Unit 3 “Investing: Making Money Work for You”
Students will be able to: Know the difference between savings and investing. Be familiar with the time value of money. Be able to compare investment options. Recognize the risks and rewards of investing. Know how to integrate investing into your financial planning. Overview:
As an investment increases in value, its earnings start to generate even more earnings, a concept known as compounding. Compounding (or compound interest) is a powerful way to create large amounts of wealth and is driven by two variables: time and the rate of eturn. More time means more money, and a higher rate of return means more money. Of course, this also invites discussion of the flip-side of compounding—the price of procrastinating about investing. These are some of the basic principles of investing that students should understand by the end of the unit. Collectively, these principles are known as the time value of money. For students, the amount saved is not nearly as important as simply developing the saving habit by ―paying yourself first,‖ a theme introduced in an earlier unit. Before investing, students must understand the concept of risk and reward. While many adults think of risk in terms of losing money, there are several other types of risk—some type of risk affects all types of investments. Even a savings account, one of the safest investment vehicles around, is subject to the risk that earnings on the account won’t keep pace with inflation, thereby reducing investors’ future purchasing power. So it’s important for students to think about their own tolerance for risk and to research potential investments. The rules for good decision making discussed in Unit 1 still apply. When students are ready to invest, one of the first decisions they must make is whether to invest for income or growth. Choosing income investments such as savings accounts, U.S. savings bonds, certificates of deposit, and money market accounts in effect makes students lenders. By depositing their money into one of these accounts, students are essentially lending their bank or credit union their money in exchange for earning interest. Choosing growth investments, such as stocks or real estate, in effect makes students owners. With stocks, they would actually own a share of (or equity in) a company, which is why stocks are also sometimes referred to as equities. By owning part of a company, however, students may become directly impacted by the ups and downs of the company’s performance. Historically, over long periods of time, growth investments have outperformed income investments. Of course, the higher potential return is tied to an increased risk of losing money, particularly in the short term. There are ways to manage risk, however. Diversifying investments in a portfolio spreads the risk around, so the investor is less affected by a drop in the value of any one investment. Students can relate to this principle when they apply to several jobs or several colleges— they know that getting rejected by one employer or college is easier after applying to several. They also know they still have other possibilities!
Saving & Investing
________________________________ is the portion of current income not spent on consumption usually for short term goals. ____________ ______________ provide an easily accessible place for people to store their money to meet daily living expenses and to have money for emergencies. Financial experts recommend individuals keep a minimum of ______ to ______ months of salary in a savings account. _________________________ is how quickly and easily an asset can be converted into cash. In an emergency, cash needs to be easily accessible. Savings accounts are __________________ liquid than investment accounts. Savings accounts generally yield a _______________ interest rate, often barely meeting inflation.
Savings Account Uses
__________________________________ Emergencies Future Purchases __________________________________
Why People Don’t Save
People are not having their current consumption needs and wants met. People do not know how much they need to be ________________ or investing for future goals. Money in savings accounts earns such poor interest rates. It barely (if at all) keeps up with inflation. Investing usually gains ___________________ interest rates. Individuals justify not needing money for emergencies because they have credit easily available. People feel they have adequate insurance and job security; therefore they do not need money for emergencies.
Investing
Setting your money aside for __________________________ goals. The purchase of assets with the goal of increasing future income. ____________________ and implement a _________________ plan before beginning an investment. Investments are not _________________________ as savings. Best reason for investing is that your _________________ is actually _______________ money for you. o Answer Exercise 3A o Review page 29.
Time Value of Money
____________________________ – refers to the relationship between the three elements of time, money, and rate of interest. ______________________ – rise in the cost of goods and services over time ______________ _______________ – payment your receive for allowing a financial institution to use your money 1) The _____________ money you have to save or invest, the more money you are likely to earn 2) The ______________ the rate of interest you earn, the more money you are likely to have. 3) The ______________ you invest your money, the more time it has to make new money.
Simple Interest
Simple Interest = __________________ x _______________________ x _________________ *you are only paid on your principal $3 = (interest) $100 x .03 x 1 year (principal) (interest rate) (time)
Compounding Interest
Compounding: _____________________________________________________
Formula: A = P (1 +i)n
Albert Einstein called compounding “the most powerful force in the Universe” http://www.ecalc.com/calculator/scientific
Rule of 72
(this rules shows you how long it takes to double your money by investing) -----------------------------------------------------------------------------------------72 _____ = Years Needed to Double Investment Interest Rate -----------------------------------------------------------------------------------------72 _____ Years Needed To Double
= Interest Rate Required
---------------------------------------------------------------------------------------- How long would it take to double your money if you earned 6% interest? ◦ ______________________________________________________
How long would it take to double your money if you earned 12% interest? ◦ _______________________________________________________
What interest rate do you need to earn in order to double your money in 4 years? ◦ _______________________________________________________
70-20-10 Rule
Spend _________________________% of money you earn ______________________________ 20% of money you earn Invest __________________________% of money you earn
Risky Business
__________________ is the uncertainty that the anticipated return will be achieved. Investing has its risk and rewards. The _______________ the risk the ________________ the payoff. _________________________ is the annual percentage return on an investment. This is how fast your money is growing.
Risk vs. Return
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On average, stocks have a___________________rate of return The ______________ or _____________ in the original purchase price of an investment Higher rate of return = ________________________________ Uncertainty about the ____________________ of an investment Stocks provide portfolio ______________________________
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Money invested in a variety of investment tools
Investing Made Simple
We go to school to learn to work hard for money. I write books and create products that teach people how to have money work hard for them. -Robert Kiyosaki
Investment Tools……….
