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Introduction to Investing

"Take Charge of Your Finances" Advanced Level

© Family Economics & Financial Education – Updated April 2011 – 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

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Saving and Investing

Once an appropriate amount of liquid assets are reached

Recommend refocusing goals from saving to investing

Remember: The

purpose of savings is to

develop financial security

© Family Economics & Financial Education – Updated April 2011 – 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

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What is Investing?• Purchase of assets with the goal of

increasing future income• Focuses on wealth accumulation• Appropriate for long-term goals

© Family Economics & Financial Education – Updated April 2011 – 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

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Rate of ReturnTotal return on investment expressed

as a percentage of the amount of money invested

Total Return

Amount of Money

Invested

Rate of Return

Remember: Return is the

profit or income

generated by savings and

investing

Investments usually earn higher rates of return than savings tools

© Family Economics & Financial Education – Updated April 2011 – 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

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What 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 – Updated April 2011 – 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

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RiskPOTENTIAL

RETURNRISK

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

© Family Economics & Financial Education – Updated April 2011 – 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

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InflationInflation

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 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

© Family Economics & Financial Education – Updated April 2011 – 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

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Types of Investment Tools

Stocks Bonds

Mutual Funds

Index Funds

Real Estate

Speculative Investments

© Family Economics & Financial Education – Updated April 2011 – 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

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StocksStock Stockholder or

shareholder

Usually a stockholder owns a very

small part of a company

A share of ownership in a company

Owner of the stock

© Family Economics & Financial Education – Updated April 2011 – 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

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Dividends Market Price

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?

© Family Economics & Financial Education – Updated April 2011 – 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

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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

© Family Economics & Financial Education – Updated April 2011 – 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

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Advantage Disadvantage

Mutual Funds

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

Make sure to research the fees charged by a mutual

fund

Reduces investment

riskFees may be

highSaves

investors time

© Family Economics & Financial Education – Updated April 2011 – 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

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Index Fund

Index

Index Fund

A mutual fund that invests in the stocks and bonds that make up an index

A group of similar stocks and bonds- Standard and Poor 500

© Family Economics & Financial Education – Updated April 2011 – 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

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Index Fund

What is the difference between a

mutual fund and an index

fund?

Advantage Disadvantage

High diversification

Usually charge lower fees than

mutual funds

Still charge fees

© Family Economics & Financial Education – Updated April 2011 – 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

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Real Estate

• Any residential or commercial property or land as well as the rights accompanying that land

• A family home is usually 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 – Updated April 2011 – 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

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Speculative Investments

High risk investmentsHave the potential for significant fluctuations

in return over a short period of time

Futures Options Commercial Paper

Collectibles

© Family Economics & Financial Education – Updated April 2011 – 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

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Financial Risk Pyramid

Speculative Investment

ToolsIncreasing potential for

higher returns

Increasing risk

Savings ToolsChecking

AccountSavings 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

© Family Economics & Financial Education – Updated April 2011 – 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

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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”

© Family Economics & Financial Education – Updated April 2011 – 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

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DISCOUNT BROKER

Buying and Selling Investments

Brokerage firm acts as a buying and selling agent for an investor (except for 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 – Updated April 2011 – 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

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TaxationProfits 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

© Family Economics & Financial Education – Updated April 2011 – 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

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Tax-Sheltered Investments

Government tries to encourage certain types of investments by making them tax-

sheltered

Tax-sheltered

investments are usually

not tax-free!

Tax-sheltered investments-

eliminate, reduce, defer, or adjust the current year

tax liability

• Retirement• Child/dependent care• Education expenses• Health care expenses

© Family Economics & Financial Education – Updated April 2011 – 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

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When are taxes for tax-sheltered investments usually paid?

Money is invested and taxes are paid

Money grows untaxed with help from

compounding interest

Money is withdrawn

Money is invested

Money grows untaxed with help from

compounding interest

Money is withdrawn and taxes are 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?

© Family Economics & Financial Education – Updated April 2011 – 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

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Employer-Sponsored Investment Accounts

• Type of tax-sheltered investment• Money is automatically taken out of

employee’s paycheck• Employers often contribute a portion of

money to the investment with no additional cost from the employee

Employee contributes 7% of

paycheck to investment

account

Example:

Employer contributes the same amount of

money to the employee’s

investment account

Employee benefits from

having double the amount of money

invested!

© Family Economics & Financial Education – Updated April 2011 – 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

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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

© Family Economics & Financial Education – Updated April 2011 – 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

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Rule of 72Allows a person to easily calculate

when the future value of an investment will double the principal

amount

72 Interest Rate

Number of years needed to double

the principal investment

© Family Economics & Financial Education – Updated April 2011 – 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

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“Rule of 72” FYI• Only an approximation• Interest rate must remain constant• Interest rate is not converted to a

decimal• Equation does not allow for

additional payments to be made to the original amount

• Interest earned is reinvested• Tax deductions are not included

© Family Economics & Financial Education – Updated April 2011 – 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

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Doug’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?

72 6.5 11 years to double

© Family Economics & Financial Education – Updated April 2011 – 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

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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?

72 4 years 18% interest rate