Investment vs. Savings
What are some ways we’ve discussed
already to make money with your
money?
• What are the pros and cons of these
methods?
Savings Tools
- What are the pro/cons of these for
making money?
•
•
•
•
•
Checking Account
Savings Account
Money Market Deposit Account
Certificate of Deposit
Savings Bond
Savings Tools
-Low risk, low rate of return/interest rates
•
•
•
•
•
Checking Account ~0.00%
Savings Account ~0.01-0.05
Money Market Deposit Account ~0.05-0.1%
Certificate of Deposit ~0.3-1.5%
Savings Bonds ~ 1.18% through October 31,
2013
• Why is it important to not only save
money in safe, low interest
accounts, but also invest in more
risky ones?
Inflation – the value of money being
less
Inflation – rise in prices over time
- your money won’t be worth as much in
the future
• http://blog.blakeyautoplexsuzuki.com/wpcontent/uploads/2012/08/InfographicHistorical-Gas-Prices.jpg
• Inflation rate varies – but it has been about
4% annual average since 1950
– Last few years - ~2% a year
• How can you beat the inflation rate with your
savings?
Stocks and Investments – Higher Risk,
Higher Return
POTENTIAL
RETURN
RISK
Risk- uncertainty regarding the outcome of
a situation or event
What is the risk
level of savings
tools?
Investment Risk- possibility that an
investment will fail to pay the expected
return or fail to pay a return at all
All investment tools carry some level of risk
Types of Investment Tools
Stocks
Bonds
Mutual
Funds
Index
Funds
Real
Estate
Speculative
Investments
Stocks
Stock
A share of
ownership in
a company
Usually a
stockholder
owns a very
small part of a
company
Stockholder or
shareholder
Owner of the
stock
Return on Stocks
Dividends
Market Price
Definition
Share of profits
distributed in cash
to stockholders
Current price that a buyer
is willing to pay for stock
What is
received?
Stockholder may
or may not
receive dividendsdepends on
company profit
If stock is sold for
a market price
higher than what
was paid
If stock is sold for
a market price
lower than what
was paid
Stockholder will
receive a return
Stockholder will
lose money
Stocks – High Risk, High Potential
Return
• http://stockcharts.com/freecharts/historical/djia1900.html
• GREAT after 1930s
• Pretty bad in 1928
Bonds
Definition
Form of lending to a
company or the government
(city, state, or federal)
Annual interest is paid to
investor
Bonds are less
risky than
stocks but
usually do not
have the
potential to
earn as high of
a return
Return
Once the maturity date is
reached, the principal is
repaid to the bondholder
Mutual Funds
Mutual fund- when
Make sure to
research the
fees charged
by a mutual
fund
a company combines
the funds of many
different investors and
then invests that
money in a diversified
portfolio of stocks and
bonds
Advantage
Reduces
investment
risk
Saves
investors
time
Disadvantage
Fees may be
high
Index Fund
Index
A group of similar
stocks and bondsStandard and Poor 500
Index
Fund
A mutual fund
that invests in the
stocks and bonds
that make up an
index
Index Fund
Advantage
Disadvantage
High
diversification
What is the
difference
between a
mutual fund
and an index
fund?
Usually charge
lower fees than
mutual funds
Still charge
fees
SPY
• https://www.spdrs.com/product/fund.seam?ti
cker=spy
Real Estate
Examples of
real estate
investments
include rental
units and
commercial
property
• Any residential or commercial
property or land as well as the rights
accompanying that land
• A family home is usually not
considered an investment asset
• Can be risky and more time
consuming but has potential for large
returns
Speculative Investments
High risk investments
Have the potential for significant fluctuations
in return over a short period of time
Futures
Options
Commercial Collectibles
Paper
Financial Risk Pyramid
The risk level for specific investment tools may vary
Futures
Increasing
potential for
higher returns
Increasing risk
Commercial
Paper
Options Collectibles
Stocks
Real Estate
Mutual
Funds
Checking Savings
Account Account
Speculative
Investment
Tools
Bonds
Money
Market
Deposit
Account
Index
Funds
Certificate
of Deposit
Investment
Tools
Savings
Bonds
Savings
Tools
Online Risk Tolerance Quiz:
• Click HERE
• Want to improve your personal finances? Start by taking this
quiz to get an idea of your risk tolerance--one of the
fundamental issues to consider when planning your
investment strategy, either alone or in consultation with a
professional.
• Choose the response that best describes you--there are no
"right" or "wrong" answers. Just have fun!
Work on 29a – Types of
Investments Pros and Cons