Introduction to
Investing
Take Charge of Your Finances
Family Economics and Financial Education
Saving vs.
Investing
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Savings is for short-term goals and
emergencies
Remember:
The purpose
of savings is
to develop
financial
security.
You should have 3 – 6 months of salary
in savings BEFORE you start investing.
Investing is for long-term goals, such as
college or retirement.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 2
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
What is Investing?
• The purchase of assets with the goal of
increasing future income
• Focuses on wealth accumulation
• Appropriate for long-term goals
What are
examples of
long-term goals
that can be
accomplished by
investing?
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 3
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Rate of Return
• Return is money that you earn from your
investment.
• The Rate of Return is the total return
on an investment expressed as a
percentage of the amount of money
invested.
Investments
usually earn
higher rates
of return
than savings
tools.
Total
Return
Amount
of
Money
Invested
Rate of
Return
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 4
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
What is Mandy’s
Rate of Return?
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Mandy saved $2,200 in a money market
deposit account. After one year, she has a
return of $110. What is Mandy’s rate
of return?
$110
$2,200
.05 =
5%
Mandy’s rate of return on investment is 5%
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 5
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
What is Derek’s
Rate of Return?
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Derek invested $900. When he withdrew his
money from the investment, he had a total of
$1,050. What is Derek’s rate of return?
$150
$900
.167 =
16.7%
Derek’s rate of return on investment is 16.7%
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 6
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Risk
POTENTIAL
RETURN
RISK
Risk
• The uncertainty regarding the outcome of a situation
or event
Investment Risk
• The possibility that an investment will fail to pay the
expected return or fail to pay a return at all
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 7
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Financial Risk
Pyramid
Increasing potential for
higher returns
Increasing risk
Speculation
Wealth
AccumulationInvestments
Financial SecuritySavings Tools
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 8
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Inflation
Inflation
The rise in the general level of prices
The rate of
return on an
investment
should be higher
than the rate of
inflation.
Inflation Risk
The danger that money won’t be worth as
much in the future as it is today
Inflation risk should not be a concern
with savings since the goal of savings is to
provide current financial security
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 9
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Investment
Philosophy
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Each individual has a tolerance level for
the amount of risk they are willing to
take on
The greater the
risk a person is
willing to make
on an
investment, the
greater the
potential return
will be.
Investment Philosophy
An individual’s general approach to
investment risk
Generally divided into three categories:
conservative, moderate, and aggressive
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 10
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Types of
Investment Tools
Stocks
Bonds
Mutual
Funds
Index
Funds
Real
Estate
Speculative
Investments
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 11
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Stocks
• Stock
– A share of ownership in a company
• Stockholder or shareholder
– Owner of the stock
Usually a
stockholder
owns a very
small part of a
company.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 12
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Return on Stocks
There are two ways people can make
money on stocks:
1. Dividends
– Dividends are the share of profits
distributed in cash to stockholders
2. Market Price
– The current price that a buyer is
willing to pay for stock
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 13
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Return on Stocks
• If stock is sold for a market price higher
than what was paid, stockholder will
receive a return (make money).
• If stock is sold for a market price lower
than what was paid, stockholder will lose
money
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 14
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Stock Markets
• Stocks are bought and sold on stock
markets by people called brokers.
• The main stock markets in the U.S. are:
– New York Stock Exchange (NYSE)
– NASDAQ
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 15
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Stock Activity
• We are going to learn about stocks using
McDonald’s as an example.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 16
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Bonds
Bonds are less
risky than stocks
but do not have
the potential to
earn as much as
a stock.
• Bonds are loans.
• A company or government will
borrow money from investors by
issuing bonds.
• Example: The Crazy Hat Co. wants
to build a new distribution center in
Louisville, KY which will cost
$7,000,000. They can issue 7,000
bonds at $1,000 each.
7,000 x $1,000 = $7,000,000
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 17
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Bonds
• The company or government pays annual
interest to the investor until the maturity
date is reached
– The maturity date is the specified time in
the future when the principal is repaid to
the bondholder.
• Bonds issued by a company are called
corporate bonds.
• Bonds issued by a government are called:
– Treasury bonds (federal government)
– Municipal bonds (local governments)
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 18
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Example
• The Crazy Hat Co. issues $1,000
bonds that pay 4.5% interest with a
maturity date of 11/22/2012 (2 years
from today).
• You buy the bond for $1,000.
• Each year you will receive a
payment of $1,000 x .045 = $45
• On 11/22/2012, you will also get
your $1,000 back.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 19
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Stocks vs. Bonds
• Stocks are equity.
• The stockholder actually owns a
piece of the company.
• Equity is the value of the company.
• For example, if a company has
10 million shares of stock, and each
share is worth $5, then the
company’s equity is:
10,000,000 x $5 = $50,000,000
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 20
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Stocks vs. Bonds
• Bonds are debt.
• Debt means the bondholder has lent
money to the company that the company
will repay with interest.
• Companies must repay debt before they
pay anything to stockholders.
