Economics

Chapter 9

Chapter 9

Section 1

Objectives

1. What benefits do people gain by saving money?

2. How do savings accounts differ from time deposits?

3. How do economists measure savings?

Spend or Save?

• As a consumer you have two choices to make: spend your money or save your money.

• A person may choose to spend their disposable income. (The money you have left over after taxes.)

• Another option is to save the money in an interest baring bank account.

Why Save Money?

• There are five major reasons that people save money:

1. Major purchases

2. To pay large annual or semiannual bills

3. Unexpected expenses

4. Major long term expenses

5. Amass wealth

Benefits of Saving

• There are two main benefits to saving money in a bank account:

1. Security-Money is insured by the FDIC in case it is stolen, or if something tragic happens to the bank.

2. Interest-To entice you to keep your money in a bank account, banks will pay you interest on your money.

-Interest rates depend largely on the minimum balance requirements for the account.

Types of Accounts

• Banks usually offer two main ways to save money: Savings Accounts and Time Deposits.

Savings Accounts

• Two main types of Savings Accounts:1. Regular Savings Account: Usually requires a

minimum balance and pays a smaller interest fee. This type of account is very liquid meaning that you can turn it into cash quickly.

2. Money Market Deposit Account: Also provide interest. Banks take your money and buy interest sensitive bonds. Interest rate you receive depends on the interest of the bonds bought. This type of account is not as liquid as a regular savings account

Time Deposits

• Two Main Types of Time Deposits:1. Certificate of Deposits (CDs): Very safe

investment. Lend money to the bank for a specific time frame and interest is paid back to you. You will be charge a fee if you need your money back earlier.

2. Savings Bond-Consumers can buy these from the government. These are like a loan to the U.S. Government and are considered to be a safe investment. Example: you buy a $25 bond, and in ten years the government will give you $50.

Chapter 9

Section 2

Objectives

1. What are the goals and elements of a personal financial plan?

2. How do financial investment and real investment differ?

3. How does real investment affect economic growth.

Investment

• Investment: Occurs when people exchange their money for something of value with the expectation of earning a profit in the future.

• In order to invest wisely, you need to develop a financial plan.

Financial Planning

• Have a good financial plan is key because it helps you organize and balance your wants and needs with your ability to pay for them.

• Key parts to a Financial Plan:– Spending and Saving Plan: Creating a budget of your

fixed and flexible expenses. – Investment Plan: Details how you plan to put your

money to work for you. – Retirement Plan: Shows how you will save for

retirement. – Estate Plan: Develops a plan to transfer your assets and

an heir after you have passed away.

Types of Investment

• If you choose to invest your money, you need to be aware of two major types of investment: Financial and Real Investment.

• Financial Investment: The exchange of property and money between two individuals were no new goods were produced. (Buying real estate)

• Real Investment: When new capital goods are created because of investment. (Building new buildings on land bought.)

Real Investment and The Economy

• Real investment helps the economy grow. • When investors use money to create new capital

goods, then other companies benefit because they have to make the goods and hire people to make them.

• Entrepreneurs look for real investors, called venture capitalist to help start their businesses.

• A venture capitalist helps an entrepreneur develop and idea into a marketable product, improve facilities, and finance product distribution.

Chapter 9

Section 3

Objectives

1. Why and how do people invest in stocks?

2. What factors influence stock prices?

3. How do corporate and government bonds differ from stocks?

4. What are the advantages and disadvantages of futures?

Stocks

• Three main reasons people choose to invest in stocks:

1. Gain a profit.

2. Limit the risk on their investment.

3. Become a part owner of a corporation

Stocks

• There are two ways to gain a profit with stocks:1. Dividends are paid to shareholders. Paid quarterly,

semiannually, or annually.

2. Sell stock for a higher price than the original purchase price.

-An investor that sells a stock for a higher price than the original has earned a capital gain.

-An investor that sells a stock for a lower price than the original has incurred a capital loss.

Stocks

• Stockholders have limited risk, or limited liability, in their investment.

• The amount of money a stockholder can loose is limited to the amount he or she invested in the stock.

Stocks

• When people invest in stocks, they become owners in a corporation.

• The larger amount of shares of stock someone holds, the more votes they have.

• Shareholders can vote to elect a board of directors and sometimes make decisions about the direction of the corporation.

• Shareholders may decided to vote on a stock split if the price of the stock gets too high and discourages people from investing in the stock. – Example: Ben holds a share valued at $300 for Company X.

The stock splits so now he has two shares valued at $150 each. Ben now holds two shares of stock instead of one and the value of each will likely rise.

Stocks

• Very few companies sell stock directly to the public.

• Brokerage firms and investment banks specialize in buying and selling stock.

• A place were many of these brokerage firms and investment banks get together to buy and sell stock is called a stock exchange.

• The largest stock exchange in the United States is called the New York Stock Exchange.

Stocks

• There are three main determinants of stock prices:

1. Corporate Finances-is a company making a profit or a loss. A company that constantly produces high quality products and has good long term prospects is said to have “blue chip” stocks.

2. Investor Expectations-What the investors feel the value of the stock will be in the future.

3. External Forces-when outside forces somehow influence the stock market. (wars, unemployment, etc)

Stocks

• Investors, market analysts, and brokers form their expectations about stocks by watching stock indexes such as the Dow Jones Industrial Average.

• The Dow records changes in the stock prices of a select group of 30 major industrial companies.

• When the Dow steadily rises over a period of time, there is a bull market.

• When the Dow falls for a period of time, there is a bear market.

Bonds

• Another way to invest money is through the buying of government or corporate bonds.

• Although less risky than stocks, bonds offer a lower profit return.

• Corporate bonds are sold at face value and investor receive and annual interest payment. After the a certain period of time, the last interest payment is collected as well as the principal (original amount of the bond)

Futures

• Another way to invest money is to buy and sell futures.

• Types of futures:1. Agricultural such as corn, wheat, and

soybeans. 2. Industrial goods such as copper and crude oil. 3. Precious metals such as gold and silver. 4. Livestock such as pigs and cattle.

Futures

• How do futures work?• Jackson decides to invest in beef cows. He signs a

contract in which he agrees to pay a certain amount of money for a later delivery of the cattle-maybe six months later.

• Jackson is hoping that in six months, the price of cattle has gone up so he can sell them to someone else for a higher price and make a profit.

• Buyers and sellers take a lot of risk when dealing with futures.