Banking and Investing

Banking and Investing Bell Ringer: If you had $10,000 to invest last year which company (or companies) would you have invested in?

Principle and Interest There are two parts to any loan: principle and interest. THE PRINCIPLE IS THE ACTUAL AMOUNT BORROWED. THE INTEREST IS THE MONEY A CUSTOMER PAYS ABOVE THE PRINCIPLE FOR THE OPPORTUNITY TO BORROW MONEY. E. Napp

Collateral and Defaults COLLATERAL IS WHAT THE BANKS HOLD (OWN) UNTIL YOU PAY OFF A LOAN (Examples?) An UNSECURED LOAN has no collateral (Examples?) When a person fails to pay back a loan, he/she has defaulted on the loan. Defaulting on a loan leads to bad credit and higher interest rates in the future. E. Napp/Helf

How do Banks Make Money? Banks loan money Where do they get the money to loan? People deposit money RESERVE RATE: PERCENT OF DEPOSITS BANKS NEED TO KEEP IN RESERVE (CAN’T LOAN OUT)

How Banks Create Money In the beginning, Alice has $10,000; Bill has $0, Christie has $0, and David has $0. ($10,000 total)

How Banks Create Money In the beginning, Alice has $10,000; Bill has $0, Christie has $0, and David has $0. ($10,000 total) Alice deposits $10,000. The reserve rate is 10%, so Alpha Bank loans Bill $9,000 ($1,000 must be reserved)

How Banks Create Money In the beginning, Alice has $10,000; Bill has $0, Christie has $0, and David has $0. ($10,000 total) Alice deposits $10,000. The reserve rate is 10%, so Alpha Bank loans Bill $9,000 ($1,000 must be reserved) Bill deposits that $9,000 into Big Bank. Big Bank loans Christie $8,100 ($900 must be reserved)

How Banks Create Money In the beginning, Alice has $10,000; Bill has $0, Christie has $0, and David has $0. ($10,000 total) Alice deposits $10,000. The reserve rate is 10%, so Alpha Bank loans Bill $9,000 ($1,000 must be reserved) Bill deposits that $9,000 into Big Bank. Big Bank loans Christie $8,100 ($900 must be reserved) Christie deposits $8,100 into Conglomerate Bank (CB). CB loans David $7,290 ($810 must be reserved)

How Banks Create Money In the beginning, Alice has $10,000; Bill has $0, Christie has $0, and David has $0. ($10,000 total) Alice deposits $10,000. The reserve rate is 10%, so Alpha Bank loans Bill $9,000 ($1,000 must be reserved) Bill deposits that $9,000 into Big Bank. Big Bank loans Christie $8,100 ($900 must be reserved) Christie deposits $8,100 into Conglomerate Bank (CB). CB loans David $7,290 ($810 must be reserved) Now, Alice has $10,000; Bill has $9,000, Christie has $8,100 and David has $7,290: ($34,390 in total)

How Banks Lose Money Customers Default on Loans (But what about the collateral?) It takes money to sell assets The Value of Houses can drop Cars Depreciate etc

Investments: Stocks and Bonds STOCKS ARE PART OWNERSHIP IN A CORPORATION A DIVIDEND WHEN A COMPANY PAYS PROFITS Stocks earn money with dividends (income) and/or when the value of the stock goes up (What is a stock worth?) he, he, he…. Bonds: “private” loans to individuals Can be corporations or governments GOV’T BONDS FUND PROJECTS LIKE SCHOOLS

Mutual Funds MUTUAL FUND: WHEN MANY PEOPLE POOL THEIR MONEY TOGETHER DIVERSIFIED INVESTMENTS PROFESSIONAL MONEY MANAGERS Investing in 100’s of companies spreads the risk Even if some companies lose money, others will gain Allows small money to invest big Spread buying commissions