CHAPTER 19
Saving & Investment Strategies
19-1 Saving & Investment Planning
SAVING AND INVESTMENT BASICS
Savings and Investment Activities
Saving – the storage of money for future use.
(ideally save 10% of your income)
Investing – using your savings to earn more
money.
19-1 Saving & Investment Planning
SAVING AND INVESTMENT BASICS
Determine Investment Goals
Two major financial goals: income and growth
Current income: people who want income for
current living expenses.
Long-term growth: those who desire financial
security in the future.
19-1 Saving & Investment Planning
SAVING AND INVESTMENT BASICS
The Growth of Saving
Interest: the money you receive for letting
others use your money.
19-1 Saving & Investment Planning
SAVING AND INVESTMENT BASICS
The Growth of Saving
Compound Interest: earning interest on
previously earned interest. It is computed on the
amount saved plus the interest previously
earned.
"Would you rather have
one million dollars, or
start with one penny and
double your savings each
day for four weeks?"
19-1 Saving & Investment Planning
19-1 Saving & Investment Planning
SAVING AND INVESTMENT CHOICES
Savings Plans
Savings Account – pays interest while keeping
money safe. The average savings account has a
measly 0.06% APY (annual percentage yield, or
interest), and many of the nation's biggest banks
pay rates as low as 0.01%.
Certificate of Deposit – allows you to earn a higher
interest rate, requires a minimum deposit for a
specified period. Penalties are assessed if the
money is withdrawn early.
CD Term
$0 - $9,999.99
$10K $24,999.99
$25K $49,999.99
$50K $99,999.99
$100K $249,999.99
$250K+
1-Month
0.02%
0.02%
0.02%
0.02%
0.02%
0.02%
2-Month
0.02%
0.02%
0.02%
0.02%
0.02%
0.02%
3-Month
0.02%
0.02%
0.02%
0.02%
0.02%
0.02%
6-Month
0.02%
0.02%
0.02%
0.02%
0.02%
0.02%
9-Month
0.02%
0.02%
0.02%
0.02%
0.02%
0.02%
12-Month
0.02%
0.02%
0.02%
0.02%
0.05%
0.05%
15-Month
0.05%
0.15%
0.15%
0.15%
0.20%
0.20%
18-Month
0.15%
0.25%
0.25%
0.25%
0.30%
0.30%
21-Month
0.15%
0.25%
0.25%
0.25%
0.30%
0.30%
24-Month
0.15%
0.25%
0.25%
0.25%
0.30%
0.30%
30-Month
0.15%
0.25%
0.25%
0.25%
0.30%
0.30%
36-Month
0.15%
0.35%
0.35%
0.35%
0.40%
0.40%
42-Month
0.25%
0.45%
0.45%
0.45%
0.50%
0.50%
48-Month
0.25%
0.45%
0.45%
0.45%
0.50%
0.50%
60-Month
0.35%
0.55%
0.55%
0.55%
0.60%
0.60%
84-Month
0.35%
0.55%
0.55%
0.55%
0.60%
0.60%
120-Month
0.90%
1.01%
1.01%
1.01%
1.05%
1.05%
19-1 Saving & Investment Planning
SAVING AND INVESTMENT CHOICES
Savings Plans
Money Market Account – pays a variable interest
rate based on various government and corporate
securities. MMA do not require long-term
deposited.
• Earnings are usually higher than regular savings
accounts, but lower than long-term CDs.
• Current Rates
19-1 Saving & Investment Planning
SAVING AND INVESTMENT CHOICES
Securities
Stock Investments – a stock purchase, is made
directly or indirectly through mutual funds.
• Capital gain – when a stock increases in value
and is them sold for more than its original
cost.
• Capital loss – when an investment is sold for
less than its original cost.
19-1 Saving & Investment Planning
SAVING AND INVESTMENT CHOICES
Securities
Bond Investments – lending money for use by
businesses and governments. Bonds represent
debt.
Mutual Funds – money from many investors is
used to invest in a variety of securities.
19-1 Saving & Investment Planning
SAVING AND INVESTMENT CHOICES
Alternative Investments
Real Estate – purchase property for rental income,
buy vacant property in hopes that value will
increase.
Commodities – grain, livestock, precious metals,
currency. (anticipation of higher market prices in
the near future) VERY RISKY
Collectibles – Old coins, works of art, antique
furniture (hopes that their value will increase)
19-1 Saving & Investment Planning
EVALUATING SAVINGS AND INVESTMENTS
Safety and Risk
Federal Deposit Insurance Corporation
• Each depositor insured to at least $250,000
per insured bank
19-1 Saving & Investment Planning
EVALUATING SAVINGS AND INVESTMENTS
Potential Return
• A good savings plan or investment should earn
a reasonable return.
• Yield – the percentage of money earned on
your saving or investment over a year. (rate of
return, annual yield)
19-1 Saving & Investment Planning
EVALUATING SAVINGS AND INVESTMENTS
Liquidity
• Liquidity – the ease with which an investment
can be changed into cash without losing its
value.
