Introduction to investing power point presentation 1.12.1.g1
Introduction to Investing "Take Charge of Your Finances" Advanced Level
Saving and Investing <ul><li>Once an appropriate amount of </li></ul><ul><li>liquid assets are reached </li></ul>Recommend refocusing goals from saving to investing Remember: The purpose of savings is to develop financial security
What is Investing? <ul><li>Purchase of assets with the goal of increasing future income </li></ul><ul><li>Focuses on wealth accumulation </li></ul><ul><li>Appropriate for long-term goals </li></ul>What are examples of long-term goals that can be accomplished by investing?
Rate of Return <ul><li>Total return on investment expressed as a percentage of the amount of money invested </li></ul>Remember: Return is the profit or income generated by savings and investing Investments usually earn higher rates of return than savings tools
What is Mandy’s Rate of Return? <ul><li>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? </li></ul>Mandy’s rate of return on investment is 5%
What is Derek’s Rate of Return? <ul><li>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? </li></ul>Derek’s rate of return on investment is 16.7%
Risk <ul><li>POTENTIAL </li></ul><ul><li>RETURN </li></ul>RISK Risk- uncertainty regarding the outcome of a situation or event Investment Risk- possibility that an investment will fail to pay the expected return or fail to pay a return at all All investment tools carry some level of risk What is the risk level of savings tools?
Inflation <ul><li>Inflation </li></ul><ul><li>Rise in the general level of prices </li></ul>Inflation Risk The danger that money won’t be worth as much in the future as it is today Inflation risk is usually not a concern with savings since the goal of savings is to provide current financial security Strive to have the rate of return on investment be higher than the rate of inflation
Stocks Usually a stockholder owns a very small part of a company A share of ownership in a company Owner of the stock
Return on Stocks If stock is sold for a market price higher than what was paid Share of profits distributed in cash to stockholders Stockholder may or may not receive dividends- depends on company profit Current price that a buyer is willing to pay for stock If stock is sold for a market price lower than what was paid Stockholder will receive a return Stockholder will lose money Definition What is received?
Bonds Form of lending to a company or the government (city, state, or federal) Annual interest is paid to investor Once the maturity date is reached, the principal is repaid to the bondholder Bonds are less risky than stocks but usually do not have the potential to earn as high of a return Definition Return
Mutual Funds <ul><ul><li>Mutual fund- when a company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds </li></ul></ul><ul><ul><li>Make sure to research the fees charged by a mutual fund </li></ul></ul>Reduces investment risk Fees may be high Saves investors time
Index Fund <ul><ul><li>A mutual fund that invests in the stocks and bonds that make up an index </li></ul></ul>A group of similar stocks and bonds- Standard and Poor 500
Index Fund What is the difference between a mutual fund and an index fund? High diversification Usually charge lower fees than mutual funds Still charge fees
Real Estate <ul><li>Any residential or commercial property or land as well as the rights accompanying that land </li></ul><ul><li>A family home is usually not considered an investment asset </li></ul><ul><li>Can be risky and more time consuming but has potential for large returns </li></ul><ul><ul><li>Examples of real estate investments include rental units and commercial property </li></ul></ul>
Speculative Investments Futures Options Commercial Paper Collectibles
Financial Risk Pyramid Speculative Investment Tools Increasing potential for higher returns Increasing risk Savings Tools Checking Account Savings Account Money Market Deposit Account Certificate of Deposit Savings Bonds Investment Tools Bonds Stocks Mutual Funds Real Estate Options Collectibles Futures Commercial Paper Index Funds The risk level for specific investment tools may vary
Investment Philosophy <ul><li>Everyone has a tolerance level for the amount of risk they are willing to take on </li></ul>Investment Philosophy - an 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, aggressive
Portfolio Diversification Portfolio Diversification- reduces risk by spreading investment money among a wide array of investment tools Creates a collection of investments that will provide an acceptable return with an acceptable exposure to risk Assists with investment risk reduction Referred to as “Building a Portfolio”
Buying and Selling Investments <ul><li>Brokerage firm acts as a buying and selling agent for an investor (except for real estate and certain speculative investments) </li></ul>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
Taxation Profits earned on investments are unearned income Taxes are often owed on unearned income Taxes are due on most investment returns in the year the unearned income is received
Tax-Sheltered Investments <ul><li>Government tries to encourage certain types of investments by making them tax-sheltered </li></ul>Tax-sheltered investments are usually not tax-free! Tax-sheltered investments- eliminate, reduce, defer, or adjust the current year tax liability <ul><li>Retirement </li></ul><ul><li>Child/dependent care </li></ul><ul><li>Education expenses </li></ul><ul><li>Health care expenses </li></ul>
When are taxes for tax-sheltered investments usually paid? There are often limits to the amount that can be invested OR What is the benefit of a tax-sheltered investment if taxes still have to be paid?
Employer-Sponsored Investment Accounts <ul><li>Type of tax-sheltered investment </li></ul><ul><li>Money is automatically taken out of employee’s paycheck </li></ul><ul><li>Employers often contribute a portion of money to the investment with no additional cost from the employee </li></ul>Example: Employer contributes the same amount of money to the employee’s investment account Employee benefits from having double the amount of money invested!
Advantages to Employer-Sponsored Investments Reduces tax liability Makes investing automatic Possibility for employer to match investment It is recommended that a person utilize these investment tools as much as possible if they are offered
Rule of 72 <ul><li>Allows a person to easily calculate when the future value of an investment will double the principal amount </li></ul>
Albert Einstein Credited 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.”
What Can the “Rule of 72” Determine? How many years it will take an investment to double at a given interest rate 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
“ Rule of 72” FYI <ul><li>Only an approximation </li></ul><ul><li>Interest rate must remain constant </li></ul><ul><li>Interest rate is not converted to a decimal </li></ul><ul><li>Equation does not allow for additional payments to be made to the original amount </li></ul><ul><li>Interest earned is reinvested </li></ul><ul><li>Tax deductions are not included </li></ul>
Doug’s Certificate of Deposit <ul><li>Invested $2,500 </li></ul><ul><li>Interest Rate is 6.5% </li></ul>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?
Jessica’s Credit Card Debt <ul><li>$2,200 balance on credit card </li></ul><ul><li>18% interest rate </li></ul>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?
Jacob’s Car <ul><li>$5,000 to invest </li></ul><ul><li>Wants investment to double in 4 years </li></ul>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?
Summary What is the Rule of 72? What is the relationship between risk and return? How can a person reduce investment risk? What are the six main investment tools? Who should a person contact to purchase investment tools? What is a tax-sheltered investment?