• Therefore, bonds are less risky than
stocks.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 21
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Portfolio
Diversification
Portfolio Diversification- reduces risk by
spreading investment money among
different investment tools
Referred to as
“Building a
Portfolio.”
Creates a collection of investments
that will increase return while
reducing risk
The main goal of diversification is to
reduce risk.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 22
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Mutual Funds
• Mutual fund- invests money in a diversified
portfolio of stocks and bonds
Always research
the fees charged
by a mutual
fund.
Reduces
investment risk
by helping
people diversify
their portfolio
Saves
investors
time
Fees can be
high
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 23
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
How Do Mutual
Funds Work?
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• Individuals buy shares
• The money is used to purchase
stocks, bonds, and other
investments.
• Profits returned to shareholders
monthly, quarterly, or semi-annually
in the form of dividends.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 24
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
How Do Mutual Funds
Work?
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 25
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
What is the Advantage of
Investing in a Mutual Fund?
• Allows small investors to get professional
account management and diversification
normally only available to large investors.
• This allows investors with a little bit of
money to be able to invest in a variety of
stocks, bonds, & other investments.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 26
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
There are lots of different
types of mutual funds!
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 27
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Market Indexes
• A market index is the value of a group
of stocks or other investments.
• Market indexes are intended to represent
an entire stock market and thus track the
market's changes over time.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 28
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Market Indexes
• Dow Jones Industrial Average (DJIA or
“The Dow”)
– 30 large companies traded on NYSE
or NASDAQ
• Standard & Poors 500 Index (S&P 500)
– An index of 500 large companies
selected by a committee
• Others
– Russell 2000, Wilshire 5000
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 29
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Index Fund
• A mutual fund that was designed to reduce fees
by investing in the stocks and bonds that make
up an index.
• Offers high diversification with low fees.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 30
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Real Estate
Examples of real
estate
investments
include rental
units and
commercial
property.
• Includes any residential or commercial
property or land as well as the rights
accompanying that land
• A family home is not considered an
investment asset
• Can be risky and more time consuming
but has potential for large returns
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 31
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Speculative
Investments
1.12.1.G1
• Have the potential for significant
fluctuations in return over a short period
of time
– Examples- future, options, commercial
paper, collectibles
• Recommended for people with an
aggressive investment philosophy and a
high level of financial security
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 32
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Buying and Selling
Investments
Investors must utilize a brokerage firm that acts as a
buying and selling agent for the investor (except for when
buying real estate and certain speculative investments).
FULL SERVICE
GENERAL
BROKERAGE
FIRM
Complete
investment
transactions
Offer investment
advice and one-onone attention from
a broker
DISCOUNT
BROKER
Only complete
investment
transactions
Offer no advice to
investors but charge
40-60% less
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 33
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Taxation
Profits earned on investments are considered
to be income
Income taxes MUST be paid
on this money
Includes all forms of returns: interest,
dividends, and price appreciation
Taxes are due on most investment returns in
the year the income is received
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 34
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Employee-Sponsored
Investment Accounts
It is
recommended
that a person
utilize these
investment tools
as much as
possible if they
are offered.
• Allow employees to reduce their tax
liability and make investing automatic
• Money is automatically taken out of an
employee’s paycheck
• Employers often contribute a portion of
money to the investment with no
additional cost from the employee
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 35
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Rule of 72
Rule of 72
Allows a person to easily calculate when the
future value of an investment will double
the principal amount
72
Interest
Rate
Number of years
needed to double
the principal
investment
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 36
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Albert Einstein
Credited for discovering the
mathematical equation for
compounding interest, thus
the “Rule of 72.” At 10%
interest rate, money doubles
every 7.2 years,
“It is the greatest mathematical
discovery of all time.”
T=P(I+I/N)YN
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 37
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
What Can the “Rule
of 72” Determine?
How many years it will
take an investment to
double at a given
interest rate using
compounding interest
How long it will
take debt to double
if no payments are
made
The interest rate an
investment must
earn to double
within a specific
time period
How many times
money (or debt)
will double in a
specific time period
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 38
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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“Rule of 72” FYI
• The rule is only an approximation
• The interest rate must remain constant
• The equation does not allow for additional
payments to be made to the original
amount
• Interest earned is reinvested
• Tax deductions are not included within the
equation
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 39
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Doug’s Certificate
of Deposit
Doug invested $2,500 into a Certificate of Deposit
earning a 6.5% interest rate. How long will it take
Doug’s investment to double?
• Invested $2,500
• Interest Rate is 6.5%
72
6.5%
= .065
11 years to
double
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 40
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Jessica’s Credit
Card Debt
1.12.1.G1
Jessica has a $2,200 balance on her credit card with an
18% interest rate. If Jessica chooses to not make
any payments and does not receive late charges, how
long will it take for her balance to double?
• $2,200 balance on credit card
• 18% interest rate
72
18%
= .18
4 years to
double
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 41
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Jacob’s Car
Jacob currently has $5,000 to invest in a car after
graduation in 4 years. What interest rate is
required for him to double his investment?
• $5,000 to invest
• Wants investment to double in 4 years
72
4
years
18%
interest rate
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 42
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
ANY QUESTIONS?