19-1 Saving & Investment Planning
EVALUATING SAVINGS AND INVESTMENTS
Taxes
• Earnings from most savings and investments
are taxed.
• Taxes reduce your rate of return.
• Some investments have tax-exempt earnings.
– 403b
19-2 Stock Investments
TYPES OF STOCK
• Stockholder – one who buys shares of
ownership in a corporation.
• Dividends – if a business is profitable, it may
put out part of the profits in cash to the
stockholders.
19-2 Stock Investments
TYPES OF STOCK
Preferred Stock
• Has priority over common stock in the
payment of dividends.
• Investing in preferred stock is less risky
• Preferred stockholders generally have no
voting rights
19-2 Stock Investments
TYPES OF STOCK
Common Stock
• Represents general ownership in a corporation
and a right to share in its profits
• Common stock holders are invited to the
annual meeting of the corporation (entitled to
one vote per share owned)
19-2 Stock Investments
STOCK TRANSACTIONS
Using a Stockbroker
• Stockbroker – a licensed specialist in the buying
and selling of stocks and bonds.
– Commission – a fee charged by brokers for services
– Full-service broker – provides information about
securities (work for brokerage houses)
– Discount broker – places orders and offers limited
research and other services (charge lower
commissions)
19-2 Stock Investments
STOCK TRANSACTIONS
Online Investing
• You serve as your own financial planner
• Transactions are usually less expensive
• Inexperience in making investment trading
decisions can result in a large financial loss
19-2 Stock Investments
STOCK TRANSACTIONS
Stock Exchanges
• A business organization that accommodates
the buying and selling of securities.
– New York Stock Exchange
– The American Stock Exchange (NY)
– Regional Stock Exchange (Boston, Chicago,
Philadelphia, San Francisco)
– 170 Stock Exchanges in operation worldwide
19-2 Stock Investments
STOCK TRANSACTIONS
Changing Stock Values
• The Market value of a stock is the price at which
share of stock can be bought and sold in the stock
market.
• Stock Index – measurement of investment values.
– The Dow Jones Industrial Average (30 of the largest
U.S. companies)
– Standard & Poor’s (S&P) – based on stock values of
500 major companies.
19-2 Stock Investments
STOCK SELECTION
Stock Information Sources
• Moody’s Handbook of Common Stocks, Value
Line, S&P’s Encyclopedia of Stocks
– Provide data about net worth, debt, sales revenue,
profits, dividend history, future prospects
– U.S. Securities & Exchange Commission (SEC) oversees
the financial markets .
• Requires all companies that issue publicly traded securities
to electronically fin detailed reports.
19-2 Stock Investments
STOCK SELECTION
Stock Information Sources
• Moody’s Handbook of Common Stocks, Value
Line, S&P’s Encyclopedia of Stocks
– Provide data about net worth, debt, sales revenue,
profits, dividend history, future prospects
– U.S. Securities & Exchange Commission (SEC) oversees
the financial markets.
• Requires all companies that issue publicly traded securities
to electronically fin detailed reports.
19-2 Stock Investments
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STOCK SELECTION
Economic Factors
Inflation – higher prices can result in lower spending by
consumers, reducing company profits
Interest rates – as the cost of money changes, company
profits can increase or decline
Consumer spending – profits of companies that sell
products and services to households are directly
affected by buying habits
Employment – as people obtain or lose jobs, the
amount of money they have for spending wil affect
company profits
19-2 Stock Investments
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STOCK SELECTION
Company Factors
Has the company been profitable over a period of years
Have the company’s managers made good business
decisions
Does the company have growth potential in coming years
Does the company have an unusually large amount of debt
How does the company compare with others in its industry
19-3 Bonds & Mutual Funds
GOVERNMENT BONDS
• A bond is a certificate representing a promise
to pay a definite amount of money at a stated
interest rate on a specific due date.
• The due date is also called the maturity date.
• When you buy a bond, you are lending money
to the organization selling the bond. You
become a creditor of the organization.
19-3 Bonds & Mutual Funds
GOVERNMENT BONDS
Municipal Bonds
• Municipal Bonds (munis) – bonds issued by
local and state governments.
– Interest is exempt from federal and most state
income taxes.
– Used to build parks, schools, roads, etc.
19-3 Bonds & Mutual Funds
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GOVERNMENT BONDS
U.S. Savings Bonds
Good for people with small amounts of money to
invest (safe investment)
Sold in denominations ranging from $50 - $10,000.
A Series EE bond is bought a half its face value.
The length of time the bond is held determines the
amount of interest.
Interest is exempt from state and local taxes.
Interest is exempt from Federal tax if used for college.
19-3 Bonds & Mutual Funds
GOVERNMENT BONDS
Other Federal Securities
• T-Bills – short-term borrowing with maturities
from 91 days to one year.
• T-Notes – maturities from 1-10 years.
• T-Bonds – long-term borrowing, with a
maturity of up to 30 years.
