ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 9
WHAT’S AHEAD
9.1 Investing Basics
9.2 How to Invest in Corporations
9.3 How to Invest in Mutual Funds
9.4 Research Investments
9.5 Retirement and Other Investments
ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 9
LESSON 9.1
Investing Basics
GOALS
►Explain the relationship between risk and return when
investing.
►Describe how to evaluate the level of risk you should
accept when investing.
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 9
KEY TERMS
 Investing – Choosing to save in a way that
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earns income.
Risk – The chance that an investment will
decrease in value.
Return – The income you earn on an
investment. (Stated in Dollars).
Diversification – Investing in various
businesses with different levels of risk.
Rate of Return – The percentage you earn on
your investment. (Return/Investment).
© 2010 South-Western, Cengage Learning
ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 9
What Is Investing?
►Risk and rate of return
►Evaluate your risks
►Limit risk through diversification
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 9
Risk/Return
Rate of return
High
High
Risk
In order to earn a higher return, you must be willing to take
more risks.
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© 2010 South-Western, Cengage Learning
ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 9
How to Make
Investment Choices
►Your financial situation
►Your risk tolerance
►Your values
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© 2010 South-Western, Cengage Learning
ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 9
Why should you expect an investment with a
greater potential return to have more risk?
Why should you consider your financial situation,
risk tolerance, and values when choosing
investments?
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© 2010 South-Western, Cengage Learning
ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 9
Why should you expect an investment with a
greater potential return to have more risk?
• Investors demand a higher return for accepting greater risk.
• Organizations that offer investment opportunities must
offer higher returns as their risk grows.
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© 2010 South-Western, Cengage Learning
ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 9
Why should you consider your financial situation,
risk tolerance, and values when choosing
investments?
• Financial situations determine how much an investor can
afford to risk.
• Risk tolerance determines what investments an investor is
comfortable making.
• Investing according to values provides satisfaction beyond
financial goals.
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 9
LESSON 9.2
How to Invest in Corporations
GOALS
►Describe the ways to purchase different types of stock.
►Explain the difference between investing in corporate
stocks or corporate bonds.
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© 2010 South-Western, Cengage Learning
ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 9
KEY TERMS
 corporate stock
 dollar cost averaging
 stockholder
 preferred stock
 stockbroker
 common stock
 brokerage firm
 corporate bond
 stock exchange
 junk bond
 NASDAQ
 Dividend
 Capital Gain
 Capital Loss
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© 2010 South-Western, Cengage Learning
ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 9
KEY TERMS
 corporate stock – a unit of ownership in a corporation.
 Stockholder – Investors who own the corporation
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because they own shares of its stock.
Stockbroker – a person who handles the transfer of
stocks and bonds between buyers and sellers.
brokerage firm – a company that specializes in helping
people buy and sell stocks and bonds.
stock exchange – where orders to buy or sell stock are
sent and carried out. (example - NYSE)
NASDAQ – electronically links brokerage firms and is
the most common way to trade stock.
© 2010 South-Western, Cengage Learning
ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 9
Key Terms
 dollar cost averaging – investing equal amounts of
money at regular intervals.
 preferred stock – A non-voting share of company stock
that pays a fixed dividend.
 common stock – A voting share that does not pay a set
dividend. Most stock is common.
 corporate bond – Sold by corporations to finance
business activities. These are loans – not ownership.
Bonds are less risky than stocks and generally pay a
smaller return.
ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 9
Key Terms
Dividend – Profit earned by a corporation and
distributed to stockholders. Not all companies pay
dividends.
Capital Gain – Profit you earn from selling stock at a
higher price than you paid for it.
Capital Loss – Amount you lose if you sell your stock
at a lower price than you paid for it.
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 9
Stock Classifications
► Blue chip stocks – large, well established corporations.
► Growth stocks – corporations expected to experience rapid
growth.
► Large cap stocks – corporations with a total stock value of $10
billion or more.
► Mid cap stocks – corporations with a total stock value from $2
billion to $10 billion.
► Small cap stocks …less than $2 billion.
► Sector stocks – companies that operate in a particular industry or
sector of the economy. ( ex. - technology)
► Cyclical and non-cyclical stocks – how close is company’s success
linked to economy
► International stocks – corporations located outside U.S.
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© 2010 South-Western, Cengage Learning
ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 9
What are the two ways to earn income by
purchasing corporate stock?
What is the difference between stock and
bonds? Why does this difference matter to you as
an investor?
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© 2010 South-Western, Cengage Learning
ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 9
What are the two ways to earn income by
purchasing corporate stock?
You may receive a return from owning stock if it 1) pays a
Dividend or 2)increases in value if you sell your stock
(Capital Gain).
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© 2010 South-Western, Cengage Learning
ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 9
What is the difference between stock and bonds?
Why does this difference matter to you as an
investor?
• Stocks are ownership, and returns depend on the
company’s performance.
• Bonds are loans the company must repay in a specified
time frame with a specified interest.
• Because bonds must be paid on time, they are less risky.
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© 2010 South-Western, Cengage Learning