CH 10: Investing 101 ObjectivesIdentifying basic investing tools and tips

• Life Situation: what stage are you at in your life?

• Compound interest: earning interest on interest

• Investment tools: stocks, bonds, mutual funds, real estate, starting your own business

• Portfolios• Diversification

What is investing?

The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.

• It is putting your money to work for you• Investing is not gambling

Critical Thinking: Explain the difference between investing and saving

Life Situation

75 year old widow vs 30 yr old business executive – Widow: preserve value (Lower risk)– Business executive: more aggressive (Higher risk)

Millionaire vs. Newlyweds

– Millionaire: invest $100,000– Newlyweds: invest $1,000

Compound Interest• Highly powerful income-generating tool

• Requires two things: the re-investment of earnings and time

• More time = More income potential

• Start Early & Don’t raid the piggy bank

Pam Informed Sam Uninformed

Start at 25 Start at 35

Invest 15,000 Invest 15,000

5.5% interest 5.5% interest

$57,200.89 at age 50 $33,487.15 at age 50

Both investments start slow and then accelerate. Pam's line becomes steeper as she nears her 50s because she has accumulated more interest and because this accumulated interest is itself accruing more interest.

Pam's line gets even steeper (her rate of return increases) in another 10 years. At age 60 she would have nearly $100,000 in her bank account, while Sam would only have around $60,000, a $40,000 difference!

Investment Tools: Bonds

Lend your money to a company or government. In return, they agree to give you interest on your money and eventually pay you back the amount you lent out.

Relatively safe: government is risk-free

Little risk = little potential return

**The rate of return on bonds is generally lower than other securities.

Investment Tools: Stocks

• Part owner of the business

• Vote at the shareholders' meeting

• May allow you to receive company profits/dividends

**Higher potential returns, however, higher risk of losing some or all of your investment.

Investment Tools: Mutual Fund

• A collection of stocks and bonds• Pool your money with other investors to pay a

professional manager to select specific securities for you

• Focus: large stocks, small stocks, bonds from governments, bonds from companies, stocks and bonds, stocks in certain industries, stocks in certain countries, etc.

**Allows you to invest money without time and experience

Portfolios

• A combination of different investment assets (mixed and matched)

• The asset mix you choose will determine the risk and expected return of your portfolio.

Diversification • Don’t put all your egg’s in one basket

• Different securities perform differently at any point in time, so your entire portfolio does not suffer the impact of a decline of any one security with diversification.

**When your stocks go down, you may still have the stability of the bonds in your portfolio.

Partner Activity

• Read the Investing DQ’s posted on my assignments page and discuss with a partner. Construct a brief response.