The Fundamentals of Investing Advanced Level 2.4.4.G1 Investments

The Fundamentals of Investing Advanced Level 2.4.4.G1 Investments

The Fundamentals of Investing Advanced Level 2.4.4.G1 Investments Investments assets purchased with the goal of providing additional income from the asset itself but with the risk of loss Financial Plan Savings Investments Take Charge Today August 2013 The Fundamentals of Investing Slide 2 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

All Investments Have Some Risk Return Profit or income generated by saving and investing Trade off Higher returns Higher risk (chance of loss) Investment Risk Possibility that an investment will fail to pay the expected return Investments have the potential for higher returns Take Charge Today August 2013 The Fundamentals of Investing Slide 3 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Investments are Important to Building Net

Worth 2.4.4.G1 Savings Tools = Monetary Assets (liquid quickly and easily converted to cash) Investment Tools = Investment Assets (may not be easily converted to cash or penalties charged to access the funds early) Investments are less liquid than savings tools Take Charge Today August 2013 The Fundamentals of Investing Slide 4 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona Investments Help Accomplish Long-Term Goals Money invested is usually used to pay for long-term goals

Buying a House Higher Education Retirement 2.4.4.G1 It is recommended that at least 10% of net income is dedicated to savings and investments each time income is received Take Charge Today August 2013 The Fundamentals of Investing Slide 5 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1

Saving vs. Investing Saving Investing Emergencies Long-term goals More liquid Less liquid Limited risk Higher risk Lower returns (0-4%) Higher returns (8-12%) Financial security Net worth What types of feelings result from saving and investing?

Take Charge Today August 2013 The Fundamentals of Investing Slide 6 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Rate of Return Total return on investment expressed as a percentage of the amount of money saved Total Return Amount of Money Invested Rate of Return Take Charge Today August 2013 The Fundamentals of Investing Slide 7 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 What is Mandys Rate of Return? Mandy saved $2,200 in a money market deposit account. After one year, she has a

return of $110. What is Mandys rate of return? $110 $2,200 .05 = 5% Mandys rate of return on investment is 5% Take Charge Today August 2013 The Fundamentals of Investing Slide 8 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Inflation Inflation Rise in the general level of prices Inflation Risk The danger that money wont be worth as much in the future as it is today How does inflation relate to investing? Strive to have the rate of

return on investment be higher than the rate of inflation Take Charge Today August 2013 The Fundamentals of Investing Slide 9 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Types of Investment Tools Bond Stock Real Estate Speculative Investments Mutual Funds Index Funds

What do you already know about each investment tool? Take Charge Today August 2013 The Fundamentals of Investing Slide 10 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Bond Definition Description Investment Risk Form of lending to a company or the government Organization pays interest to the lender (purchaser) until the maturity date

is reached Least amount (typically) Depends on the type of bond Return Fixed interest rate Maturity date specified time in the future when the principal amount of the bond is repaid to the bondholder Take Charge Today August 2013 The Fundamentals of Investing Slide 11 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Stock Stock Stockholder or

shareholder A share of ownership in a company Owner of the stock Usually a stockholder owns a very small part of a company Take Charge Today August 2013 The Fundamentals of Investing Slide 12 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Stock Returns - Dividends Dividends Share of profits distributed in cash to stockholders

Stockholde r may or may not receive dividends Take Charge Today August 2013 The Fundamentals of Investing Slide 13 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Stock Returns Capital Gains Market Price Current price a buyer is willing to pay Stocks sells for a price higher than what was paid Stock sells for a price lower than what was paid Capital gain unearned income received from the

sale of an asset above its purchase price Stockholder will lose money Take Charge Today August 2013 The Fundamentals of Investing Slide 14 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Real Estate Ownership of residential or commercial property or land Potential for Returns Capital gains (selling the property for more than what was paid) Rent (charging others for use of the

property) Real estate can be time consuming but the potential for returns is high Take Charge Today August 2013 The Fundamentals of Investing Slide 15 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Speculative Investments High risk investments Have the potential for significant fluctuations in return over a short period of time Futures Options Collectibles Type of return depends on the investment Take Charge Today August 2013 The Fundamentals of Investing Slide 16 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1

Mutual Funds When a company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds What is Included Type of Returns Bonds Stocks Real Estate Speculative Investments Interest Dividends Rents Capital Gains Take Charge Today August 2013 The Fundamentals of Investing Slide 17 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Mutual Funds Advantage

Disadvantage Reduces investment risk Saves investors time Fees may be high Take Charge Today August 2013 The Fundamentals of Investing Slide 18 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Ariana has $150 to Invest Option 1 - Stock A G Ariana invests in one companys stock

B F C E D Company C has had a bad year and their market price drops significantly. Ariana may lose her $150 investment Take Charge Today August 2013 The Fundamentals of Investing Slide 19 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Ariana Has $150 to Invest Option 2 Mutual Fund

Market price of companies C and F decreased Market price increased for all other companies A G B F C E D Ariana has reduced her investment risk and may still earn

money Take Charge Today August 2013 The Fundamentals of Investing Slide 20 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Index Fund Index Fund Type of mutual fund designed to reduce fees by investing in the stocks and bonds that make up the index Index Group of similar stocks and bonds Exampl e Standard and Poors

