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Economics Today and Tomorrow

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					Chapter Introduction
Section 1: Why Save?
Section 2: Investing: Taking
           Risks With Your
           Savings
Section 3: Special Savings
           Plans and Goals
Visual Summary
Governments and institutions
help participants in a market
economy accomplish their
financial goals.
In this chapter, read to learn
about reasons for saving, as well
as various investment possibilities
and the risks associated with
them.
Section Preview
In this section, you will learn about the
benefits of saving and the types of savings
accounts available to you.
Content Vocabulary
• saving
• savings account
• money market deposit account
• time deposits
• maturity
• certificates of deposit
Academic Vocabulary
• require
• minimum
How important is saving money to you?
A. Extremely important
B. Fairly important
C. Not important
                                   A. A
                                   B. B
                              0%    0%    0%
                                   C. C
                          A




                                   B




                                          C
Deciding to Save
        Savings consist of income set aside for
        future use.
Deciding to Save (cont.)
• Economists define savings as the setting
  aside of income for a period of time so that
  it can be used later.
  – A person receives interest on a savings
    plan for as long as the funds are in the
    account.
Deciding to Save (cont.)
• Saving benefits the economy as a whole:
  – It provides funds for others to invest or
    spend.
  – It allows businesses to expand, which
    provides increased income for
    consumers and raises the standard of
    living.
Deciding to Save (cont.)
• Some savings plans allow immediate
  access to your funds but pay a low rate of
  interest.
• Others pay higher interest and allow
  immediate use of your funds, but require a
  large minimum balance.
All of the following are places to put
your savings EXCEPT:
A. A commercial bank
B. A savings and loan
   association
                                      A.   A
C. A credit union
                                      B.   B
D. A mortgage                         C.   C
                                0%   0%    0%   0%
                            A
                                      D.   D
                                     B




                                           C




                                                D
Savings Accounts and Time Deposits
        Savings accounts and time deposits
        offer a variety of maturities and are
        insured by agencies of the federal
        government.
Savings Accounts and Time Deposits
                                            (cont.)
• Options for saving:
  – A savings account pays interest, has
    no maturity date, and allows funds to be
    withdrawn at any time without penalty.
  – Money market deposit account
    (MMDA) pays relatively high rates of
    interest, requires a minimum balance of
    $1,000 to $2,500, and allows immediate
    access to funds.
                                 View: Savings Basics
Savings Accounts and Time Deposits
                                            (cont.)
 – Time deposits require savers to leave
   their funds on deposit for certain periods
   of time, or maturity.
 – Time deposits are often called
   certificates of deposit (CDs), or
   savings certificates.




                                View: Savings Choices
Savings Accounts and Time Deposits
                                          (cont.)
• After the stock market crash of 1929, the
  Federal Deposit Insurance Corporation
  (FDIC) was created to protect peoples’
  funds.
  – The National Credit Union Association
    (NCUA) is another federal agency that
    insures most banks and savings
    institutions.
Which type of account will pay you
more in the long run?
A. A regular savings
   account
B. A CD
                                A. A
                                B. B
                             0%      0%

                            A




                                     B
Section Preview
In this section, you will learn about different
types of investments and the risks that they
carry.
Content Vocabulary
• stockholders       • Treasury bonds
• capital gain       • broker
• capital loss       • over-the-counter
                       market
• tax-exempt bonds
                     • stock market indexes
• savings bonds
                     • mutual fund
• Treasury bills
                     • money market fund
• Treasury notes
Academic Vocabulary
• design
• scheme
Would you keep your savings in a
bank or would you buy stocks?
A. Bank
B. Stock

                               A. A
                               B. B
                           0%      0%

                           A




                                   B
Stocks and Bonds
        Stockholders are owners of a
        corporation, and bondholders are
        creditors of a corporation.
Stocks and Bonds (cont.)
• Corporations are formed or can expand
  business by selling shares of stock.
  – The person who buys this stock,
    becomes a stockholder, and is entitled
    to part of the future profits and assets of
    the corporation.
Stocks and Bonds (cont.)
• Stockholders benefit from stock in two
  ways:
  – Earn dividends or a return based on the
    amount of stock invested.
  – Can sell stock for more than they paid
    for it.
Stocks and Bonds (cont.)
• Profits made on the sale of stock is
  referred to as a capital gain.
• A decrease in value on the sale of the
  stock is referred to as a capital loss.
Stocks and Bonds (cont.)
• Similar to stock, a bond is a certificate
  issued by a company or the government in
  exchange for borrowed funds.
  – Bonds promise to pay a stated rate of
    interest over a stated period of time, in
    addition to repaying the borrowed
    amount in full at the maturity date.
  – A bond does not make a bondholder part
    owner of the company.
Stocks and Bonds (cont.)
• Tax-exempt bonds are sold by local and
  state governments: interest paid on the
  bond is not taxed by the federal
  government.
  – Interest that you earn on bonds your
    own city or state issues is also exempt
    from city and state income taxes.



