introduction to investing powerpoint presentation 1.12.1.g1
TRANSCRIPT
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Introduction to Investing
"Take Charge of Your Finances"
Advanced Level
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 2Funded 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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Saving and Investing
Once an appropriate amount of
liquid assets are reached
Recommend refocusing goals fromsaving to investing
Remember:
The
purpose ofsavings is to
develop
financial
security
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 3Funded 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?
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 4Funded 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 expressedas a percentage of the amount of
money invested
TotalReturn
Amountof
MoneyInvested
Rate ofReturn
Remember:
Return is the
profit orincome
generated by
savings and
investing
Investments usually earn higher
rates of return than savings tools
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 5Funded 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 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%
Mandys rate of return on investment is 5%
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 6Funded 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 Dereks Rate of
Return?
Derek invested $900. When he withdrew
his money from the investment, he had a
total of $1,050. What is Dereks rate ofreturn?
$150 $900.167 =
16.7%
Dereks rate of return on investment is 16.7%
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 7Funded 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
RETURNRISK
Risk- uncertainty regarding the outcome ofa situation or event
Investment Risk- possibility that an
investment will fail to pay the expectedreturn or fail to pay a return at all
All investment tools carry some level of risk
What is the risk
level of savingstools?
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 8Funded 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
Strive to have
the rate of
return on
investment be
higher than the
rate of inflation
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 9Funded 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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Types of Investment
Tools
Stocks Bonds
MutualFunds
IndexFunds
RealEstate
SpeculativeInvestments
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 10Funded 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 orshareholder
Usually a
stockholderowns a very
small part of a
company
A share of
ownership ina company
Owner of the
stock
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 11Funded 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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Dividends Market Price
Return on Stocks
If stock is sold for
a market price
higher than what
was paid
Share of profits
distributed in cashto stockholders
Stockholder may
or may notreceive dividends-
depends on
company profit
Current price that a buyer
is willing to pay for stock
If stock is sold for
a market price
lower than what
was paid
Stockholder will
receive a returnStockholder will
lose money
Definition
What isreceived?
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 12Funded 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
Form of lending to a
company or the government
(city, state, or federal)
Annual interest is paid to
investor
Once the maturity date is
reached, the principal is
repaid to the bondholder
Bonds are less
risky than
stocks butusually do not
have the
potential to
earn as high of
a return
Definition
Return
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 13Funded 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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Advantage Disadvantage
Mutual Funds
Mutual fund-when a company
combines the funds of
many differentinvestors and then
invests that money in
a diversified portfolio
of stocks and bonds
Make sure to
research the
fees charged
by a mutual
fund
Reduces
investmentrisk
Fees may be
high
Saves
investors
time
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 14Funded 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
IndexFund
A mutual fund
that invests in the
stocks and bonds
that make up anindex
A group of similar
stocks and bonds-
Standard and Poor 500
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 15Funded 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
What is the
differencebetween a
mutual fund
and an index
fund?
Advantage Disadvantage
High
diversification
Usually charge
lower fees than
mutual funds
Still charge
fees
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 16Funded 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
Examples of
real estate
investmentsinclude rental
units and
commercial
property
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 17Funded 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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Speculative Investments
High risk investments
Have the potential for significant fluctuations
in return over a short period of time
FuturesOptions
Commercial
PaperCollectibles
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 18Funded 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
Speculative
Investment
ToolsIncreasing
potential forhigher returns
Increasing risk
Savings
ToolsChecking
Account
Savings
Account
Money
Market
Deposit
Account
Certificate
of Deposit
Savings
Bonds
Investment
Tools
Bonds
Stocks
Mutual
Funds
Real Estate
Options Collectibles
Futures
Commercial
Paper
Index
Funds
The risk level for specific investment tools may vary
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 19Funded 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 theamount of risk they are willing to take on
Investment Philosophy- an individuals
general approach to investment riskThe greaterthe risk a
person is
willing to make
on an
investment,
the greater the
potential
return will be
Generally divided into three categories:
conservative, moderate, aggressive
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 20Funded 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
Assists with investment
risk reduction
Referred to as
Building a
Portfolio
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 21Funded 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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DISCOUNT
BROKER
Buying and Selling
InvestmentsBrokerage firm acts as a buying and selling agent
for an investor (except for real estate and certain
speculative investments)
FULL SERVICE
GENERAL
BROKERAGE
FIRM
Complete
investment
transactions
Offer investment
advice and one-
on-one attention
from a broker
Only complete
investment
transactions
Offer no advice to
investors but
charge 40-60%
less
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 22Funded 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 areunearned income
Taxes are often owed on
unearned income
Taxes are due on most investment
returns in the year the unearned
income is received
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 23Funded 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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Tax-Sheltered
InvestmentsGovernment tries to encourage certain
types of investments by making them tax-
sheltered
Tax-
shelteredinvestments
are usually
not tax-free!
Tax-sheltered
investments-
eliminate, reduce,
defer, or adjustthe current year
tax liability
Retirement
Child/dependent care
Education expensesHealth care expenses
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 24Funded 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 andtaxes are paid
Money grows untaxedwith help from
compounding interest
Money is withdrawn
Money is invested
Money grows untaxedwith help from
compounding interest
Money is withdrawnand taxes are paid
There are often limits to the amount
that can be invested
OR
What is the
benefit of a tax-
sheltered
investment if
taxes still have
to be paid?
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 25Funded 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 ofmoney to the investment with no
additional cost from the employee
Employeecontributes 7% ofpaycheck toinvestment
account
Example:
Employer contributes
the same amount of
money to the
employees
investment account
Employee
benefits from
having double the
amount of money
invested!
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 26Funded 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 Employer-
Sponsored Investments
Reduces
tax liability
Makes
investingautomatic
Possibility foremployer to match
investment
It is
recommended
that a person
utilize theseinvestment
tools as much
as possible if
they are
offered
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 27Funded 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 calculatewhen the future value of an
investment will double the principal
amount
72
Interest
Rate
Number of yearsneeded to double
the principalinvestment
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 28Funded 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 discoveringthe 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)YNIt is the greatest
mathematical discovery of
all time.
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 29Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
What Can the Rule of 72
Determine?
How many years it
will take an
investment to
double at a given
interest rate
How long it will
take debt to
double if no
payments aremade
The interest rate an
investment must
earn to double
within a specific
time period
How many times
money (or debt)
will double in a
specific time
period
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 30Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 31Funded 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
Invested $2,500
Interest Rate is 6.5%
Doug invested $2,500 into a Certificate of
Deposit earning a 6.5% interest rate. How long
will it take Dougs investment to double?
72 6.5 11 yearsto double
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 32Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Jessicas Credit Card Debt
$2,200 balance on credit card
18% interest rate
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?
72 184 years to
double
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 33Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Jacobs Car
$5,000 to invest
Wants investment to double in 4 years
Jacob currently has $5,000 to invest in a carafter graduation in 4 years. What interest
rate is required for him to double hisinvestment?
724
years18%
interest rate
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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 34Funded by a grant from Take Charge America Inc to the Norton School of Family and Consumer Sciences at the University of Arizona
Summary
What is the Rule
of 72?
What is therelationship
between risk
and return?
How can aperson reduce
investment risk?
What are the six
main investment
tools?
Who should aperson contact to
purchase
investment tools?
What is a tax-
sheltered
investment?