risk

Federal BondsThe federal government

issues bonds to pay for services; military, roads, infrastructure.

Virtually NO RISK!!Savings bonds, Series EE & HH

Who regulates the sale of stocks and bonds?

Securities Exchange Commission (SEC)

What is the most important thing to remember for Investing and Savings?

Start early!!!