MODULE 3 THE NEXT BIG THING Lesson 3.2 Stocks, Bonds & Mutual Funds

Stocks, Bonds & Mutual Funds What is investing? Investing is purchasing a financial product or other item of value with an expectation of favorable returns. Explain to students that saving is preserving money for a later time. While investing is taking some risk to make it possible for the investment to grow in value over time. While investing can help achieve long-term goals, saving is an effective way of managing money to meet short-term needs and to provide a safety net for emergency expenses. What is the purpose of investing? The purpose of investing is to save money in order to improve financial well-being.

Stocks, Bonds & Mutual Funds What is return on investment (ROI)? ROI is the rate of revenues received for every dollar on invested in an item or activity. ROI rates vary with each investment. The higher the ROI, the better. A positive ROI is money gained and a negative ROI is money lost.

Stocks, Bonds & Mutual Funds What are stocks? Stock is an instrument that signifies ownership in a corporation and represents claim on a share of a corporation’s assets and profits. Stocks are typically riskier and long-term investments. Explain to students that a minimum amount of money is needed up front to purchase investments. Stocks may or may not pay interest and it is uncertain if one gets their money back.

Stocks, Bonds & Mutual Funds What are bonds? Bonds are interest-bearing certificates used as a way for government or business to raise money. The bondholder lends money to the bond issuer for a set amount of time and interest. When the bonds are “sold” back to the issuer, the interest earned is given to the bondholder. Bonds are typically low-risk and good for short-term investments. Explain to students that a minimum amount of money is needed up front to purchase bonds. Bonds do pay interest and it is certain one will get their money back.

Stocks, Bonds & Mutual Funds What are mutual funds? Mutual funds are open-ended investments that are professionally managed and consist of a variety of investment instruments including stocks, bonds, options, commodities, and money market securities. Diversification provides greater safety and reduces risk. Mutual funds are long-term investments. Explain to students that a minimum amount of money is needed up front to purchase mutual funds. Mutual funds may or may not pay interest and it is uncertain if one gets their money back.

Stocks, Bonds & Mutual Funds What is real estate? Real estate is a piece of land and any buildings or structures on it. Real estate is a long-term investment. Explain to students that a minimum amount of money is needed up front to purchase real estate. Real estate does not pay interest and it is uncertain if one gets their money back. Examples of real estate: Personal home, rental home, rental apartments, office space, and land.

Stocks, Bonds & Mutual Funds What are collectibles? Collectibles are items which have value due to its rarity and desirability, such as antiques, coins, cars, and art. Collectibles are long-term investments. Explain to students that a minimum amount of money is needed up front to purchase collectibles. Collectibles not pay interest and it is uncertain if one gets their money back. Examples of collectibles: Antiques, coins, cars, and art

Stocks, Bonds & Mutual Funds What are precious metals? Precious metals are natural metals that have value, such as gold, silver, platinum, and palladium. Precious metals are long-term investments. Explain to students that a minimum amount of money is needed up front to purchase precious metals. Precious metals do not pay interest and it is uncertain if one gets their money back. Examples of precious metals: Gold, silver, platinum, palladium

Stocks, Bonds & Mutual Funds Do all investments offer a guaranteed positive return on investment (ROI)? NO! Although some investments are more likely to have a positive return on investment. Investments do not guarantee a positive ROI. However, some investments are “safer” than others (lower risk).

Stocks, Bonds & Mutual Funds How are risk and return related? The greater the risk an investment may lose money, the greater its potential to provide a positive substantial return. The inverse is also true. The lower the risk an investment may lose money, the lower its potential to provide a positive substantial return.

Stocks, Bonds & Mutual Funds What factors determine the degree of risk investors take? Age Risk tolerance Investment goals Age – investors with more time to invest can tolerate the market going up and down Risk tolerance – comfort level of the investor to deal with the ups and downs Investment goals – what the investor wants to achieve with the money and when.

Stocks, Bonds & Mutual Funds Investor Profiles Very Conservative – seeks to maintain the original value of the investments and is prepared to accept lower returns for lower risk. Conservative – seeks relatively stable returns and accepts some risk through a diversified portfolio. Moderate – seeks higher medium-term returns and accepts the possibility of negative returns over short periods. Aggressive – seeks high long-term returns and accepts the higher possibility of sustained negative returns over short periods. Very Aggressive – seeks to maximize long-term returns and accepts the possibility of greater volatility and short-term capital losses. The comfort level of an investor regarding ROI determines at which level they should invest.

Stocks, Bonds & Mutual Funds Types of investments Individual stocks Individual bonds Mutual funds Real estate Collectibles Precious metals

Investment Attributes Identify the attributes (qualities) for different investments. Answer the questions for each type of investment.   Piggy Bank Savings Account Individual Bonds Mutual Funds Individual Stocks Real Estate Collect-ibles Precious Metals Do you need a minimum amount of money to start/buy it? Can you get initial money back? Does it pay interest? Can someone steal it? Is it professionally managed? Is it easy to access the money? Best for Long-Term or Short-Term Goals? Have students use their notes to complete the sheet. Complete the sheet as a class, as needed.

Investment Attributes Identify the attributes (qualities) for different investments. Answer the questions for each type of investment.   Piggy Bank Savings Account Individual Bonds Mutual Funds Individual Stocks Real Estate Collect-ibles Precious Metals Do you need a minimum amount of money to start/buy it? No Maybe Yes Can you get initial money back? Does it pay interest? Can someone steal it? Is it professionally managed? Is it easy to access the money? Best for Long-Term or Short-Term Goals? Short Long Have students use their notes to complete the sheet. Complete the sheet as a class, as needed.

Stocks, Bonds & Mutual Funds Uma will be retiring in five years. She needs a low-risk place to put her money that will earn interest. Where might she invest? Why? Bonds would be a good place for her retirement monies. They are typically low-risk and still pay interest.

Stocks, Bonds & Mutual Funds Skip will be retiring in 38 years. He has an emergency fund that could support him for nine months if something were to happen. Skip wants his money to work for him and he is not scared of market fluctuations. Where might he invest? Why? Stocks and/or mutual funds would be good options. Typically, stocks and mutual funds perform well over time and outperform other investments.

Stocks, Bonds & Mutual Funds Imogene needs to start an emergency fund. Where might she invest? Why? A savings account in a bank would be a good option for her. It is a low-risk investment, easily accessible and it earns interest.

Stocks, Bonds & Mutual Funds Anne is saving for a new car. She wants to buy the car in three years. Where might she invest? Why? A savings account in a bank would be a good option for her. She would earn interest, and it is a low-risk investment.

Stocks, Bonds & Mutual Funds There are different types of investments and all have different ROI. The greater the risk on an investment, the greater the possibility of high returns and also negative returns. The type of investment should align with your investment profile.