saving and investing basics saving and investing options evaluation factors for savings and...
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Saving and investing basics Saving and investing options Evaluation factors for savings and
investing options
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Reasons money is borrowed by the following:› Individuals Cars and Houses
› Businesses Operate or Expand
› Government Improve schools or transportation
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Saving:› Putting money away for future use
Investing:› Using savings to earn more money
for future financial security Saving influences on economic
activity:› Making more money available to be
used by individuals, businesses, and the government
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Main goals of savers and investors:› Making available income and long-term
growth Growth of savings
› Simple interest› Compound interest
Impact of compound frequency on savings growth rate:› The more times that interest is
compounded the more growth of savings.
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How is simple interest calculated?› Simple interest is calculated by using the
formula (P=Principal, R=Rate, T=Time and I=Interest Rate)
› I=P * R * T. How is compound interest calculated?
› Compound interest is calculated by using the formula (A=Amount, P=Principal amount/the initial amount you borrow or deposit, r=Annual rate of interest and n=Number of times interest is compounded)
› A=P(1+r/n)nt.
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Simple interest$1,000 at 10%
Year 1: $1,000 * .10 = $100
$1,000 + $100 = $1,100Year 2:
$1,000 * .10 = $100$1,100 + $100 = $1,200What would the value
be at the end of year 3?
Compound interest$1,000 at 10%
Year 1: $1,000 * .10 = $100
$1,000 + $100 = $1,100Year 2:
$1,100 * .10 = $110$1,100 + $110 = $1,210What would the value
be at the end of year 3?
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Savings Plans› Savings account
Allows low or zero balance, deposit or withdrawals anytime and interest to be earned. Usually withdrawals are allowed without penalties.
› Certificates of deposit (CDs) Requires a minimum deposit, money to remain
deposited for a period of time without penalties. Penalties may be assessed if money is withdrawn before specified time.
› Money market account Requires a minimum deposit and interest is
earned based on government and corporate securities. Usually withdrawals are allowed without penalties.
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Stocks Bonds Mutual Funds and Exchange-traded
Funds Real Estate Commodities Collectibles
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Two main categories of stock:› Preferred› Common
What are the major similarities and differences between preferred and common stocks?› Similarities:
Investment risks and pay dividends› Differences:
Preferred stock is less risky than common stock.
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Stockbrokers› Buy and sell stock and bonds at a set
price for a commission for stockholders. Stock exchange
› Where the trading of securities take place.
What is market value of stock?› The price for which a share of stock can
be purchased.
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A B C D E F G H I
52 Week Sales
High Low Stock Div Yld PE Vol100s
High Low Last Chg
12 1/8 8 AAR .44 6.2 15 6 6 3/4 6 5/8 6 1/2 -1/8
49 1/2 31 1/4 ACF 1.76 7.4 7 477 36 1/4 37 5/8 37 +3/4
26 1/2 16 AMF 1.36 6.7 7 133 17 1/2 17 1/2 17 1/2 -3/8
6 1/8 3 1/8 ARA 2 7 8 10 33 7/8 33 7/8 33 -1
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Factors that could influence investors in selecting stock:› Economic
Inflation Interest rates Consumer spending Employment
› Company Dividend yield Price-earnings ratio
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Yield is usually calculated in the following way:current value – original value = yield
original value Current value=closing price for the day Original price=price paid for stock Yield=Interest earned For example: a stock is bought at $40 and
valued at $43:$43 – $40
$40 yield = 7.5%
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Dividends also may be added to the calculation.
For example: a stock is bought at $40 and sold at $43, but also earned a $2 dividend during that time:
$43 + $2 – $40 $40
yield = 12.5%
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Bond:› A promissory note to pay back a specified amount of
money at a stated rate on a specific date. Main Categories of Bonds
› Government bonds Municipal bonds U.S. savings bonds Treasury bills and notes
› Corporate bonds Purchasing corporate bonds is a means of
loaning money to a company.
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How does stated interest rate impact the value of a bond?› The stated interest rate usually determines
the price investors want to pay for a bond. If a bond’s stated interest rate is lower than similar ones, investors will most likely want to pay less for the bond. If the stated interest rate is higher than similar ones, the seller will most likely want to be paid more than its face value.
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Companies’ major tasks in assisting investors of mutual funds by studying companies stocks and bonds, and then buying a variety of stocks and bonds to sell.
Some examples of mutual fund categories› Aggressive-growth stock funds
Look for quick growth, but also have an higher risk than other stock.
› Income funds Concentrate on stocks that pay regular
dividends.
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› International funds Invest in a variety of company stock around
the world.› Sector funds
Purchase stocks of companies in the same industry.
› Bond funds Concentrate in corporate bonds.
› Balanced funds Invest in both stocks and bonds.
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Exchange-traded fund (ETF):› A portfolio of stocks, bonds or other investments that trade on a stock exchange like regular stock.
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Real Estate› Advantages
Tax Benefits Increased Equity Pride of Ownership
› Disadvantages Property Taxes Interest Payments
Commodities and futures› Grain, livestock, precious metals (like gold)
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Evaluation Factors for Savings
and Investing Options
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Safety and risk Potential yield Liquidity Taxes