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G1

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

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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 Funded 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 3 Funded 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 Return
Total return on investment expressed as a percentage of the amount of money invested
Total Return
Amount of Money Invested

Remember: Return is the profit or income generated by savings and investing

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 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

What is Mandys Rate of Return?

Mandy saved $2,200 in a money market deposit account. After one year, she has a return of $110. What is Mandys rate of return?
$110 $2,200 .05 = 5%

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Mandys rate of return on investment is 5%

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 5 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

What is Dereks Rate of Return?

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Derek invested $900. When he withdrew his money from the investment, he had a total of $1,050. What is Dereks rate of return?
$150
$900

.167 = 16.7%

Dereks rate of return on investment is 16.7%

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 6 Funded 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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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 Funded 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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Inflation
Inflation Rise in the general level of prices
Inflation Risk The danger that money wont 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 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Strive to have the rate of return on investment be higher than the rate of inflation

Types of Investment Tools

Stocks Bonds

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Mutual Funds
Real Estate

Index Funds
Speculative Investments

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 9 Funded 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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Stocks
Stock Stockholder or shareholder

A share of ownership in a company

Usually a stockholder owns a very small part of a company

Owner of the stock

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 10 Funded 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
Dividends
Definition
Share of profits distributed in cash to stockholders

Market Price
Current price that a buyer is willing to pay for stock
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

What is received?

Stockholder may or may not receive dividendsdepends on company profit

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 11 Funded 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
Definition
Form of lending to a company or the government (city, state, or federal) Annual interest is paid to investor
Bonds are less risky than stocks but usually do not have the potential to earn as high of a return

Return

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 Funded 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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Mutual Funds
Mutual fundAdvantage
Disadvantage

Make sure to research the fees charged by a mutual fund

when a company combines the funds of Reduces many different investment investors and then risk invests that money in Saves a diversified portfolio investors of stocks and bonds time

Fees may be high

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 13 Funded 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
A group of similar stocks and bondsStandard 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 Funded 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
Advantage
Disadvantage

High diversification
Usually charge lower fees than mutual funds

What is the difference between a mutual fund and an index fund?

Still charge fees

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 15 Funded 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
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 16 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Examples of real estate investments include rental units and commercial property

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Speculative Investments
High risk investments Have the potential for significant fluctuations in return over a short period of time

Futures

Options

Commercial Collectibles Paper

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 17 Funded 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

The risk level for specific investment tools may vary
Futures

Increasing potential for higher returns Increasing risk

Commercial Paper Options Collectibles Stocks Mutual Funds Bonds Money Market Deposit Account Real Estate Index Funds

Speculative Investment Tools Investment Tools Savings Tools

Checking Savings Account Account

Certificate of Deposit

Savings Bonds

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 18 Funded 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 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 individuals 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 Funded 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
Referred to as Building a Portfolio

Assists with investment risk reduction

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 20 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Buying and Selling Investments

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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 Offer investment advice and oneon-one attention from a broker

DISCOUNT BROKER
Only complete investment transactions Offer no advice to investors but charge 40-60% less

Complete investment transactions

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 21 Funded 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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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 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Tax-Sheltered Investments

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Government tries to encourage certain types of investments by making them taxsheltered

Tax-sheltered investmentseliminate, reduce, defer, or adjust the current year tax liability

Taxsheltered investments are usually not tax-free!

Retirement Child/dependent care Education expenses Health care expenses

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 23 Funded 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 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 Funded 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 employees paycheck Employers often contribute a portion of money to the investment with no additional cost from the employee
Employer contributes the same amount of money to the employees investment account Employee benefits from having double the amount of money invested!

Example:

Employee contributes 7% of paycheck to investment account

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 25 Funded 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 EmployerSponsored Investments

Reduces tax liability
It is recommended that a person utilize these investment tools as much as possible if they are offered

Makes investing automatic

Possibility for employer to match investment

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 26 Funded 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
Allows a person to easily calculate when the future value of an investment will double the principal amount
Number of years needed to double the principal investment

72

Interest Rate

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 27 Funded 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 Einstein
Credited for discovering the mathematical equation for compounding interest, thus the Rule of 72. At 10% interest rate, money doubles every 7.2 years,
It is the greatest mathematical discovery of all time.

T=P(I+I/N)YN

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 28 Funded 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
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 Funded 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 30 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Dougs Certificate of Deposit

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Doug invested $2,500 into a Certificate of Deposit earning a 6.5% interest rate. How long will it take Dougs investment to double?

Invested $2,500 Interest Rate is 6.5%

72

6.5

11 years to double

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 31 Funded 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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Jessicas 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

72

18

4 years to double

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 32 Funded 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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Jacobs 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 Funded 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 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 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona