Unit 4 Saving and Investing1. Compare consumer choices for saving and investing. 2. Explain the relationship be tween saving and investing. 3. Examine reasons for saving and investing, e.g., time value of money. 4. Compare the risk, return, liquidity, manageability, and tax aspects of investment

alternatives. 5. Demonstrate how to buy and sell investments. 6. Analyze factors affecting the rate of return on investments (e.g., Rule of 72, simple

interest, compound interest). 7. Evaluate sources of investment information. 8. Examine how agencies that regulate financial markets protect investors. 9. Demonstrate how to evaluate advisors’ credentials and how to select professional

advisors and their services.

Savings Plans

Savings Plans

• Regular Savings Accounts – often called passbook accounts

• Little or no minimum balance• Withdraw money on demand• Called share accounts at credit unions

• Very liquid• Compounds interest• Flexible amounts and withdrawal times• FDIC Insured

Certificates of Deposit (CD)

• Money is left on deposit for a stated period of time (term) at a specific rate of return

• Maturity Date – the date the money becomes available to you• Three key limitations:

• Time specification-Your money is on deposit for 1 month to 5 years

• There is a penalty for taking your money before the maturity date• Amount specification-You must deposit a minimum amount

• FDIC insured

CD Investment Strategies

• Check for the best rate• Consider the economy—if rates are high you may want to

buy long-term• Do not “roll-over” at maturity without checking rates• When do you need the money• Consider different CD’s at different rates and maturity

dates

Money Market Accounts

• Minimum balance required• Rates fluctuate monthly as market changes• Penalty if you fall below minimum balance• Limited amount of checks can be written each month

U.S. Savings Bond

• Series EE Savings Bond• Buy at reduced rate, interest rate and time determine maturity date• If cashed after less than 5 years—there is a 3-month penalty of

interest• Continues to earn interest for 30 years• Interest is tax-exempt from state and local taxes• Federal taxes are paid when bond is cashed in• If used for higher education, there are no taxes on interest

Evaluating Savings Plans

• Rate of Return – the percentage of increase in the value of your savings

• Compounding – interest is earned on both the principal and previously earned interest• Can be compounded every day, month, quarter or year

Evaluating Savings Plans

• Inflation – compare earning rate with inflation rate• Tax Consideration – tax-exempt or tax-deferred savings• Liquidity – can I get to my money• Restrictions and fees – fees and/or service charges

Truth in Savings

Financial institutions must inform you of:• Fees on deposit accounts• Interest rate• Annual percentage yield (APY) – based on stated annual

interest rate and the frequency of compounding• Terms and conditions of the savings plan

Investments

FINANCIAL GOALS

• Pay YOURSELF FIRST!

• EMERGENCY FUND – A savings account that you can access quickly to pay for unexpected expenses or emergencies.

• Often thought to be 3 – 8 months of expenditures—very liquid

FINANCIAL GOALS

Take advantage of 401K or 403B plans - employer often matches

Elective Savings ProgramsSpecial Savings EffortGifts, inheritances and windfalls

Investment Growth & LiquidityTime Value of Money – increase in an

amount of money due to interest earned over time

Rule of 72 – divide the number 72 by your interest rate amount to find out how long it will take to double your investment◦Example: Invest $1,000 at 6%

=72 / 6 = 12 years to double your amount to $2,000

=72 /12 years = 6, you would need 6% interest to double your investment to $2,000 in 12 years

Investment Growth & Liquidity

Retained Earnings – profits that a company reinvests, usually for expansion or to conduct research and development.

Investment Liquidity – the ability to buy or sell an investment quickly without substantially reducing its value.

INVESTMENT DECISIONS

Safety and risk◦Return on investment will be DIRECTLY related

to the risk you take

Safe investment – low return (chance of losing your money is fairly small)

Speculative Investment – high risk investment that might earn a large profit in a short time (large return on investment, but you may lose all you invest)

5 COMPONENTS OF RISK

InflationInterest RateBusiness FailureFinancial MarketGlobal Investment

INVESTMENT RISKS

• SAFE:• Government Bonds• Savings Accounts• Certificates of

Deposit

• Varying risk:– Stocks– Corporate bonds– Mutual Funds– Real Estate

• High Risk:– Commodities– Options – Precious Metals and gems– Collectibles; coins, stamps, comic books

Investment Portfolio

A collection of all investments held by an individual◦Should be diverse◦Diversification-the process of spreading your

assets among several different types of investments to reduce risk.

Savings & Investing Options

SAVINGS ACCOUNTS/CDsREAL ESTATECOLLECTIBLESSECURITIES

◦BONDS◦MUTUAL FUNDS◦OPTIONS ◦COMMODITIES◦STOCKS

REAL ESTATE

Resale for profitRental Income

COLLECTIBLES

CoinsStampsBeanie BabiesSports cards

BONDS

A bond is lending money to a corporation or government entity for a period of time

Corporate Bond – a written pledge to repay a specific amount of money along with interest

Government Bond – a written pledge of a government or a municipality such as a city to repay a specific sum of money with interest

MUTUAL FUNDS

A mutual fund is an investment in which investors pool their money to buy stocks, bonds, and other securities selected by professional managers who work for an investment company.

OPTIONS

Contract between a buyer and a seller that gives the buyer the right to buy a particular asset at a later date for an agreed upon price◦Example: Buyer agrees on the option to buy

100 shares of stock XYZ for $5 in the future. The stock’s value on that particular date turns out to be $10. If the buyer exercises his right to buy at $5, then his stock value is much greater than what he actually paid for it.

