+ Investments. + Learning Objectives Students will know investment options. Students will be able to identify relative risk, return and liquidity of the.

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Presentation transcript:

+ Investments

+ Learning Objectives Students will know investment options. Students will be able to identify relative risk, return and liquidity of the investment options. Students will understand the basic terminology of stocks. Students will understand the basics of 401k, IRA and Roth IRA retirement accounts.

+ Purpose of Investments Investments constitute something that is purchased for future benefit (money, experience) Promotes economic growth and contributes to a nation’s wealth

+ Financial System Is a network of savers, investors, and financial institutions that work together to transfer savings to investors.

+ Financial Intermediaries Financial Intermediaries –are financial institutions that lend the funds that savers provide to borrows. Commercial Banks Savings & Loans Credit Unions Savings Banks Mutual Savings Banks

+

+ Investing “Trade-Offs” Liquidity - (How easy is it to access your money) Savings accounts are good for immediate cash, but pay a low interest rate Return- (How much will you make) ( the money an investor receives over and above their initial investment Risk- (How likely are you to lose your investment) Anything insured by the gov’t carries no risk compared to investments with high risks (but greater rewards), such as investing in the stock market

+ Mutual Funds An investment company that pools money to invest in several different stocks on behalf of a group of investors. The fund is managed by a professional investment manager. (Includes Pension Funds- IRA’s)

+ Mutual Funds Benefits: Good for Beginning Investors Relatively Safe due to Diversification Professional Management of Fund Adapts it to meet the changing Market Drawbacks: Have to pay an annual fee to the Mutual Fund managing company

+ Certificates of Deposit Savings account that delivers a higher rate of interest than a traditional account over a fixed period of time Benefits: Insured by FDIC Person can chose length of maturity Cost as little as $100 Drawbacks: Penalties if withdrawn prior to the maturity period

+ Bond An investment in a corporation or a government body through a loan. If you purchase a bond, you are loaning money with the expectation of interest compounded on your investment. Bonds have three basic components: 1. The coupon rate — the interest rate that the issuer will pay the bondholder. 2. The maturity — the time when payment to the bondholder is due. 3. The par value — the amount that an investor pays to purchase the bond and that will be repaid to the investor at maturity. Savings Bonds, Municipal Bonds, Corporate Bonds, Junk Bonds

+ Bond Ratings Standard & Poor’s and Moody’s rate bonds on a number of factors, including the issuer’s ability to make future payments and to repay the principal when the bond matures. Bond Ratings Standard & Poor’s Highest investment grade High grade Upper medium grade Medium grade Lower medium grade Speculative Vulnerable to default Subordinated to other debt rated CCC Subordinated to CC debt Bond in default AAA AA A BBB BB B CCC CC C D Moody’s Best quality High quality Upper medium grade Medium grade Possesses speculative elements Generally not desirable Poor, possibly in default Highly speculative, often in default Income bonds not paying income Interest and principal payments in default Aaa Aa A Baa Ba B Caa Ca C D

+ Advantages of Bonds Bonds are desirable from the investor’s point of view for two main reasons: 1. Once the bond is sold, the coupon rate for that bond will not go up or down. 2. They are relatively safe investments (Especially Government Bonds)

+ Disadvantages of Bonds If you purchase Corporate or Junk bonds you then run the risk of the business going out of business You money is tied up for an specified amount of time—NOT ALL BONDS HAVE LIQUIDITY Liquidity: Ability to turn a financial asset (Bonds, stock, accounts into cash)

+ What is a Stock? Ownership of shares in a corporation. Stockholders share a portion of the profit or loss incurred by the company.

+ Stock Stock: A.K.A. Equities…claims of ownership in a company SHARES Issued in portions called SHARES There are TWO ways to make money with stock: WHAT ARE THEY?

+ Common vs Preferred Common Stock Given a Vote in the Company A group can work together to own enough to control the firm Preferred Stock NON-voting member Receive Dividends before Common Stockholders If business goes under they also get paid back first

+ STOCK EXCHANGE How Does One Buy Stock? Most often through a STOCKBROKER who links buyers and sellers of stock Work for Brokerage Firms Common Brokerage Firms?

+ STOCK EXCHANGE What is a STOCK EXCHANGE? Place where a company sells its stock Two Most common stock exchanges? NYSE NASDAQ National Association of Securities Dealers Automated Quotations No Trading Floor like the NYSE all done through computers

+ Regulation of the Stock Market The Stock market is regulated by the S.E.C. Securities and Exchange Commission

+ Individual Retirement Accounts (IRA ’ s) Retirement Account (usually associated with a Mutual Fund) that encourages people to save today for retirement Two Types: Traditional: You invest the money in the account and pay taxes later when you withdrawal the money ROTH: Invest money after it has already been taxed so when you withdrawal money later it is tax free

+ Individual Retirement Accounts (IRA ’ s) Benefits: Either type have tax benefits Traditional: Pay less tax because you are probably in lower tax bracket Roth: No tax on capital gains or money withdrawn Drawbacks: Traditional IRA ’ s are non-transferable Large penalties exist if you withdrawal your money prior to reaching a certain age

+ 401ks Retirement Account through your place of work (usually associated with a Mutual Fund) that encourages people to save today for retirement Two Types: Traditional: You invest the money in the account and pay taxes later when you withdrawal the money ROTH: Invest money after it has already been taxed so when you withdrawal money later it is tax free

+ Advantages/Disadvantages Benefits: Either type have tax benefits Traditional: Pay less tax because you are probably in lower tax bracket Roth: No tax on capital gains or money withdrawn EMPLOYER MAY MATCH your contributions Drawbacks: Traditional IRA ’ s are non-transferable Large penalties exist if you withdrawal your money prior to reaching a certain age FEES paid to investment company