500 Take Charge Today August 2013 The Fundamentals of Investing Slide 21 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Lending vs. Owning When investing, consumers either lend money to the company/ organization or they own the asset Examples Returns Lending Bonds Interest Owning Stock Real Estate Speculative investments

Dividends Rents Capital Gains Take Charge Today August 2013 The Fundamentals of Investing Slide 22 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona Knowledge of the General Risk Level Helps Manage Risk Owning Lending Type of return Interest Dividends Rents Capital Gains

Type of Investment Bonds Mutual Fund Index Fund Stock Mutual Fund Index Fund Real Estate Mutual Fund Stock Mutual Fund Index Fund Decreased inflation risk Increased potential for high returns

Increased investment risk Take Charge Today August 2013 The Fundamentals of Investing Slide 23 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 2.4.4.G1 Characteristics of Investment Tools Order cards from lowest to highest Investment Risk Order cards from lowest to highest Potential Returns Order cards from lowest to highest Inflation Risk Speculative Stock and Real Estate Mutual Funds and Index Funds Bonds Take Charge Today August 2013 The Fundamentals of Investing Slide 24

Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Investment Philosophy Everyone has a tolerance level for the amount of risk they are willing to take on Generally divided into three categories: conservative, moderate, aggressive Time may influence investment philosophy If someone was an aggressive investor, what types of investment tools would they primarily have in their portfolio? Take Charge Today August 2013 The Fundamentals of Investing Slide 25 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Portfolio Diversification Portfolio diversification reduces risk by spreading money among a wide array of investments Goal: create a collection of investments that will provide an acceptable return with an acceptable

exposure to risk Reduces investment risk Investing in a mutual fund is an automatic form of portfolio diversification Take Charge Today August 2013 The Fundamentals of Investing Slide 26 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Stock Exchange Investments are purchased from a stock exchange (except for real estate and some speculative investments) Stock exchange provides an organized, central service to buy and sell all stocks, bonds and other

investments that are traded Worldwide, there are many different stock exchanges A limited number of people are allowed to buy and sell directly from each stock exchange Take Charge Today August 2013 The Fundamentals of Investing Slide 27 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Brokerage Firms Brokerage firms facilitate the buying and selling of investments on the stock exchange Discount Full-service

Only completes orders to buy and sell investments Offer investment transactions and a financial advisor Advice is not offered Financial advisor trained professional that helps make investing decisions Take Charge Today August 2013 The Fundamentals of Investing Slide 28 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Discount Brokerage Firm Fees Will usually charge a fee for completing a buy/sell transaction Additional fees may include:

Service fee Inactivity fee Maintenance fee Fees specific to an investment Total fees are often lower, but an individual must have the knowledge and time to monitor their investments Take Charge Today August 2013 The Fundamentals of Investing Slide 29 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Full-Service Brokerage Firm Fees

Financial advisors are compensated for the time and knowledge they provide investors. Most charge fees using one of these methods. % of the Investment Value % of the Amount Invested Hourly Rate & Flat Fee In addition to fees, financial advisors may earn commissions paid by the

company. Take Charge Today August 2013 The Fundamentals of Investing Slide 30 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Choosing a Brokerage Firm Important to research the financial advisor and firm he/she works for Questions How are the firms financial advisors to ask: compensated? How long has the firm been in business? Does the firm have a history of positive reviews and success? How does the firm rank in comparison to other brokerage firms? Take Charge Today August 2013 The Fundamentals of Investing Slide 31 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Tax-Advantaged Investments Government encourages people to invest in certain

types of investments Savings and investments are a form of unearned income and therefore subject to income tax Tax-advantaged investments Most common: reduce, defer or Retirement adjust the current Education year tax liability Take Charge Today August 2013 The Fundamentals of Investing Slide 32 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona When are taxes for tax-advantaged investments usually 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 Take Charge Today August 2013 The Fundamentals of Investing Slide 33 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1

2.4.4.G1 Investing for Retirement Choose an investment Usually mutual funds Contribute money Typically taxadvantaged When possible, use an employersponsored plan Employer may match funds (up to a certain limit) Take Charge Today August 2013 The Fundamentals of Investing Slide 34 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Retirement Accounts

Employer Sponsored Similar plans 401(k) 403 (b) (taxexempt organizations) Personal Retirement Traditional IRA (taxes when money withdrawn) Roth IRA (taxes paid when money deposited) There are many other types of plans available The tradeoff to tax advantages is most accounts have penalties if

money is withdrawn early Take Charge Today August 2013 The Fundamentals of Investing Slide 35 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona 2.4.4.G1 Summary Investments are important to building net worth A trade-off to higher returns is lower liquidity and higher risk Investments are ideal for the longterm Take advantage of portfolio diversification

Discuss your goals with a financial advisor Use tax-advantaged investments & employersponsored plan Take Charge Today August 2013 The Fundamentals of Investing Slide 36 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

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