Prepare for your Future Chapter 13

Investing  Making money with money  Investing = Saving  It involves risk—you can lose your $$

What is Investing?  It is the process of increasing the value of your assets.  Based on the principle of Time Value of Money! Your initial investment and any other additions of money (payments) that you invest will increase in value over time due to interest, dividends, or capital appreciation.

When do you consider it an investment?  Putting money in the bank?  Buying a home?  Buying stocks and bonds?  Establishing a business?  Putting money in a safe deposit box?  Putting money in your piggy bank?

If you invest $1,000 each year

What are some ways to invest?  Stocks  Bonds  Mutual Funds  Currency  Real Estate

Rule of 72’s  The time or the interest rate you need to double your money 72/t=int 72/int=t

Retirement Plans  IRA’s  Pension Plans  401K  403B  SEP Plans

Retirement and Other Investment  Individual Retirement Account (IRA) Do I pay taxes on earnings? - all earnings are tax deferred until you make withdrawals from the account. Contributions up to 100% of your compensation of $5,000, whichever is less Penalties - None after age 59 1/2.  Roth IRA Contributions are taxed in the year you contribute Singles who earn less than $95,000 a year and married couples who earn less than $150,000 a year can put up to $3,000 annually. People who expect to be in a higher tax bracket when they retire may benefit more from these accounts than from a Traditional IRA. Penalties - None after age 59 1/2.

Where should I put my money? Retirement and Other Investment  Pension plans Less common. Workers need to take responsibility for their own retirement savings.  Salary Reduction Plans - 401(K) & 403(B) Part of your salary is taken out before taxes (tax-deferred) and put into a savings or investment account set up by the employer. You are not taxed on your contributions until retirement. Some employers match contributions.

Lower Risk/Lower Return Medium Risk/Medium Return  Risk The chance that the investment will decrease in value  Rate of return (measured as a %) The income that you earn on an investment  Limit risk through diversification Distribute your money among a variety of investments Distribute among different levels of risk Higher Risk/Higher Return

How to Make Investment Choices  Your financial situation Life-span goals  The rate of return you need to reach your investment goal.  Ease of management of the investment  The risk level of the investment  Your risk tolerance How comfortable are you with risk?  Your values Investments reflect your values

Mutual Funds An Easy Way to Diversify  Financial investment company that manages a diversified portfolio of stocks, bonds, cash investments, and other securities on behalf of its shareholders.  One large advantage Easier to manage because the fund’s professional fund manager does the research, selection, tracking and selling of the fund’s investments.

Dollar Cost Averaging  Letting your money work for you over time Diversification  Spreading your money out over different investments Ex: stocks, bonds, mutual funds, etc. Investing Choices

Now What?  How does diversification help limit risk?  How does age and financial situation affect how you make investment decisions?

Risk/Return Pyramid for Mutual Funds Greater Risk and Potential Return Income Funds Tax-free Funds Growth and Income Funds Growth Funds Lower Risk and Potential Return Growth fundsGrowth funds -New business- likely to grow -New business- likely to grow Growth and income fundsGrowth and income funds -Established business – rapidly -Established business – rapidlygrowing Income fundsIncome funds -Established firms- good return Tax-exempt fundsTax-exempt funds -Municipal bonds- pay tax free interest interest

The Stock Market

Stock  Represents ownership in a corporation

Corporate Stocks  Corporations sell their stock to raise money, or capital.  Stockholder - Investor who own the corporation because they own shares of its stock  Stockbroker - Person who handles the transfer of stocks & bonds  Brokerage Firm- Company that specializes in helping people buy and sell stocks & bonds  Stock Exchange- Where orders to buy or sell are sent and carried out. (Largest is NYSE)

Stocks  Do stockholders earn returns? Dividends Selling the stock Capital gain or loss  Do stock prices change? Yes…depending on how much people want to buy it Large profits = high dividends Low profits = small dividends and stockholders selling shares

Two Types of Stocks  Does not pay a fixed dividend. The dividend is determined by the corporation depending on their earnings.  Entitled to vote for members of the Board of Directors.  KEY BENEFIT - price typically increases more than with preferred stocks.  A stock that pays a FIXED dividend and carries no voting privileges for its owner.  Owners of preferred stock ALWAYS receive the same amount in dividends.  Preferred Stock is less risk than Common Stock.  If a company goes bankrupt, preferred stockholders are paid before common stockholders.

Types of Stocks  Blue Chip Stock These are stocks of the largest corporations with long, steady records of paying dividends.  Income Stock A stock with a history of paying consistently high dividends  Growth Stocks When the stock of a company is growing earnings and/or revenue faster than its industry or the overall market. Such companies usually pay little or no dividends, preferring to use the income instead to finance further expansion.

Stocks  A block of stock is one hundred (100) shares.

EXAMPLE:  Suppose you bought 150 shares of stock at $2.50 per share last year. The corporation paid a $.15 dividend per share for the year. At the end of the year, you sold the stock for $3.00 per share. What was the total return on this investment if you disregard fees? What rate of return did you earn on your initial investment? 150 Shares x $2.50/share = $375 initial investment 150 shares x $.15 dividend = $22.50 total dividend 150 shares x $3.00 per share = $450 price of stock sold $450 price of stock sold - $375 initial = $75 capital gain $75 capital gain + $22.50 total dividend = $97.50 total return $97.50 total return / $375 initial = 0.26 = 26% return

Market Value The amount of money you can sell your investment at in the market place.

Stock Exchanges  NYSE  NASDAQ  American Exchange  Nikki in Japan

How to Trade on the NASDAQ  NASDAQ- National Association of Securities Dealers Automated Quotation System  Electronically linked brokerage firms.  Less expensive to operate  Operates longer hours

Bear Market VS Bull Market  A prolonged period of falling prices, usually by 20% or more.  A prolonged period of rising prices, usually by 20% or more. Usually last longer than Bear Markets.

Dow Jones

Liquidity  Selling your assets for cash Cash Stocks Houses/Cars/Jewelry

Dividends  Share of the profits from a corporation  Receive dividends for each share

How are earnings made?  Dividends Dividend are usually paid quarterly  Buy Low & Sell High

Advantages of Stock Investments  If the market value goes up, the gain can be considerable  Liquid Money is easily accessible

Disadvantages  If the market value goes down, the loss can be considerable  Time

Stock Line

Homework: Bring in a current issue of the newspaper.

Bonds  is an IOU, certifying that you loaned money to a government or corporation and outlining the terms of repayment

How Bonds Work  Buyer purchases bonds at a discount  Fixed interest rate  Fixed period of time  When matured it is redeemed for full face value

Bond Types  Corporate  Municipal  Federal Government

Corporate Bonds  Issued by a Business to raise money for a capital venture.  Higher risk  Better rates of interest

Municipal Bonds  State or local governments issue bonds for the construction of buildings, roads, schools, etc.  Moderate, if any, risk

Federal Bonds  The federal government issues bonds to pay for services; military, roads, infrastructure.  Virtually NO RISK!! Savings bonds, Series EE & HH

 Who regulates the sale of stocks and bonds? Securities Exchange Commission (SEC)

What is the most important thing to remember for Investing and Savings? Start early!!!