1.12.1.G1
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
What are examples of long-term
goals that can be
accomplished by investing?
© 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
1.12.1.G1
Rate of ReturnTotal return on investment expressed
as a percentage of the amount of money invested
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?
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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What is Derek’s Rate of Return?
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?
Derek’s rate of return on investment is 16.7%
© 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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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
What is the risk level of savings
tools?
© 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
1.12.1.G1
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 9Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Types of Investment Tools
© 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
1.12.1.G1
Stocks
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 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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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 12Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
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 13Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
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 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
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 15Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
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
© 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
1.12.1.G1
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 17Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Speculative Investments
Futures Options Commercial Paper
Collectibles
© 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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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 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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Investment PhilosophyEveryone has a tolerance level for the
amount of risk they are willing to take on
Investment Philosophy- an individual’s general approach to investment riskThe 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
© 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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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 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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Buying and Selling Investments
Brokerage firm acts as a buying and selling agent for an investor (except for real estate and certain
speculative investments)
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 22Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
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 23Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
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 24Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
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?
© 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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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 employeeExample:
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 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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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 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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Rule of 72Allows a person to easily calculate
when the future value of an investment will double the principal
amount
© 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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Albert EinsteinCredited 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.”
© Family Economics & Financial Education – Updated April 2011 – Investing Unit – Introduction to Investing – Slide 29Funded 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 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
© Family Economics & Financial Education – Updated April 2011 – Investing Unit – Introduction to Investing – Slide 30Funded 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 31Funded 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?
© Family Economics & Financial Education – Updated April 2011 – Investing Unit – Introduction to Investing – Slide 32Funded 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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Jessica’s Credit Card Debt
• $2,200 balance on credit card• 18% interest rate
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?
© Family Economics & Financial Education – Updated April 2011 – Investing Unit – Introduction to Investing – Slide 33Funded 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?
© Family Economics & Financial Education – Updated April 2011 – Investing Unit – Introduction to Investing – Slide 34Funded 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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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?