                View: Differences Between Stocks and Bonds
Stocks and Bonds (cont.)
• Savings bonds are issued by the federal
  government as a way of borrowing money.
  – These are safe.
  – Interest earned is not taxed until the
    bond is turned in for cash.
Stocks and Bonds (cont.)
• The Treasury Department of the US
  Government sells several types of larger
  investments. They include:
  – Treasury bills (T-bills)
  – Treasury notes (T-notes)
  – Treasury bonds (T-bonds)
Is the following description of a stock or
a bond?
These represent ownership, do not have a fixed
dividend rate, and do not have a maturity date.

A. Stock
B. Bond                                 A. A
                                        B. B
                                    0%     0%

                                    A




                                           B
Stock and Bond Markets
        Ownership of stocks and bonds can be
        transferred on centralized exchanges
        or in decentralized markets.
Stock and Bond Markets (cont.)
• Stocks are bought and sold through
  brokers or through Internet brokerage
  firms.
• Brokerage houses communicate with the
  busy floors of the stock exchanges.
  – The largest stock exchange, or stock
    market, is the New York Stock Exchange
    (NYSE). Others include the Chicago
    Exchange, London Exchange and Tokyo
    Exchange.
Stock and Bond Markets (cont.)
• Stocks can also be sold on the over-the-
  counter market, an electronic marketplace.
• The largest volume of these smaller
  company stocks are quoted on the National
  Association of Securities Dealers Automated
  Quotations (NASDAQ) national market
  system.
Stock and Bond Markets (cont.)
• Nearly every weekday, news is given
  about the activity to the stock market
  indexes.
  – Dow Jones Industrial Average or “The
    Dow” is the most well known index.
• The New York Exchange Bond Market and
  the American Exchange Bond Market are
  the two largest bond exchanges.
Stock and Bond Markets (cont.)
• Many people invest in the stock market by
  placing savings in a mutual fund.
  – The long-run return from index funds is
    higher than can be expected from
    almost any other investment.
  – A managed mutual fund is one in which
    the managers adjust the mix of stocks
    and move in and out of the market to try
    to generate the highest total return.
Stock and Bond Markets (cont.)
• Money market fund is one type of mutual
  fund.
  – The investor can write checks (above
    some minimum amount) against their
    account.
Stock and Bond Markets (cont.)
• Banks and savings and loan associations
  offer money market deposit accounts
  (MMDA).
• The advantage to MMDAs is that the
  federal government insures them against
  loss.
If you had to choose how to invest
your money, which one of these
would you pick?
A. Stocks
B. Bonds
                                     A.   A
C. Mutual fund
                                     B.   B
D. Money market fund                 C.   C
                               0%   0%    0%   0%
                           A
                                     D.   D
                                    B




                                          C




                                               D
Government Regulations
        Securities markets are heavily
        regulated to protect investors.
Government Regulations (cont.)
• The Securities and Exchange Commission
  (SEC) is responsible for administering all
  federal securities laws.
• It also investigates any dealings among
  corporations.
Government Regulations (cont.)
• Congress passed the Securities and
  Exchange Act after the stock market crash
  of 1929.
• The SEC requires any institution issuing
  stocks or bonds:
  – To file a registration statement with the
    federal government
  – Give a prospectus (brief description) to
    each potential buyer of stocks or bonds
Government Regulations (cont.)
• States also have securities laws which
  protect small investors.
Do you believe that we will have another
stock market crash similar to 1929?
A. Definitely
B. Possibly
C. Unlikely                         A. A
                                    B. B
                               0%    0%    0%
                                    C. C
                           A




                                    B




                                           C
Section Preview
In this section, you will learn about special
types of investment plans and how to
decide what portion of your income to save
and invest.
Content Vocabulary
• pension plans
• Keogh plan
• individual retirement account (IRA)
• Roth IRA
• diversification
Academic Vocabulary
• portion
• contribute
• overall
What do you think would be most
important to save for?
A. A house
B. Your child’s college
   fund
                                    A.   A
C. Retirement
                                    B.   B
D. Travel, shopping,                C.   C
                              0%   0%    0%   0%
   cars (fun things)
                          A
                                    D.   D
                                   B




                                         C




                                              D
Investing for Retirement
         Retirement is a major reason for saving
         and investing.
Investing for Retirement (cont.)
• It is important for a person to save for and
  invest in his or her own retirement.
• Retirement savings plans can include:
  – A pension plan is a company supported
    plan like a 401(k) that is not taxed until
    used.
  – A Keogh plan is a retirement plan for
    self-employed individuals.
Investing for Retirement (cont.)
  – An individual retirement account (IRA) is
    a private retirement plan for individuals.
    • Contributions are deductible from
      taxable income.
    • Taxed when taken out.
Investing for Retirement (cont.)
  – A Roth IRA is a private plan for
    individuals.
    • Taxes income before it is saved.
    • Does not tax interest on that income
      when funds are used upon retirement.




