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Unit 4 Investing

Unit 4 Investing. I. Investing / A. Investing vs. Saving / 1. Investing - putting money to work to earn a profit / 2. Saving - foregoing present spending

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Investing Cont. / 5. Risk vs. Return - higher risk investment, greater potential return / 6. Time value of money - relationship between time, money and interest / -sooner you invest the more time it has to make you new money / Rule of 72 - dividing 72 by the interest rate gives you the number of years it will take for your money to double / Ex. 72/9%= 8 years / 5. Risk vs. Return - higher risk investment, greater potential return / 6. Time value of money - relationship between time, money and interest / -sooner you invest the more time it has to make you new money / Rule of 72 - dividing 72 by the interest rate gives you the number of years it will take for your money to double / Ex. 72/9%= 8 years

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Page 1: Unit 4 Investing. I. Investing / A. Investing vs. Saving / 1. Investing - putting money to work to earn a profit / 2. Saving - foregoing present spending

Unit 4

Investing

Page 2: Unit 4 Investing. I. Investing / A. Investing vs. Saving / 1. Investing - putting money to work to earn a profit / 2. Saving - foregoing present spending

I. Investing A. Investing vs. Saving

1. Investing - putting money to work to earn a profit

2. Saving - foregoing present spending for future use

3. Capital Gains - money earned from buying and selling stock

4. Dividends - part of earnings paid quarterly to shareholders by check

Page 3: Unit 4 Investing. I. Investing / A. Investing vs. Saving / 1. Investing - putting money to work to earn a profit / 2. Saving - foregoing present spending

Investing Cont. 5. Risk vs. Return - higher risk investment,

greater potential return 6. Time value of money - relationship between

time, money and interest -sooner you invest the more time it has to make you

new money Rule of 72 - dividing 72 by the interest rate gives you

the number of years it will take for your money to double

Ex. 72/9%= 8 years

Page 4: Unit 4 Investing. I. Investing / A. Investing vs. Saving / 1. Investing - putting money to work to earn a profit / 2. Saving - foregoing present spending

B. Stock Market

Page 5: Unit 4 Investing. I. Investing / A. Investing vs. Saving / 1. Investing - putting money to work to earn a profit / 2. Saving - foregoing present spending

B. Stock Market1. Common Stock -- shares in a public corporation. Person has

one vote per share owned to determine the company’s B.O.D

1. Classifications:1. Growth -- companies that have a consistent record of rapid

growth and earnings in all conditions.2. Income -- high dividends b/c company chooses to retain only

a small portion of profit. Attractive to investors looking for dividends producers.

3. Value, Countercycle, Cyclical, Speculative, Blue Chip2. Preferred Stock -- Shares with fixed dividends that take

precedence over common stock. Less risky than common stock.

1. No voting rights in the company.

Page 6: Unit 4 Investing. I. Investing / A. Investing vs. Saving / 1. Investing - putting money to work to earn a profit / 2. Saving - foregoing present spending

C. Researching Stocks1. Book Value -- net worth of the company

1. Assets - Liabilities = Book Value2. Earnings per Share -- How much a company can pay in

dividends and reinvest3. P/E Ratio -- (Price/Earnings) Relationship of price of one

share to annual earnings of the company. 1. Low P/E - High dividends, low risk, slow growth2. High P/E - Means high growth in the future

4. Beta - Measures stocks volatility compared to the overall market

1. Low Beta - Stock is less sensitive to change, good for conservatives.

2. High Beta - Stock is more volatile, greater risk.

Page 7: Unit 4 Investing. I. Investing / A. Investing vs. Saving / 1. Investing - putting money to work to earn a profit / 2. Saving - foregoing present spending

D. Reading Stocks1. Terminology

a) YTD -- Year to Date, % stock has changed since Jan. 1st.

b) 52 Week -- high price and low price over the past year.

c) Stock -- stock symbol, each company has an abbreviated name.

d) DIV - Dividendse) YLD - Yield % -

dividend expressed as a % of the price of the share.

f) VOL - volume, total number of shares traded.

g) High/Low - represent high and low selling price for the day.

h) Close - Price the last share sold for on that day.

i) Net Change - Difference between closing prices from yesterday to today.

Page 8: Unit 4 Investing. I. Investing / A. Investing vs. Saving / 1. Investing - putting money to work to earn a profit / 2. Saving - foregoing present spending

E. Stock Exchanges1. NYSE -- New York Stock

Exchange -- oldest and largest. 1,366 seats and over 2,800 companies traded on the exchange.

2. AMEX - American Stock Exchange - 2nd Largest, list some similar companies as NYSE

3. NASDAQ - Over the counter market, stocks not traded on an exchange but are traded by two brokers negotiating the sale. 4,000 US and foreign Companies.

Page 9: Unit 4 Investing. I. Investing / A. Investing vs. Saving / 1. Investing - putting money to work to earn a profit / 2. Saving - foregoing present spending

F. Stock Market Indicators1. Dow Jones Industrial Average -- oldest Indicator, lists

ups and downs of 30 NYSE blue chip stocks.2. S&P 500 -- Covers activities of 500 stocks across all

markets.3. NASDAQ -- Monitors tech. stocks and financial

services stocks.4. Bull Market -- Describes the state of the economy

when market is doing well and investors are optimistic about purchasing stocks.

5. Bear Market -- Describes the state of the economy when the market is doing poorly and investors are not confident.

Page 10: Unit 4 Investing. I. Investing / A. Investing vs. Saving / 1. Investing - putting money to work to earn a profit / 2. Saving - foregoing present spending

G. Why do stocks change value?1. Change in earnings2. Change in Interest

Rates3. Change in

Executives.4. Media Coverage5. Corporate

Takeovers/Mergers

Page 11: Unit 4 Investing. I. Investing / A. Investing vs. Saving / 1. Investing - putting money to work to earn a profit / 2. Saving - foregoing present spending

H. Other types of Investments

1. Mutual Funds -- managed portfolios of stocks, bonds, etc. Buy shares and fund uses money to buy investments for you. Profits returned in dividends.

a) Allows small investors to reduce risk of investing and have professional account management.

b) Balanced funds, Global funds, Growth funds, Income funds, etc…

c) Roth IRA, 401K, 403b -- allows investors to invest in mutual funds tax free for retirement with certain stipulations.

Page 12: Unit 4 Investing. I. Investing / A. Investing vs. Saving / 1. Investing - putting money to work to earn a profit / 2. Saving - foregoing present spending

H. Investments Cont.2. Bonds - IOU certifying you loaned money to

govt. or a corporation. Buyer pays and gets a fixed interest rate for a fixed amount of time. Can collect when it matures at the end of the set time.

a) Corporate bond -- junk bonds, sold to raise moneyb) Municipal bonds -- non-federal gov’t.c) T-Bills/Savings bonds -- safest investment you can

make. US government backs them, and must repay.

Page 13: Unit 4 Investing. I. Investing / A. Investing vs. Saving / 1. Investing - putting money to work to earn a profit / 2. Saving - foregoing present spending

H. Investments Cont.3. Real Estate -- land, homes, apartments,

buildings, land, etc…a) People buy real estate in the hopes that it will increase

in value and can resell at a higher price. Also buy to develop and collect rent.

4. Commodities -- Anything for which there is demand, but which is supplied without any difference.

a) Iron, Crude Oil, Coal, Ethanol, Salt, Sugar, Coffee Beans, soybeans, aluminum, rice, wheat, gold and silver