Investment vs. Savings

What are some ways we’ve discussed already to make money with your

money?• What are the pros and cons of these

methods?

Savings Tools- What are the pro/cons of these for making money?

• Checking Account• Savings Account• Money Market Deposit Account• Certificate of Deposit• Savings Bond

Savings Tools-Low risk, low rate of return/interest rates

• Checking Account ~0.00% • Savings Account ~0.01-0.05• Money Market Deposit Account ~0.05-0.1%• Certificate of Deposit ~0.3-1.5%• Savings Bonds ~ 1.18% through October 31,

2013

• Why is it important to not only save money in safe, low interest accounts, but also invest in more risky ones?

Inflation – the value of money being less

Inflation – rise in prices over time- your money won’t be worth as much in the

future

• http://blog.blakeyautoplexsuzuki.com/wp-content/uploads/2012/08/Infographic-Historical-Gas-Prices.jpg

• Inflation rate varies – but it has been about 4% annual average since 1950– Last few years - ~2% a year

• How can you beat the inflation rate with your savings?

Stocks and Investments – Higher Risk, Higher Return

POTENTIAL RETURN

RISK

Risk- uncertainty regarding the outcome of a situation or event

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

What is the risk level of savings

tools?

Types of Investment Tools

Stocks Bonds

Mutual Funds

Index Funds

Real Estate

Speculative Investments

Stocks

Stock Stockholder or shareholder

Usually a stockholder owns a very

small part of a company

A share of ownership in a company

Owner of the stock

Dividends Market Price

Return on Stocks

If stock is sold for a market price

higher than what was paid

Share of profits distributed in cash

to stockholders

Stockholder may or may not

receive 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 return

Stockholder will lose money

Definition

What is received?

Stocks – High Risk, High Potential Return

• http://stockcharts.com/freecharts/historical/djia1900.html

• GREAT after 1930s• Pretty bad in 1928

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 but

usually do not have the

potential to earn as high of

a return

Definition

Return

Advantage Disadvantage

Mutual Funds

Mutual fund- when a company combines

the funds of many different investors and

then invests that money in a diversified portfolio of stocks and

bondsMake sure to research the fees charged by a mutual

fund

Reduces investment

riskFees may be

highSaves

investors time

Index Fund

Index

Index Fund

A mutual fund that invests in the stocks and bonds that make up an index

A group of similar stocks and bonds- Standard and Poor 500

Index Fund

What is the difference between a

mutual fund and an index

fund?

Advantage Disadvantage

High diversification

Usually charge lower fees than

mutual funds

Still charge fees

SPY

• https://www.spdrs.com/product/fund.seam?ticker=spy

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

investments include rental

units and commercial

property

Speculative Investments

High risk investmentsHave the potential for significant fluctuations

in return over a short period of time

Futures Options Commercial Paper

Collectibles

Financial Risk Pyramid

Speculative Investment

ToolsIncreasing potential for

higher returns

Increasing risk

Savings ToolsChecking

AccountSavings 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

Online Risk Tolerance Quiz:

• Click HERE• Want to improve your personal finances? Start by taking this

quiz to get an idea of your risk tolerance--one of the fundamental issues to consider when planning your investment strategy, either alone or in consultation with a professional.

• Choose the response that best describes you--there are no "right" or "wrong" answers. Just have fun!

Work on 29a – Types of Investments Pros and Cons