Investments SSEPF2: The student will explain that banks and other financial institutions are businesses that channel money from savers to investors c.Give examples of the direct relationship between risk and return d.Evaluate a variety of saving and investment options; include stocks, bonds, and mutual funds

Relationship between risk and return The relationship between risk and return is a direct one. The higher the risk, the higher the potential return (profit) one makes from an asset. You also have a much better chance of losing your money due to high risk.

Savings Accounts Accounts that are kept at banks or credit unions. They are 100% safe up to the insured amount (roughly $250,000). Since there is virtually no risk, they generally offer relatively low interest rates. You may start a savings account with a couple hundred dollars

Certificate of Deposit (CD) When you buy a certificate of deposit you are agree to leave a specific amount with a bank for a specific amount of time. If you withdraw your money early, there is a significant penalty. This is a relatively low risk, so interest rates are still pretty low. It generally takes a few thousand dollars to begin a CD, and the lowest amount of time of maturity usually 12 months.

Bond This works much like a CD, but you leave your money with a company or the government (you are literally giving that company a loan). Government bonds are very low risk, so they have lower interest rates than business bonds. Business are riskier because there is the risk that a business fails. One would generally invest several thousands of dollars in a bond, and leave the money invested for at least 5 or 10 years.

Mutual Fund When the money of several investors is pooled together, and an investor puts that money into the market on the investors’ behalf. You own a small part of several different stocks. The risk is shared, but so is the profit. You would generally need at least a few to several thousands of dollars to invest in mutual funds

Stocks When you buy a share of a business you are literally buying a fraction of the business. Companies generally issue many of shares with the board (group that runs the company) retaining a large number of the shares. If the company loses value, the value of your stock goes down, and vice-versa. In order to legitimately make money in the stock market you would ideally invest $10,000-$20,000

Risk/Return Pyramid

Tell me how you would invest in each of the following situations You have $5,000 to invest. No other information is available. You have $4,000 you need six months from now. You inherited $20,000 from a relative. You want to put it towards retirement. You are just beginning your career. You have $50 extra dollars per paycheck. When you are 35 you have a child. You have $100 per month to put away for the child’s college, and your parents gave you $10,000 to start the fund.