1. Chapter 32 Saving and Investing Introduction to Business Spring 2005

2. Saving and Investing Saving vs. Investing Saving vs. Investing Investments in the news Investments in the news Why should you save? Why should you save? –Future expenses –“Rainy day” –Retirement

3. Saving and Investing Imagine that you want to purchase $2500 for a home theater system 12 months from now. How much money would you need to save per month to make the purchase? Now lets compute the cost of buying on credit and paying it off within a year. The APR is 16%. Imagine that you want to purchase $2500 for a home theater system 12 months from now. How much money would you need to save per month to make the purchase? Now lets compute the cost of buying on credit and paying it off within a year. The APR is 16%.

4. Saving and Investing Name three major reasons people save money Name three major reasons people save money How can saving for purchases save you money on a purchase? How can saving for purchases save you money on a purchase? How does investing differ from saving? How does investing differ from saving?

5. Your Savings Program Automatic deductions from paycheck Automatic deductions from paycheck –Cannot spend what you “don’t have” –Regular savings Banks, credit unions, and savings associations Banks, credit unions, and savings associations –Use your money to lend to others –Liquidity of savings accounts

6. Your Savings Program Money market accounts Money market accounts –Offered by banks and investment companies –Higher interest rates –Large minimum balance –Withdrawing Bank info you need for savings program Bank info you need for savings program –Interest rates –Minimum deposits –Any other requirements

7. Your Savings Program How can setting a goal help you save money? How can setting a goal help you save money? As you plan your savings program, what kind of information should you get from banks? As you plan your savings program, what kind of information should you get from banks?

8. Guidelines for Investing Factors to consider in investment options Factors to consider in investment options –Risk –Rate of Return –Availability of Funds –Inflation –Tax Advantages –Personality Fit

9. Guidelines for Investing What is the Risk? What is the Risk? –Risk- possibility that you may lose your investment –The economic climate may change, causing a safe investment into a risky one. –Most investments offer no guarantee –Evaluate risk before you make any investment!!!

10. Guidelines for Investing What is the Rate of Return? What is the Rate of Return? –Rate of Return- the amount of money, or yield, an investment earns; it is expressed as a percentage of the original investment –Figured on an annual basis –Fixed-rate- type of investment that yields an unchanging return  high degree of accuracy on return; examples are savings accounts and bonds. –Variable-rate- type of investment whose rate of return changes depending on the average yield of the investment, ie. stocks –The greater the risk, the greater the return (generally

11. Guidelines for Investing Availability of Funds Availability of Funds –Design a savings plan that can respond to emergencies  Liquidity- measures how quickly you can turn an investment into cash –Savings account, usually stocks are more liquid –Real estate and antiques not as liquid –Wise investors must provide for unplanned cash needs with highly liquid investments

12. Guidelines for Investing Inflation-Proof? Inflation-Proof? –You want your investment to earn enough to keep up with the rising cost of goods and services –Always compare the inflation rate with the rate of return to make sure it is greater than the inflation rate –Current inflation is…..?  What rate of return will an investment need for you to invest?

13. Guidelines for Investing Tax Advantages Tax Advantages –Some investments offer income tax breaks  Interest income from gov’t bonds is not taxed –Investing in a house reduces income taxes b/c of interest paid on mortgage and real estate taxes are deductible from taxable income before the tax is computed

14. Guidelines for Investing Personality Fit Personality Fit –The investment should fit your personality –Ask yourself these questions:  Am I willing to take a smaller return in exchange for a smaller risk?  Am I willing to take a greater risk in exchange for a greater return?  Will I spend time worrying about whether my investment is safe?  Am I depending on the investment to fund a known future expense?  Can I afford to lose all the money I’m investing?  Do I have enough information about the investment to make an informed decision?

15. Guidelines for Investing What do you need to know about an investment before you invest? What do you need to know about an investment before you invest? What is meant by the rate of return? As the risk of an investment increases, how might the rate of return change? What is meant by the rate of return? As the risk of an investment increases, how might the rate of return change? REMEMBER: as your financial needs change, your comfort with certain investments will change as well. REMEMBER: as your financial needs change, your comfort with certain investments will change as well.

16. Common Investment Choices Certificate of Deposit (CD) Certificate of Deposit (CD) –Higher interest, less liquid –Money remains in bank for a specific time  Maturity date- end date of the specified time for a CD –Penalty for withdrawing money early –Relatively low-risk

17. Common Investment Choices Securities Securities –Securities are sold by corporations and governments to finance growth –Purchased as stocks or bonds

18. Common Investment Choices Stocks Stocks –Finance expansions –Buyers of stock become shareholders in the company –Dividend- returns on each share of stock the investor holds. (earning money for stocks)  The amount of money paid depends on how much profit the company has made

19. Common Investment Choices Stocks continued Stocks continued –Capital gain- profit from the sale of stocks, Capital loss if you sell for less than you paid. –More risky b/c of possibility of decrease in value  “buy low, sell high” –Two types  Common stockk  Preferred stock

20. Common Investment Choices Stocks concluded Stocks concluded –Stock certificate- proof of stock ownership –Most stocks are bought and sold through a trading market known as a stock exchange –Mutual funds  Less risky

21. Common Investment Choices Bonds Bonds –Issued by gov’ts and corps to borrow money –Corporate and municipal bonds –U.S. Savings Bonds  T-Bills  Treasury Notes  Treasury bonds

22. Common Investment Choices Choose three stocks that you are interested in. Imagine you have purchased 500 shares of each of the stocks one year ago and plan to sell that stock day. Use stock quotations from the business section of today’s newspaper to determine the amount of capital gain (or capital loss) associated with the sale of the stock. Choose three stocks that you are interested in. Imagine you have purchased 500 shares of each of the stocks one year ago and plan to sell that stock day. Use stock quotations from the business section of today’s newspaper to determine the amount of capital gain (or capital loss) associated with the sale of the stock.

23. Common Investment Choices Real Estate Real Estate –land and all the buildings that are attached to it –equity- the difference between the value of property and the amount owed on the mortgage –Expenses and advantages of ownership –Income property –Undeveloped property

24. Common Investment Choices Name three common types of investments Name three common types of investments What are two kinds of securities investors can purchase What are two kinds of securities investors can purchase Which kinds of securities are lower risk? Higher risk? Which kinds of securities are lower risk? Higher risk? Name three kinds of real estate investments. Name three kinds of real estate investments.

25. Reading Stock Market Quotations Pg 543 Pg 543 –Answer the practice questions