                           View: Retirement Plan Options
Investing for Retirement (cont.)
• Buying real estate, such as land and
  buildings, is another form of long term
  investing.
Which type of plan would you feel
most comfortable with?
A. 401(k)
B. Keogh
C. IRA                               A. A
D. Roth IRA                          B. B
                              0%   0%    C
                                     C. 0%   0%

                                     D. D
                          A




                                   B




                                       C




                                             D
How Much to Save and Invest?
        How much to save and invest is
        determined by each individual’s
        income, risk tolerance, and values.
How Much to Save and Invest? (cont.)
• The higher the promised return on an
  investment, the greater the risk.




                          View: Savings Considerations
How Much to Save and Invest? (cont.)
• When you have very little income, you
  should probably put your savings lower
  risk accounts.
• It is important to practice diversification
  to lower your overall risk.




                                  View: Risk and Return
How Much to Save and Invest? (cont.)
• Your values may also determine where
  you invest your savings.
• You might want to invest locally, choose to
  invest in environmentally responsible
  companies or choose to invest in
  companies that have aggressive equal
  opportunity programs.
In general, what three things
determine how you should save?
A. Time, income, and job.
B. Income, job, and
   inheritance.
                                       A.   A
C. Income, risk tolerance,
   and values.                         B.   B
                                 0%    C.
                                      0%    C
                                            0%   0%
D. Values, risk tolerance,
   and time.                 A
                                       D.   D
                                      B




                                            C




                                                 D
Saving some of your income allows you to
earn interest and put away funds for future
purchases.
After you have accumulated savings funds,
you may want to invest some of it to try to
earn greater returns.
It is important to
diversify your
saving and investing,
especially when
looking toward
retirement. In
general, the greater
the risk involved in
any venture, the
greater the potential
return.
saving: setting aside income for a
period of time so that it can be used
later
savings account: account that pays
interest, has no maturity date, and
from which funds can be withdrawn at
any time without penalty
money market deposit account:
account that pays relatively high rates
of interest, requires a minimum
balance, and allows immediate
access to funds
time deposits: savings plans that
require savers to leave their funds on
deposit for certain periods of time
maturity: period of time at the end of
which time deposits will pay a stated
rate of interest
certificates of deposit: time deposits
that state the amount of the deposit,
maturity, and rate of interest being
paid
stockholders: people who have
invested in a corporation and own
some of its shares of stock
capital gain: increase in value of an
asset from the time it was bought to
the time it was sold
capital loss: decrease in value of an
asset from the time it was bought to
the time it was sold
tax-exempt bonds: bonds sold by
local and state governments; interest
paid on the bond is not taxed by the
federal government
savings bonds: bonds issued by the
federal government as a way of
borrowing money; they are purchased
at half the face value and increase
every 6 months until full face value is
reached
Treasury bills: certificates issued
by the U.S. Treasury in exchange
for a minimum amount of $1,000
and maturing in a few days up to
26 weeks
Treasury notes: certificates issued
by the U.S. Treasury in exchange for
minimum amounts of $1,000 and
maturing in 2 to 10 years
Treasury bonds: certificates issued
by the U.S. Treasury in exchange for
minimum amounts of $1,000 and
maturing in 30 years
broker: person who acts as a
go-between for buyers and sellers
of stocks and bonds
over-the-counter market: electronic
purchase and sale of stocks and
bonds, often of smaller companies,
which often takes place outside the
organized stock exchanges
stock market indexes: measures of
what is happening to a given set of
stock prices for a specified list of
companies; the most well known is
the Dow Jones Industrial Average
mutual fund: investment company
that pools the funds of many
individuals to buy stocks, bonds, or
other investments
money market fund: type of mutual
fund that uses investors’ funds to
make short-term loans to businesses
and banks
pension plans: company plans that
provide retirement income for their
workers
Keogh plan: retirement plan that
allows self-employed individuals to
save a maximum of 15 percent of
their income up to a specified amount
each year, and to deduct that amount
from their yearly taxable income
individual retirement account (IRA):
private retirement plan that allows
individuals or married couples to save
a certain amount of untaxed earnings
per year with the interest being tax-
deferred
Roth IRA: private retirement plan that
taxes income before it is saved, but
which does not tax interest on that
income when funds are used upon
retirement
diversification: spreading of
investments among several different
types to lower overall risk
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posted:8/13/2011
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