COMMODITIES

Something for which there is a demand but there is no difference in quality, no matter who produces it◦Resources such as agricultural products or

minerals◦Petroleum (gasoline), Paper, Milk, Rice, Gold,

Silver◦Price based on market as a whole, not on

quality of product

STOCKS

Equity capital – money that a business gets from its owners to operate; unit of ownership in a company◦Public corporations- sell their stocks openly on

the stock market◦Private corporations- (closely held) only issue

stock to a small group of people

WHY BUY STOCK

To gain larger returns than they can get from more conservative investments such as savings accounts or government bonds.

FACTORS TO CONSIDER WHEN INVESTING IN STOCK

You are not guaranteed what you paid for each share

Current value is determined by how much another investor will pay for share – supply and demand

A corporation does not have to pay dividends.

Common Stock

• A form of Equity – to make money you buy low, sell high – so you make money through appreciation of stock value. The price is how much a buyer is willing to pay.

• Common stock – a unit of ownership of a company, it entitles the owner or stockholder to:• voting privileges• growth profits• maybe dividends• Stock splits

Common Stock (Cont)

Dividends – Profit can be paid to shareholders as dividends or be used to “grow” the business

May be a specific amount of money or percentage of par value (assigned dollar value printed on the stock certificate that does not change with market price)

Stock Splits – divided into twice the number worth half as much◦When stock value is higher than “ideal range”◦Considered a positive sign to business growth

Common Stock (Cont)

Shareholder meeting – required to be held one per year

Right to vote - one vote for each share they own

Preemptive right – current stockholder have first right to buy any new stock a corporation offers

Preferred Stock

Preferred stock – a type of stock that gives the owner the following advantage:◦Cash dividends before common stockholders

Attracts more conservative investorsReceive dividends first so often purchased

if steady income is desiredNot considered a good investment for

most people

Blue-Chip Stocks

A safe investment that generally attracts conservative investors

Strongest and most respected companies◦Stable earnings◦Consistent dividends

Income Stock

Pays higher-than-average dividends compared to other stocks◦Examples:

Dow Chemical Bristol-Myers Squibb Gas and Electric companies

Growth Stock

A corporation whose potential earnings may be higher than the average earnings predicted for industry◦Examples in early 2000’s:

Home Depot Southwest Airlines

Cyclical Stocks

Market value tends to reflect the state of the economy ◦Economy up, market value up◦Economy down, market value down

Buy on a downturn of the economy to ride as the economy improves

Defensive Stocks

A stock that remains stable during declines in the economy◦Steady income even when economy declines

CAP STOCKS

Capitalization- total amount of stocks and bonds issued by a company

Large-cap stocks- corporation issued a large number of shares

Small-cap stocks- stock issued by a company with less than $500 million capitalization (higher risk)

Penny Stocks

Typically sell for less than $1 a shareIssued by new companies whose sales are

very unsteadyPrices go up and down wildly—hard to

trackCan be risky

Stock Exchanges

NYSE – New York Stock Exchange - The largest stock exchange in the world by dollar value and has 2,764 listed companies.

NASDAQ - National Association of Securities Dealers Automated Quotations – the largest electronic screen-based trading market in the United States

AMEX - American Stock Exchange – small to mid-sized stocks

SEC

Securities & Exchange Commission- regulatory agency of the stock market and prevents corporate abuses

Market Conditions

Bull Market –when investors are optimistic about the economy and buy stocks

Bear Market – when investors are pessimistic about the economy and sell stocks

Sources for Evaluating Stocks

Newspapers in the financial section◦Wall Street Journal

The InternetStock Advisory ServicesCorporate News Publications

◦Barron’s◦Smart Money

PERSONAL INVESTMENT PLAN

FINANCIAL PLANNER – a specialist who is trained to offer specific financial help and advice◦Decision is based on:

Income level Willingness to make your own plan

FINANCIAL PLANNERS

Fee-only planners – charge an hourly rate or percent of the value of the investments they manage

Fee-offset planners – charge an hourly rate but reduce it with commissions they make through your investments

FINANCIAL PLANNERS

Fee and commission planners – fixed fee for a financial plan and earn commission from products they sell

Commission only planners- earn through commissions they make on sales of insurance, mutual funds and other investments

FINANCIAL PLANNERS

Should provide the following services:◦Assess current financial position◦Offer written plan with recommendations◦Discuss plan and answer questions◦Keep track of your progress◦Guide you to other financial experts and

services as needed

Certification of Financial Planners

CFP – Certified Financial PlannerChFC – Chartered Financial Consultant

Check the credentials before working with a planner

Managing your Investments

Evaluate investment – research before investing

Monitor investment – track the value of the investments

Keep accurate records – to notice increase in profits or to reduce losses

Managing your Investments

Consider tax consequences◦Tax-exempt – income not taxed (gov’t bonds)◦Tax-deferred – income that is taxed at a later

date (IRA’s, 401K’s)◦Capital Gain – profit from the sale of an asset;

taxed on how long the asset was owned◦Capital Loss – sale of an investment for less

than its purchase price

SOURCES OF INVESTMENT INFORMATION

• Internet• Newspapers and News Programs• Business Publications• Government Publications• Corporate Reports

• Prospectus – a document that discloses information about a company’s earning, assets and liabilities, its products or services, and its management

• Investor Services:• Free newsletters mailed to clients• Examples: Moody’s Investment Service or Value Line

SOURCES OF INVESTMENT INFORMATION

Statistical Averages◦Dow Jones Industrial Average- average that

consists of 30 of the largest and most widely held public companies

◦Standard & Poor’s Stock Index -the stocks of 500 corporations, all of which are from the US.