Savings Account
Description: _________________________________________________________________________ ____________________________________________________________________________________
Benefits: ___________________________________________________________________________ ____________________________________________________________________________________
Risks: ______________________________________________________________________________ ____________________________________________________________________________________
Costs / Examples: ___________________________________________________________________ ____________________________________________________________________________________
Money-Market Deposit Accounts
Description: _________________________________________________________________________ ____________________________________________________________________________________
Benefits: ___________________________________________________________________________ ____________________________________________________________________________________
Risks: ______________________________________________________________________________ ____________________________________________________________________________________
Costs / Examples: ___________________________________________________________________ ____________________________________________________________________________________
Certificates of Deposit
Description: _________________________________________________________________________ ____________________________________________________________________________________
Benefits: ___________________________________________________________________________ ____________________________________________________________________________________
Risks: ______________________________________________________________________________ ____________________________________________________________________________________
Costs / Examples: ___________________________________________________________________ ____________________________________________________________________________________
Bonds
Description: _________________________________________________________________________ ____________________________________________________________________________________
Benefits: ___________________________________________________________________________ ____________________________________________________________________________________
Risks: ______________________________________________________________________________ ____________________________________________________________________________________
Costs / Examples: ___________________________________________________________________ ____________________________________________________________________________________
Mutual Funds
Description: _________________________________________________________________________ ____________________________________________________________________________________
Benefits: ___________________________________________________________________________ ____________________________________________________________________________________
Risks: ______________________________________________________________________________ ____________________________________________________________________________________
Costs / Examples: ___________________________________________________________________ ____________________________________________________________________________________
Real Estate
Description: _________________________________________________________________________ ____________________________________________________________________________________
Benefits: ___________________________________________________________________________ ____________________________________________________________________________________
Risks: ______________________________________________________________________________ ____________________________________________________________________________________
Costs / Examples: ___________________________________________________________________ ____________________________________________________________________________________
Stocks
Description: _________________________________________________________________________ ____________________________________________________________________________________
Benefits: ___________________________________________________________________________ ____________________________________________________________________________________
Risks: ______________________________________________________________________________ ____________________________________________________________________________________
Costs / Examples: ___________________________________________________________________ ____________________________________________________________________________________
The Language of the Stock Market Common Stock Vs. Preferred Stock
Common Stock • ____________________ – shares or units of ownership in a public corporation
– Most __________________ form of ownership – One vote per share owned to determine company’s ___________________________
• Ways the stock value can change
– The dollar value _______________________or _______________________ – Stock split occurs – shares owned by existing stockholders are _____________________ into a larger number of shares – A ________________________ of two companies – Dividends are _________________________
Preferred Stock
Preferred stock – _____________________________________________________________________ Less _____________________than common stock ___________________ voting rights Dividends are stated as a percentage known as the ___________________________ _____________________________ value stated on the stock certificate
Rewards for investing in stocks
Returns can be made up of income such as ___________________ which is a share of the profits you receive as a stockholder. Returns can also come from the growth of stock prices, called _______________________. This is the difference between when an investor buys a stock and sells it later at a higher price If an investor buys a stock and sells it at a lower price the difference is called a ___________________________________.
Researching A Stock
____________________________ is the net worth of a company ______________________ Liabilities = _________________________
Information can be found in the company’s _________________________ Indicates what would happen if a company’s assets were sold, debts paid, and proceeds distributed to stockholders
Reading Stock Quotes
YTD % -16.3
52-Week Stoc High Low k 43 36 AAR
Div
YLD % 2.5
P/E
Vol High Low 100s 1479 40 37
Clos e 42
Net Chg .027
.33
22
How Well the Stock Market is Doing Overall
3 Basic Indicators
Standard and Poor’s 500 Composite Index Covers market activity for _____________________ stocks More _______________ than DOW because it evaluates a greater variety of stock National Association of Security Dealers Automated Quotations (“____________”) Monitors________________ moving technology companies Speculative stocks, show _______________________ ups and downs Dow Jones Industrial Average (“DOW”) ______________________________________________________
Ups and Downs
The term ______________________ means the market is doing well because investors are optimistic about the economy and are purchasing stocks The term ______________________ means the market is doing poorly and investors are not purchasing stocks or selling stocks already owned
Purchasing Stock
A _____________________ is a person who is licensed to buy and sell stocks, provide investment advice, and collect a commission on each purchase or sale Purchases stocks on an organized exchange (_____________________) Over ________________ of all stocks are bought and sold on an organized exchange
New York Stock Exchange
__________________________________________ (NYSE) Oldest and largest, began in 1792 1,366 seats available 2,800 companies Average stock price is $33.00 Strict requirements
NASDAQ
National Association of Securities Dealers Automated Quotations Stocks are traded in an over the counter ________________________ market 4,000 _____________________ companies Company requirements are not as strict More volatile because companies are young and new Average stock price is $____________________
Investing
Securities and Exchange Commission is in charge of keeping all wall street trading of stocks in check. (SEC Worksheet) www.sec.gov DOW Industrial Average - _______________________________________________
Supply vs. Demand
The _______________________ is organized based upon the laws of supply and demand ________________________ is the relationship of prices to the quantities of a good or service sellers are willing to offer for sale at any given point in time _______ is the relationship of prices to the quantities and the corresponding quantities of a good or service buyers are willing to purchase at any given point in time.