Investing 101
Having Your Money Work For YOU
Saving vs. Investing
• List 2 ways you can save on one post-it
and 2 ways you can invest on the other.
• Stick on board when finished
Learning Targets
• Calculate simple and compound interest,
and rate of return
• Understand the factors to consider when
evaluating an investment
Basic Principle of Investing
• Assets: Any item of economic value
owned by an individual or corporation,
which could be converted to cash.
Basic Principle of Investing
So investing means to…
• Buy assets that appreciate in value.
Two most important factors for
successful investing:
Time
$
Knowledge
Would you rather have a million
dollars now or a penny doubled
every day for thirty days?
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
1: $.01
2: $.02
3: $.04
4: $.08
5: $.16
6: $.32
7: $.64
8: $1.28
9: $2.56
10: $5.12
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
11:
12:
13:
14:
15:
16:
17:
18:
19:
20:
$10.24
$20.48
$40.96
$81.92
$163.84
$327.68
$655.36
$1,310.72
$2,621.44
$5,242.88
Day
Day
Day
Day
Day
Day
Day
21:
22:
23:
24:
25:
26:
27:
$10,485.76
$20,971.52
$41,943.04
$83,386.08
$167,772.16
$335,544.32
$671,088.64
Day 28: $1,342,177.28
Day 29: $2,684,354.56
Day 30: $5,368,709.12
Simple vs Compound interest
Simple Interest means interest paid
only on the original principle
amount.
Example…
• You deposited $100 dollars into a bank
account that pays 5% interest every year.
• = Principle x Rate x Time
• You will have $105 after year one
• $110 after year two
• $115 after year three
• $120 after year four
Compound Interest
• The interest earned not only on the
original principal, but also on all interests
earned previously
Example
• You deposited $100 dollars into a bank
account that pays 5% interest compounded
every year. How much will you have in four
years?
http://www.econedlink.org/lessons/index.php?lid=603&type=educator
Rule of 72
• Divide 72 by the interest rate of a
investment to find the amount of years it
takes to double your money.
Example:
• Savings Account is paying 5% interest
• 72/5 = 14.4 years to double your money
Factors to consider when
selecting an investment….
Basic Factor: Return
• The income produced by an investment
• Income or loss / Initial investment = Return %
• Example:
Bought stock at $10
Sold stock at $15
Return = 50%
Basic Factor: Return
Another Example:
• Bought stock @ $75 per share
• Sold stock @ $120 per share
What is the return?
Income or loss / Initial investment = Return %
Who wants to win some
money?
Risk vs. Return
The greater the risk, the
greater the return
Basic Characteristics
Volatility
• The degree to which an investment’s
return or value may change.
Risk vs. Return
• How much risk should one take????
• Factors
– Age
– Income
– Savings
– Goals
– Personal Tolerance
Basic Factor: Liquidity
Liquidity
• The ease at which an investment can be
converted to cash.
Diversification
• Strategy of making a variety of
investments in order to reduce your
exposure to risk.
Don’t put all your eggs in one basket!
Review
• Compound interest is a powerful force
• Major factors to consider when choosing
an invest include…
– Return
– Risk
– Liquidity
– Volatility
– Diversification