19-3 Bonds & Mutual Funds
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CORPORATE BONDS
Bond Components
Each bond has a face value, also called the
maturity value. (the amount being borrowed)
Corporate bonds are issued for $1000 and
$25,000
Interest is paid twice a year based on the face
value and the stated interest rate
On the bond’s maturity date the face value is
repaid to the investor
19-3 Bonds & Mutual Funds
CORPORATE BONDS
Bond Values
• The market value of a bond varies based on
changing interest rates and the credit rating of
the borrowing organization.
• Corporate bond prices are stated in $100s, but
sold in $1,000s denominations.
• Ex. A bond selling at 100 has a market value of
$1,000
19-3 Bonds & Mutual Funds
MUTUAL FUNDS
Types of Mutual Funds
Many people who are interested in investing do not have the
time or knowledge needed to make wise investments.
• More than 60,000 different mutual funds are
available to investors.
• Theses funds have different objectives:
– Growth stocks
– High paying dividends
– International stocks
19-3 Bonds & Mutual Funds
MUTUAL FUNDS
Mutual Fund Values
• Mutual fund investors own shares of the
mutual funds
• The values of each share is based on the total
value of all investments made by the mutual
fund company
19-3 Bonds & Mutual Funds
MUTUAL FUNDS
Mutual Fund Values
• Net asset value (NAV) – If the investments
were worth $400,000 and 80,000 shares
existed each share would be worth $5
19-4 Real Estate Investments
SELECTING HOUSING
Real estate – land and anything that is attached
to it.
19-4 Real Estate Investments
SELECTING HOUSING
Buying A Home
• Mortgage – legal document giving the lender a
claim against the property if the principal,
interest, or both are not paid as agreed.
– Fixed-rate mortgage – one set rate for the term of the
loan
– Adjustable-rate mortgage – rate is raised or lowered
depending on the current interest rate being charged
by lenders
19-4 Real Estate Investments
SELECTING HOUSING
Buying A Home
• Mortgage – legal document giving the lender a
claim against the property if the principal,
interest, or both are not paid as agreed.
– Fixed-rate mortgage – one set rate for the term of the
loan
– Adjustable-rate mortgage – rate is raised or lowered
depending on the current interest rate being charged
by lenders
19-4 Real Estate Investments
SELECTING HOUSING
• Services of Real Estate Agents
• Other Real Estate Professionals
– Appraiser – someone trained to estimate the
value of property and who can give an official
report on the value
19-4 Real Estate Investments
Benefits of Home Ownership
• Tax Benefits
– Interest paid on a mortgage is included as a deductible
expense
– Property taxes are also deductible when computing your
federal income taxes
• Increased Equity
– Equity – the difference between the price at which you
could sell your house and the amount owed on the
mortgage.
– Appreciation – a general increase in the value of property
that occurs over time.
19-4 Real Estate Investments
COSTS OF HOME OWNERSHIP
• Property Taxes
– Assessed value – the amount your local government determines
your property to be worth for tax purposes
– Market Value: $180k Assessed: 90k Tax rate: $60 per $1000
$90,000 / $1,000 X $60 = $5,400
• Interest Payments
– 30-year mortgage at 8% interest would cost $164,000
• Property Insurance
– Provides protection from fire, theft, accident, or other losses.
• Maintenance
– Upkeep – maintaining your property in good condition
19-5 Other Investments
COMMODITITES AND FUTURES
• Commodities – include grain, livestock, and
precious medals
– Speculative investment – unusually high risk
• Futures contract – an agreement to buy or sell
an amount of a commodity at a specified price
in the future
19-5 Other Investments
COMMODITITES AND FUTURES
Commodity Exchanges
• Buyers and sellers are represented by traders
on the exchanges.
• Chicago Board of Trade (CBOT)
– Established in 1848 to provide a market for
agricultural products
– In 2007 merged with Chicago Mercantile Exchange
to create the CME Group
19-5 Other Investments
COMMODITITES AND FUTURES
Agricultural Commodities
• Corn, soybeans, wheat
• Agricultural producers sell their crops in
advance of a harvest at what they believe is a
good price
• The futures contract buyers hope the price of
the crop will go up when harvested so that
they can earn a profit.
19-5 Other Investments
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COMMODITITES AND FUTURES
Gold, Silver, Precious Metals
Gold has the longest history as a monetary
commodity going back to 500 BC
Since 1979, the price of gold has ranged from
$1000 to $300
Precious metals are quoted as spot prices per one
troy ounce.
Money invested in precious metals does not earn
interest.
19-5 Other Investments
COMMODITITES AND FUTURES
Currency and Financial Instruments
• Currencies (Dollar, Euro, Yen) and financial
instruments (T-Bills and T-Notes) are traded on
the futures markets.
• The price of currency and financial instruments is
affected by a country’s economic outlook and
current interest rates.
• Investors expect the prices to increase so they
can sell them for a profit.
19-5 Other Investments
COLLECTIBLIES
Items of personal interest to collectors that can
increase in value in the future.
Types of Collectibles
• Stamps, coins, sport trading cards, antiques, rare
books, toys
Collectible Values
• Only rate stamps, coins, art, and antiques tend to
be items on which the investor can make a
considerable profit.