It seems to be a law of nature, inflexible and inexorable, that those who will not risk cannot win.

Transcription

1 Bell Ringer It seems to be a law of nature, inflexible and inexorable, that those who will not risk cannot win. -John Paul Jones What does the quote mean? Restate the quote in your own words. When was a time when this quote applied to your life? Draw from personal experience.

2 Objectives 1. Describe the benefits and risks associated with investing. 2. Identify the four basic types of risk.

3 Introduction What are the benefits and risks of saving and investing? Savings you deposit in a bank will grow (a little) with almost no risk at all. Investing, while more risky, may yield a larger return for your initial investment. It may also prove to be financially devastating if it is ill-timed or mismanaged.

4 Introduction The simple truth is you will all invest at some point in your lives. College House Car Children Retirement

5 Diversification Diversification is a risk management technique that spreads out your money across a variety of investments. Don t put all your eggs in one basket! Spreading out risk helps prevent losing everything on a bad investment.

6 Liquidity Liquidity is the ability of property, capital, or investments to be used as or converted into cash. This determines how easily people can access their money when they need it, depending on how liquid the investment is.

7 Return and Risk In general, the higher the potential risk, the higher the return. The lower the potential risk, the lower the return. Whenever people evaluate their potential investments, they must balance the risks involved with the rewards they expect to gain.

8 Types of Risk 1.Credit risk Borrowers may not pay off the money they have borrowed, or they may be late in making payments 2.Inflation rate risk Inflation rates erode the value of your assets 3.Liquidity risk You may not be able to convert the investment back into cash quickly enough for your needs 4.Time risk You may have to pass up other, more profitable investment opportunities aka, opportunity cost

9 Bell Ringer Why do people need to diversify their investments? What are the four types of risk?

10 Objectives 1. Describe the characteristics of bonds as financial assets. 2. Identify different types of bonds.

11 Bonds What is a bond? Bonds are a form of debt investment where an investor loans money to a business or government entity. They are loans to institutions or to the government, but you serve as the bank.

12 Bonds as an Investment Why are bonds bought and sold? Bonds are sold by governments and/or corporations to finance projects. They offer a higher rate of return than a savings account, although they are generally a non-risky investment.

13 Components of Bonds Bonds have three basic components: Coupon rate - the interest rate that a bond issuer will pay to a bondholder Maturity when payment to a bondholder is due Par value - the amount to be paid to the bondholder at maturity

14 Advantages and Disadvantages Advantages Once a bond is sold, the coupon rate remains the same. (Stability) The return for a bond investment is predictable. Disadvantages Once a bond is sold, the coupon rate remains the same. (Low returns) A company/government does not have to share profits with bondholders if it is doing well.

15 Municipal Bonds State and local governments issue municipal bonds to finance such projects as highways, libraries, parks, and schools. These are attractive to long-term investments and are relatively safe. Why are they a safe investment?

16 Corporate and Junk Bonds Corporate bonds are issued by corporation to help raise money to expand business. These bonds have a moderate risk level because investors must depend on the corporation s success. Junk bonds are bonds with a high risk and a potentially high return. Investors in junk bonds face a strong possibility that some of the issuing firms will default on their debt. Why would someone want to buy a junk bond?

17 Key Terms coupon rate: the interest rate that a bond issuer will pay to the bondholder maturity: the time at which payment to a bondholder is due par value: a bond s stated value, to be paid to the bondholder at maturity

18 Key Terms, cont. municipal bond: a bond issued by a state or local government or a municipality to finance a public project corporate bond: a bond issued by a corporation to help raise money for an expansion junk bond: a bond with high risk and potentially high yield

19 Stock Review Stocks, or ownership shares in a company, are traded on a stock exchange. Investors typically hire stockbrokers to handle these transactions. The two largest stock exchanges in the world are the NYSE and Nasdaq.

20 Objectives 1. Define what a stock is. 2. Describe how stocks are traded. 3. Explain how stock performance is measured. 4. Describe the Great Crash of 1929 and more recent stock market events.

21 Review h6w54b8 Stock Market Basics

22 Benefits of Buying Stock The two ways of making money from buying stock are: Dividends part of the firm s profits, usually paid quarterly Capital gains selling the stock for more than you paid for it Buy low, sell high

23 Measuring Stock Performance When the stock market rises steadily over a period of time it is known as a bull market. When the stock market falls or stagnates for a significant period it is a bear market.

24 The Great Crash The U.S. enjoyed a decade-long bull market following World War I. The market value of all stocks rose from $27 billion in 1925 to $87 billion by late 1929.

25 The Great Crash However, the income was spread unequally throughout society, making the economic growth unsound. Consumer debt rose exponentially throughout the 1920s. Stock brokers encouraged the practice of buying on margin (making high-risk investments using borrowed money). By August 1929, nearly 40% of all money loaned in the U.S. was used to buy stocks!

26 The Great Crash The Dow began steadily dropping in September People began to liquidate their shares in a panic, sending the prices of stocks into a free-fall. On October 29, 1929, a record 16.4 million shares were sold and the market crashed (aka, Black Tuesday). The NYSE lost $14 billion in investments ($200 billion today) The Crash led to the Great Depression.

27 The Aftermath For decades after the Great Depression, many people were scared to invest in the stock market. By the 1980s, with the development of mutual funds & ETFs (a pool of funds placed in diversified investments and professionally managed), Americans became more comfortable with stock ownership once again.

28 The Stock Market Today In 2008, the stock market began falling, causing a major economic crisis in the United States once again (aka, The Great Recession). Although some business sectors are still struggling, the stock market has rebounded and is currently in a bull market. On November 2, 2017, the DJIA closed at a record high of 23,

29 Key Terms share: a portion of stock capital gain: the difference between the selling price and purchase price that results in a financial gain for the seller

30 Key Terms, cont. stockbroker: a person who links buyers and sellers of stock bull market: a steady rise in the stock market over a period of time bear market: a steady drop or stagnation in the stock market over a period of time