Savings and
Investment
Why do we invest?
If we have money we can...
Spend It
Save It
Put It In The Bank
Invest It
What are the
Advantages/R
isks of each
option?
Investment - redirecting resources from being
consumed today so that they may create benefits in the
future
If you had
$1,000
Spend it now, take advantage of the
utility and value of your money.
You Could...
Or, invest your money now in
order to receive benefits in the
future.
Ways to Invest:
- Save money in a bank
and collect interest
- Buy Stock
- Buy Bonds
Return - the money an investor
receives above and beyond the
sum of money initially invested.
Ways to Invest
Savings in the Bank
Bonds - Government, Municipal,
Corporate
Shares of Stock
Saving in Bank
Rather than save money hidden in your house, you can
save your money in a bank, where it is still easily
accessible if you need it, but safe, insured, and
collecting interest.
Interest gained on money saved in the bank is based
on an Annual Percentage Rate (APR).
Typically, the interest percentage an individual earns
on savings accounts is about 2%
The catch is that you have to leave your money in the
savings account so that the bank can use it.
How You and Banks make
Money
• You open a savings account at the bank.
• The bank pays you interest on the money that
you deposit and leave in that account.
• The bank then loans that money out to other
people, only they charge a slightly higher
interest rate on the loan than what they pay
you for your account.
Bonds
Bond - A formal contract to repay borrowed money with
interest at a fixed intervals
Essentially a loan taken out by a government,
municipality, or company, that is funded by the buyers
of bonds.
Generally considered
a long-term
investment, but
bonds can mature in
various time periods,
from months to over
ten years.
Types of Bonds
Government Bond - Issued by a government in order to
acquire money to pay their bills and finance programs.
The more stable the issuing government, the less risk
in the investment.
Municipal Bond - Issued by a state, city, county, or
district, in order to raise funds and finance projects such
as hospitals, power plants, streets, schools, or airports.
Corporate Bond - Issued by businesses to help pay
expenses or fund growth. Risk is determined by the
stability and future of the company
Intro Question –
• 10/27/15 – Intro – How do you decide what
to invest your money in when buying stocks?
The Stock Market
What are stocks?
• Corporations can raise money by issuing stock,
which represents ownership in the corporation.
• A portion of stock is called a share (aka: equities)
• You Earn Profits by capital gains. This is earned when a
stockholder sells stock for more than he or she paid for
it. A stockholder that sells stock at a lower price than
the purchase price suffers a capital loss.
Stock Splits and Stock
Stock Splits
Risks
• A stock split is the division of a single share of stock into
more than one share.
• Stock splits occur when the price of a stock becomes so high
that it discourages potential investors from buying it.
Risks of Buying Stock
• Purchasing stock is risky because the firm selling the stock
may encounter economic downturns
• That force dividends down or reduce the stock’s value. It is
considered a riskier investment than bonds.
Buying Stocks
How do you buy stocks?
Stockbroker - someone who brings together buyers and
sellers of stock to make a trade.
Brokerage Firms - Brokerage firms are companies that
specialize in trading stocks and employ stockbrokers.
Stock Exchange
Stock Exchange - A market for buying and selling stock
NYSE - New York Stock Exchange. The country’s
largest and most powerful exchange. NYSE handles
transactions for only the largest and most established
companies.
Does the Performance of
one company’s Stock
Represent the Health of the
Economy?
How Can We Determine the
Health of the Economy
through the Stock Markets?
Dow Jones Industrial Average - Tracks the performance
of stock from 30 of the country’s largest companies in
various industries. Used to measure the health of the
country’s economy as a whole.
Is This Analysis Accurate?
How might we more accurately analyze
stock performance and the economy?
S & P 500 - Standard & Poor’s 500
gives a broader picture of stock
performance. Tracks 500 companies and
measures overall stock market
performance.
Bull Market - When the stock market
rises steadily over a period of time
Bear Market - When the stock
market falls for a period of time
Investment - Risk and
Advantages
Long Term = Less Risk
Short Term = Greater Risk
As a general rule:
However...
Long Term = Smaller Returns
Short Term = Chance of Greater
Returns
Long Term Investments also have less liquidity
Short-Term Investments have greater liquidity as their
resources more easily accessed.
It’s all about Trade Off’s
How can we Minimize Risk
in Investment?
Diversification
The strategy of spreading out investments to reduce risk.
If I wanted to invest my money I
could...
Buy Stock In:
British
Petroleum
Royal Dutch
Shell
Chevron
Buy Stock In:
OR
British
Petroleum
Microsoft
Target
Buy:
OR
British Petroleum Stock
A Government Bond
Money in Savings Account
Pair/Share How does investment allow
your money to “work for
you?”