Introduction to Investing

Transcription

1 Introduction to Investing "Take Charge of Your Finances" Advanced Level

2 Saving and Investing Once an appropriate amount of liquid assets are reached Remember: The purpose of savings is to develop financial security Recommend refocusing goals from saving to investing Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 2

3 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 3

4 Rate of Return Total 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 Total Return Amount of Money Invested Rate of Return Investments usually earn higher rates of return than savings tools Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 4

5 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, = 5% Mandy s rate of return on investment is 5% Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 5

6 What is Derek s Rate of G1 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? $150 $ = 16.7% Derek s rate of return on investment is 16.7% Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 6

7 Risk POTENTIAL RETURN RISK Risk uncertainty regarding the outcome of a situation or event What is the risk level of savings tools? 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 7

8 Inflation Inflation Rise in the general level of prices Strive to have the rate of return on investment be higher than the rate of inflation 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 Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 8

9 Types of Investment G1 Tools Stocks Bonds Mutual Funds Index Funds Real Estate Speculative Investments Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 9

10 Stocks Stock A share of ownership in a company Stockholder or shareholder Owner of the stock Usually a stockholder owns a very small part of a company Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 10

11 Return on Stocks Definition Dividends Share of profits distributed in cash to stockholders Market Price Current price that a buyer is willing to pay for stock What is received? Stockholder may or may not receive dividendsdepends on company profit If stock is sold for a market price higher than what was paid Stockholder will receive a return If stock is sold for a market price lower than what was paid Stockholder will lose money Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 11

12 Bonds Definition Form of lending to a company or the government (city, state, or federal) Bonds are less risky than stocks but usually do not have the potential to earn as high of a return Return Annual interest is paid to investor Once the maturity date is reached, the principal is repaid to the bondholder Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 12

13 Mutual Funds Make sure to research the fees charged by a mutual fund Mutual fundwhen a company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds Advantage Reduces investment risk Saves investors time Disadvantage Fees may be high Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 13

14 Index Fund Index A group of similar stocks and bonds Standard and Poor 500 Index Fund A mutual fund that invests in the stocks and bonds that make up an index Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 14

15 Index Fund Advantage Disadvantage High diversification What is the difference between a mutual fund and an index fund? Usually charge lower fees than mutual funds Still charge fees Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 15

16 Real Estate Examples of real estate investments include rental units and commercial property 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 Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 16

17 Speculative Investments High risk investments Have 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 17

18 Financial Risk Pyramid The risk level for specific investment tools may vary Increasing potential for higher returns Increasing risk Checking Account Stocks Savings Account Futures Commercial Paper Options Collectibles Mutual Funds Bonds Money Market Deposit Account Real Estate Index Funds Certificate of Deposit Speculative Investment Tools Savings Bonds Investment Tools Savings Tools Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 18

19 Investment Philosophy Everyone has a tolerance level for the amount of risk they are willing to take on The greater the risk a person is willing to make on an investment, the greater the potential return will be Investment Philosophy an individual s general approach to investment risk Generally divided into three categories: conservative, moderate, aggressive Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 19

20 Portfolio Diversification Portfolio Diversification reduces risk by spreading investment money among a wide array of investment tools Referred to as Building a Portfolio Creates a collection of investments that will provide an acceptable return with an acceptable exposure to risk Assists with investment risk reduction Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 20

21 Buying and Selling G1 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 DISCOUNT BROKER Complete investment transactions Offer investment advice and oneon one attention from a broker Only complete investment transactions Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 21 Offer no advice to investors but charge 40 60% less

22 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 Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 22

23 Tax Sheltered G1 Investments Government tries to encourage certain types of investments by making them taxsheltered Taxsheltered investments are usually not tax free! Tax sheltered investmentseliminate, 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 23

24 When are taxes for tax sheltered investments usually paid? Money is invested and taxes are paid Money is invested Money grows untaxed with help from compounding interest OR Money grows untaxed with help from compounding interest What is the benefit of a taxsheltered investment if taxes still have to be paid? Money is withdrawn Money is withdrawn and taxes are paid There are often limits to the amount that can be invested Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 24

25 Employer Sponsored Investment Accounts Example: 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 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 25

26 Advantages to Employer Sponsored Investments It is recommended that a person utilize these investment tools as much as possible if they are offered Reduces tax liability Possibility for employer to match investment Makes investing automatic Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 26

27 Rule of 72 Allows 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 27

28 Albert Einstein It is the greatest mathematical discovery of all time. 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 Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 28

29 What Can the Rule of 72 Determine? How many years it will take an investment to double at a given interest rate The interest rate an investment must earn to double within a specific time period How long it will take debt to double if no payments are made 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 29

30 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 30

31 Doug s Certificate of G1 Invested $2,500 Interest Rate is 6.5% Deposit 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? years to double Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 31

32 Jessica s Credit Card Debt 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? $2,200 balance on credit card 18% interest rate years to double Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 32

33 Jacob s Car 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? $5,000 to invest Wants investment to double in 4 years 72 4 years 18% interest rate Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 33

34 Summary What is the relationship between risk and return? What are the six main investment tools? How can a person reduce investment risk? Who should a person contact to purchase investment tools? What is a taxsheltered investment? What is the Rule of 72? Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 34