SAVING AND INVESTING Standard 16 Dr. Maria L. Edlin MTSU Center for Economic Education

Standard 16- Saving and Investing 16) Explain how saving and investing contribute to financial well-being, building wealth, and helping meet personal financial goals. Compare and contrast saving and investment strategies, such as savings accounts, certificates of deposit, stocks, bonds, mutual funds, employer sponsored savings plans, physical assets, and commodities.. Design a diversified saving and investment plan that includes strategies compatible with personal goals. Include time value of money and compound interest calculations in analysis. (TN CCSS Reading 4, 5; TN CCSS Writing 4, TN CCSS Mathematics F-IF)

The Magic of Compounding Interest Albert Einstein once noted that the most powerful force in the universe was the principle of compounding

The numbers….. Interest RateMonthly Deposit# of YearsBalanceInterest Earned 8%$ $18,864.14$3, %$ $46,596.33$16, %$ $87,913.02$42, %$ $149,468.51$89, %$ $241,176.69$165, %$ $377,807.73$287, %$ $581,366.90$476, %$ $884,638.65$764, %$ $1,336,466.77$1,201,216.77

STOCKS

Before We Talk About Stocks….  Let’s talk about the difference between a company and a brand.  You invest in companies that OWN brands  You invest in companies that are publically traded  Let’s examine some brands and get our students busy at the keyboard researching those brands and companies! Alphabet Soup

Alphabet Soup!

Stocks Stock is partial ownership in a company. Common stock Preferred stock

Making money with stocks…. Price is determined by the simple principle of supply and demand! Buy Low – Sell High Sell High – Buy Low

Who Decides…..  Who got up this morning and decided that Wal-Mart Stores, Inc. (WMT) was worth approximately $58.85?  wal-marts-ceo-is-right.html wal-marts-ceo-is-right.html  What do some of the numbers mean?  Prev. Close vs. Open – if difference – WHY?  Day’s Range  52 Week Range  Volume  Market Capitalization

The Dow Jones Industrial Average  Every night, you hear on the news… markets closed at….  What does that mean?  Does it affect you?

30 Major American Companies…. CompanyExchangeSymbolIndustryDate AddedNotes 3MNYSEMMMConglomerate as Minnesota Mining and Manufacturing American ExpressNYSEAXPConsumer finance AppleNASDAQAAPLConsumer electronics BoeingNYSEBAAerospaceAerospace and defensedefense CaterpillarNYSECATConstructionConstruction and mining equipmentmining equipment ChevronNYSECVXOil & gas also to Cisco SystemsNASDAQCSCOComputer networking Coca-ColaNYSEKOBeverages also to DuPontNYSEDDChemical industry also to ExxonMobilNYSEXOMOil & gas as Standard Oil of New JerseyStandard Oil of New Jersey General ElectricNYSEGEConglomerate also to and to Goldman SachsNYSEGSBankingBanking, Financial servicesFinancial services The Home DepotNYSEHDHome improvementHome improvement retailerretailer IntelNASDAQINTCSemiconductors IBMNYSEIBMComputersComputers and technologytechnology also to Johnson & JohnsonNYSEJNJPharmaceuticals JPMorgan ChaseNYSEJPMBanking McDonald'sNYSEMCDFast food MerckNYSEMRKPharmaceuticals MicrosoftNASDAQMSFTConsumer electronics NikeNYSENKEApparel PfizerNYSEPFEPharmaceuticals Procter & GambleNYSEPGConsumer goods TravelersNYSETRVInsurance UnitedHealth GroupNYSEUNHManaged health care United TechnologiesNYSEUTXConglomerate as United Aircraft VerizonNYSEVZTelecommunication VisaNYSEVConsumer banking Wal-MartNYSEWMTRetail Walt DisneyNYSEDISBroadcastingBroadcasting and entertainmententertainment

The Early Dow…. 11 Stocks  American Cotton Oil CompanyAmerican Sugar Company (became Domino Sugar)  American Tobacco Company  Chicago Gas Company  Distilling and Cattle Feeding Company  Laclede Gas Company  National Lead Company  North American Company (electric utility)  Tennessee Coal, Iron, and Railroad company  U.S. Leather Company  United States Rubber Company (became Uniroyal)

BONDS

Bonds  Bonds are loans.  Debt financing vs. the equity financing you get from issuing stock.  Bonds are not typically traded daily.  There are over 3 million domestic bond options!  Government  Municipal  Corporate

Bond Terminology  Par Value = Face Value  Accrued Interest – the interest that has accumulated sine the principal investment, or since the previous interest payment.  If a bond is resold (secondary market) it can be: At a discount = < par At a premium = > par This fluctuates based on interest rates and time until maturity

Bond – making money There are two ways to increase your investment: Interest Payments Increase in the resale price of the bond

Characteristics of Bonds  Length of Term  Longer term bonds are riskier therefore they usually have a higher interest rate  British government has a bond that never matures – called a perpetuity – pays interest forever but the principal is never repaid  Credit Risk  Probability that the borrower will fail to pay some interest or principal – failure to pay is called “default”  Tax Treatment  The interest on most bonds is taxable income – most municipal bonds (issued by state and local government) are not federally taxed so you would expect a lower interest rate.

Things That Affect Bond Prices  Economic Crisis  Natural & Unnatural Disasters  Peace & Prosperity  Interest Rates  Rates increase = bond price decrease  Rates decrease = bond price increase

MUTUAL FUNDS

Mutual Funds A company that pools money from many investors to purchase some combination of stocks, bonds, real estate and other securities. Mutual funds exemplify the adage “Don’t put all of your eggs in one basket.” Diversification

Can my money earn money when I diversify my portfolio?  Risk vs. Reward  The greater the risk, the greater the potential for reward.  The greater the risk, the greater the potential for disaster.

Types of Mutual Funds  Mutual funds come with varying levels of risk and different philosophies  Examples:  Some funds invest in only blue chip stocks  Some funds invest in only start-up businesses  Some funds invest in only bonds  Some funds invest in green companies

Types of Mutual Funds (cont.)  Mutual funds are also called open-end funds. This means that the fund will usually sell as many shares as investors want to buy.  Closed-end funds, like mutual funds, are collections of securities managed by a professional investment advisor. But unlike mutual funds, there are a fixed number of shares available and these shares are traded on the stock exchange.  Exchange-traded funds, are also like mutual funds in that they are collections of securities managed by a professional advisor, and like closed-end funds are traded on the stock exchange.

What Animal Are You?  Are you a bull?  Are you a bear?  Are you a chicken?  Are you a pig?