Unit 4 Saving and Investing 1. Compare consumer choices for saving and investing. 2. Explain the relationship be tween saving and investing. 3. Examine.

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<p>Unit 4 Saving and Investing</p> <p>Unit 4 Saving and Investing1. Compare consumer choices for saving and investing. 2. Explain the relationship be tween saving and investing. 3. Examine reasons for saving and investing, e.g., time value of money. 4. Compare the risk, return, liquidity, manageability, and tax aspects of investment alternatives. 5. Demonstrate how to buy and sell investments. 6. Analyze factors affecting the rate of return on investments (e.g., Rule of 72, simple interest, compound interest). 7. Evaluate sources of investment information. 8. Examine how agencies that regulate financial markets protect investors. 9. Demonstrate how to evaluate advisors credentials and how to select professional advisors and their services. Savings PlansSavings PlansRegular Savings Accounts often called passbook accountsLittle or no minimum balanceWithdraw money on demandCalled share accounts at credit unionsVery liquidCompounds interestFlexible amounts and withdrawal timesFDIC Insured</p> <p>Certificates of Deposit (CD)Money is left on deposit for a stated period of time (term) at a specific rate of returnMaturity Date the date the money becomes available to youThree key limitations:Time specification-Your money is on deposit for 1 month to 5 yearsThere is a penalty for taking your money before the maturity dateAmount specification-You must deposit a minimum amountFDIC insuredCD Investment StrategiesCheck for the best rateConsider the economyif rates are high you may want to buy long-termDo not roll-over at maturity without checking ratesWhen do you need the moneyConsider different CDs at different rates and maturity datesMoney Market AccountsMinimum balance requiredRates fluctuate monthly as market changesPenalty if you fall below minimum balanceLimited amount of checks can be written each monthU.S. Savings BondSeries EE Savings BondBuy at reduced rate, interest rate and time determine maturity dateIf cashed after less than 5 yearsthere is a 3-month penalty of interestContinues to earn interest for 30 yearsInterest is tax-exempt from state and local taxesFederal taxes are paid when bond is cashed inIf used for higher education, there are no taxes on interest</p> <p>Evaluating Savings PlansRate of Return the percentage of increase in the value of your savingsCompounding interest is earned on both the principal and previously earned interestCan be compounded every day, month, quarter or yearEvaluating Savings PlansInflation compare earning rate with inflation rateTax Consideration tax-exempt or tax-deferred savingsLiquidity can I get to my moneyRestrictions and fees fees and/or service chargesTruth in SavingsFinancial institutions must inform you of:Fees on deposit accountsInterest rateAnnual percentage yield (APY) based on stated annual interest rate and the frequency of compoundingTerms and conditions of the savings planInvestments11FINANCIAL GOALSPay YOURSELF FIRST!EMERGENCY FUND A savings account that you can access quickly to pay for unexpected expenses or emergencies.Often thought to be 3 8 months of expendituresvery liquid12FINANCIAL GOALSTake advantage of 401K or 403B plans - employer often matchesElective Savings ProgramsSpecial Savings EffortGifts, inheritances and windfalls13Investment Growth &amp; LiquidityTime Value of Money increase in an amount of money due to interest earned over timeRule of 72 divide the number 72 by your interest rate amount to find out how long it will take to double your investmentExample: Invest $1,000 at 6%=72 / 6 = 12 years to double your amount to $2,000=72 /12 years = 6, you would need 6% interest to double your investment to $2,000 in 12 years14Investment Growth &amp; LiquidityRetained Earnings profits that a company reinvests, usually for expansion or to conduct research and development.Investment Liquidity the ability to buy or sell an investment quickly without substantially reducing its value.15INVESTMENT DECISIONSSafety and riskReturn on investment will be DIRECTLY related to the risk you take</p> <p>Safe investment low return (chance of losing your money is fairly small)</p> <p>Speculative Investment high risk investment that might earn a large profit in a short time (large return on investment, but you may lose all you invest)165 COMPONENTS OF RISKInflationInterest RateBusiness FailureFinancial MarketGlobal Investment17INVESTMENT RISKSSAFE:Government BondsSavings AccountsCertificates of DepositVarying risk:StocksCorporate bondsMutual FundsReal EstateHigh Risk:CommoditiesOptions Precious Metals and gemsCollectibles; coins, stamps, comic books</p> <p>18</p> <p>19Investment PortfolioA collection of all investments held by an individualShould be diverseDiversification-the process of spreading your assets among several different types of investments to reduce risk.20Savings &amp; Investing OptionsSAVINGS ACCOUNTS/CDsREAL ESTATECOLLECTIBLESSECURITIESBONDSMUTUAL FUNDSOPTIONS COMMODITIESSTOCKS21REAL ESTATEResale for profitRental Income22COLLECTIBLESCoinsStampsBeanie BabiesSports cards23BONDSA bond is lending money to a corporation or government entity for a period of timeCorporate Bond a written pledge to repay a specific amount of money along with interestGovernment Bond a written pledge of a government or a municipality such as a city to repay a specific sum of money with interest</p> <p>24MUTUAL FUNDSA mutual fund is an investment in which investors pool their money to buy stocks, bonds, and other securities selected by professional managers who work for an investment company. 