1.12.1.G1
Introduction to Investing
"Take Charge of Your Finances"
Advanced Level
1.12.1.G1
Saving and Investing
Once an appropriate amount of
liquid assets are reached
Remember:
The
purpose of
savings is to
develop
financial
security
Recommend refocusing goals from
saving to investing
© Family Economics & Financial Education – Updated April 2011 – 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?
• 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 – Updated April 2011 – 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
Total return on investment expressed
as a percentage of the amount of
money invested
Remember:
Return is the
profit or
income
generated by
savings and
investing
Total
Return
Amount
of
Money
Invested
Rate of
Return
Investments usually earn higher
rates of return than savings tools
© Family Economics & Financial Education – Updated April 2011 – 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
1.12.1.G1
What is Mandy’s Rate of
Return?
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 – Updated April 2011 – 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?
1.12.1.G1
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 – Updated April 2011 – 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- 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
© Family Economics & Financial Education – Updated April 2011 – 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
1.12.1.G1
Inflation
Inflation
Rise in the general level of prices
Strive to have
the rate of
return on
investment 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 is usually not a concern
with savings since the goal of savings
is to provide current financial security
© Family Economics & Financial Education – Updated April 2011 – 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
Types of Investment
Tools
Stocks
Bonds
Mutual
Funds
Index
Funds
Real
Estate
Speculative
Investments
© Family Economics & Financial Education – Updated April 2011 – 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
1.12.1.G1
1.12.1.G1
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 – Updated April 2011 – 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
1.12.1.G1
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
© Family Economics & Financial Education – Updated April 2011 – 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
1.12.1.G1
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
© Family Economics & Financial Education – Updated April 2011 – 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
Mutual Funds
Mutual fund-
Make sure to
research the
fees charged
by a mutual
fund
Advantage
when a company
combines the funds of
Reduces
many different
investment
investors and then
risk
invests that money in
Saves
a diversified portfolio
investors
of stocks and bonds
time
Disadvantage
Fees may be
high
© Family Economics & Financial Education – Updated April 2011 – 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
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
© Family Economics & Financial Education – Updated April 2011 – 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
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
© Family Economics & Financial Education – Updated April 2011 – 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
1.12.1.G1
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
© Family Economics & Financial Education – Updated April 2011 – 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
Speculative Investments
High risk investments
Have the potential for significant fluctuations
in return over a short period of time
Futures
Options
Commercial Collectibles
Paper
© Family Economics & Financial Education – Updated April 2011 – 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
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
© Family Economics & Financial Education – Updated April 2011 – 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
Savings
Tools
1.12.1.G1
Investment Philosophy
Everyone 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, aggressive
© Family Economics & Financial Education – Updated April 2011 – 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
Portfolio Diversification
Portfolio Diversification- reduces risk by
spreading investment money among a
wide array of investment tools
Creates a collection of investments
that will provide an acceptable return
with an acceptable exposure to risk
Referred to as
“Building a
Portfolio”
Assists with investment
risk reduction
© Family Economics & Financial Education – Updated April 2011 – 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
Buying and Selling
Investments
1.12.1.G1
Brokerage firm acts as a buying and selling agent
for an investor (except for real estate and certain
speculative investments)
FULL SERVICE
GENERAL
BROKERAGE
FIRM
Complete
investment
transactions
Offer investment
advice and oneon-one attention
from a broker
DISCOUNT
BROKER
Only complete
investment
transactions
Offer no advice to
investors but
charge 40-60%
less
© Family Economics & Financial Education – Updated April 2011 – 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
1.12.1.G1
Taxation
Profits earned on investments are
unearned income
Taxes are often owed on
unearned income
Taxes are due on most investment
returns in the year the unearned
income is received
© Family Economics & Financial Education – Updated April 2011 – 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
Tax-Sheltered
Investments
1.12.1.G1
Government tries to encourage certain
types of investments by making them taxsheltered
Taxsheltered
investments
are usually
not tax-free!
Tax-sheltered
investmentseliminate, reduce,
defer, or adjust
the current year
tax liability
•Retirement
•Child/dependent care
•Education expenses
•Health care expenses
© Family Economics & Financial Education – Updated April 2011 – 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
1.12.1.G1
When are taxes for tax-sheltered
investments usually paid?
What is the
benefit of a taxsheltered
investment if
taxes still have
to be paid?
Money is invested and
taxes are paid
Money is invested
Money grows untaxed
with help from
compounding interest
Money grows untaxed
with help from
compounding interest
Money is withdrawn
OR
Money is withdrawn
and taxes are paid
There are often limits to the amount
that can be invested
© Family Economics & Financial Education – Updated April 2011 – 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
Employer-Sponsored
Investment Accounts
Example:
• Type of tax-sheltered investment
• Money is automatically taken out of
employee’s paycheck
• Employers often contribute a portion of
money to the investment with no
additional cost from the employee
Employee
contributes 7% of
paycheck to
investment
account
Employer contributes
the same amount of
money to the
employee’s
investment account
Employee
benefits from
having double the
amount of money
invested!
© Family Economics & Financial Education – Updated April 2011 – 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
Advantages to EmployerSponsored Investments
Reduces
tax liability
It is
recommended
that a person
utilize these
investment
tools as much
as possible if
they are
offered
Makes
investing
automatic
Possibility for
employer to match
investment
© Family Economics & Financial Education – Updated April 2011 – 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
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 – Updated April 2011 – 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
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 – Updated April 2011 – 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
What Can the “Rule of 72”
Determine?
How many years it
will take an
investment to
double at a given
interest rate
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 – Updated April 2011 – 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
“Rule of 72” FYI
• Only an approximation
• Interest rate must remain constant
• Interest rate is not converted to a
decimal
• Equation does not allow for
additional payments to be made to
the original amount
• Interest earned is reinvested
• Tax deductions are not included
© Family Economics & Financial Education – Updated April 2011 – 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
Doug’s Certificate of
Deposit
1.12.1.G1
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
11 years
to double
© Family Economics & Financial Education – Updated April 2011 – 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
1.12.1.G1
Jessica’s Credit Card Debt
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
4 years to
double
© Family Economics & Financial Education – Updated April 2011 – 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
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 – Updated April 2011 – 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
Summary
What is the
relationship
between risk
and return?
How can a
person reduce
investment risk?
What are the six
main investment
tools?
Who should a
person contact to
purchase
investment tools?
What is a taxsheltered
investment?
What is the Rule
of 72?
© Family Economics & Financial Education – Updated April 2011 – 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