25OPTIONSContract between a buyer and a seller that gives the buyer the right to buy a particular asset at a later date for an agreed upon priceExample: Buyer agrees on the option to buy 100 shares of stock XYZ for $5 in the future. The stocks value on that particular date turns out to be $10. If the buyer exercises his right to buy at $5, then his stock value is much greater than what he actually paid for it.26COMMODITIESSomething for which there is a demand but there is no difference in quality, no matter who produces itResources such as agricultural products or mineralsPetroleum (gasoline), Paper, Milk, Rice, Gold, SilverPrice based on market as a whole, not on quality of product27STOCKSEquity capital money that a business gets from its owners to operate; unit of ownership in a companyPublic corporations- sell their stocks openly on the stock marketPrivate corporations- (closely held) only issue stock to a small group of people</p> <p>28</p> <p>29WHY BUY STOCKTo gain larger returns than they can get from more conservative investments such as savings accounts or government bonds.30FACTORS TO CONSIDER WHEN INVESTING IN STOCKYou are not guaranteed what you paid for each shareCurrent value is determined by how much another investor will pay for share supply and demandA corporation does not have to pay dividends. 31Common StockA form of Equity to make money you buy low, sell high so you make money through appreciation of stock value. The price is how much a buyer is willing to pay.Common stock a unit of ownership of a company, it entitles the owner or stockholder to:voting privilegesgrowth profitsmaybe dividendsStock splits32Common Stock (Cont)Dividends Profit can be paid to shareholders as dividends or be used to grow the businessMay be a specific amount of money or percentage of par value (assigned dollar value printed on the stock certificate that does not change with market price)</p> <p>Stock Splits divided into twice the number worth half as muchWhen stock value is higher than ideal rangeConsidered a positive sign to business growth 33Common Stock (Cont)Shareholder meeting required to be held one per yearRight to vote - one vote for each share they ownPreemptive right current stockholder have first right to buy any new stock a corporation offers34Preferred StockPreferred stock a type of stock that gives the owner the following advantage:Cash dividends before common stockholdersAttracts more conservative investorsReceive dividends first so often purchased if steady income is desiredNot considered a good investment for most people</p> <p>35Blue-Chip StocksA safe investment that generally attracts conservative investorsStrongest and most respected companiesStable earningsConsistent dividends36Income StockPays higher-than-average dividends compared to other stocksExamples:Dow ChemicalBristol-Myers SquibbGas and Electric companies37Growth StockA corporation whose potential earnings may be higher than the average earnings predicted for industryExamples in early 2000s:Home DepotSouthwest Airlines</p> <p>38Cyclical StocksMarket value tends to reflect the state of the economy Economy up, market value upEconomy down, market value downBuy on a downturn of the economy to ride as the economy improves</p> <p>39Defensive StocksA stock that remains stable during declines in the economySteady income even when economy declines40CAP STOCKSCapitalization- total amount of stocks and bonds issued by a companyLarge-cap stocks- corporation issued a large number of sharesSmall-cap stocks- stock issued by a company with less than $500 million capitalization (higher risk)41Penny StocksTypically sell for less than $1 a shareIssued by new companies whose sales are very unsteadyPrices go up and down wildlyhard to trackCan be risky42Stock ExchangesNYSE New York Stock Exchange - The largest stock exchange in the world by dollar value and has 2,764 listed companies. </p> <p>NASDAQ - National Association of Securities Dealers Automated Quotations the largest electronic screen-based trading market in the United States </p> <p>AMEX - American Stock Exchange small to mid-sized stocks43SECSecurities &amp; Exchange Commission- regulatory agency of the stock market and prevents corporate abuses44Market ConditionsBull Market when investors are optimistic about the economy and buy stocks</p> <p>Bear Market when investors are pessimistic about the economy and sell stocks45Sources for Evaluating StocksNewspapers in the financial sectionWall Street JournalThe InternetStock Advisory ServicesCorporate News PublicationsBarronsSmart Money46PERSONAL INVESTMENT PLANFINANCIAL PLANNER a specialist who is trained to offer specific financial help and adviceDecision is based on:Income levelWillingness to make your own plan47FINANCIAL PLANNERSFee-only planners charge an hourly rate or percent of the value of the investments they manage</p> <p>Fee-offset planners charge an hourly rate but reduce it with commissions they make through your investments</p> <p>48FINANCIAL PLANNERSFee and commission planners fixed fee for a financial plan and earn commission from products they sell</p> <p>Commission only planners- earn through commissions they make on sales of insurance, mutual funds and other investments49FINANCIAL PLANNERSShould provide the following services:Assess current financial positionOffer written plan with recommendationsDiscuss plan and answer questionsKeep track of your progressGuide you to other financial experts and services as needed50Certification of Financial PlannersCFP Certified Financial PlannerChFC Chartered Financial Consultant</p> <p>Check the credentials before working with a planner51Managing your InvestmentsEvaluate investment research before investingMonitor investment track the value of the investmentsKeep accurate records to notice increase in profits or to reduce losses52Managing your InvestmentsConsider tax consequencesTax-exempt income not taxed (govt bonds)Tax-deferred income that is taxed at a later date (IRAs, 401Ks)Capital Gain profit from the sale of an asset; taxed on how long the asset was ownedCapital Loss sale of an investment for less than its purchase price</p> <p>53SOURCES OF INVESTMENT INFORMATIONInternetNewspapers and News ProgramsBusiness PublicationsGovernment PublicationsCorporate ReportsProspectus a document that discloses information about a companys earning, assets and liabilities, its products or services, and its managementInvestor Services:Free newsletters mailed to clientsExamples: Moodys Investment Service or Value Line54SOURCES OF INVESTMENT INFORMATIONStatistical AveragesDow Jones Industrial Average- average that consists of 30 of the largest and most widely held public companiesStandard &amp; Poors Stock Index -the stocks of 500 corporations, all of which are from the US. 55</p>


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