1. Unit 5 Review: Saving and Investing
Learning Target: I will review the unit in preparation for an upcoming exam.

2. A Tale of Two Savers: How much did Ana and Shawn contribute?
Ana: $24,000; Shawn: $64,000
How much did each end up with?
Ana: $993,306; Shawn: $442,503
How much did their original savings grow?
Ana: 41 times; Shawn 7 times
How did this happen  Compounding! (earning interest on the interest earned in previous years = more money!)
WHEN SAVING/INVESTING, TIME IS WORTH MORE THAN AMOUNT OF MONEY SAVED!
Make saving a regular/automatic habit (pay yourself first!)

3. Rule of 72
An easy way to see how long it will take your money to double is to divide 72 by the interest rate (or rate of return) on your investment.
Ana/Shawn Example: 72/10 = 7.2 years

4. Investing and Risk
Investment return is the additional income earned from saving or investing money.
Risk is the uncertainty that an investor will receive the expected return.
The greater the risk, the higher the expected return.
Investors are paid to take risks.
There is no free lunch in investing! (every investment costs something)

5. Types of Investment Risk
Financial Risk: risk the business or government that you have invested in will not be able to return your money
Market Risk: risk that the price of an investment will go down (based on supply and demand)
Liquidity Risk: ability to turn your money into cash or spendable funds
Inflation Risk: risk that an increase in prices/decrease in the value of money will reduce the value of your return
Fraud Risk: risk that investments are misrepresented

6. Pyramid of Risk and Rewards

7. Types of Investments / Risks
Regular Savings Account: insured by FDIC; low interest rates; little money required; money easily accessible.
Certificate of Deposit: insured by FDIC; higher interest than savings; $500 required; if money is withdrawn early, there is interest penalty
Money Market Mutual Funds: pool investor’s money to invest in low risk/liquid short term investments (i.e. gov. bonds); higher interest than CDs; $10,000 required; money can be withdrawn at any time and customer can write limited number of checks.

8. Types of Investments / Risks
Stocks: share of ownership in a corporation; owner is entitled to a vote in decisions and a share of company profits(dividend; if company pays them); price/value of stock depends on supply/demand of the stock; stock can usually only be bought/sold through a bank/broker when stock markets are open
US Government Savings Bond: bonds are IOUs from the US government; at least $25 required; you may sell the bond at any time, but the longer you hold the bond, the more interest you earn (at a fixed rate) until bond reaches maturity (usually 10 years); TAX FREE!

9. Types of Investments / Risks
Stock Mutual Funds: pool money from investors to buy a variety of stocks; funds can invest in safer “blue-chip” stocks or more risky “speculative stocks”; investors’ money is automatically diversified (spread out into multiple types of investments) to reduce risk; $ required ($1500 if using an IRA); fund company charges fee; shares can be sold back to the fund company at any time
Stock Index Funds: pool money from investors to buy groups of stock that mirror large segments of the stock market (i.e. S&P500 fund); $ required ($1500 if using an IRA); provide greater diversification, lower risk, higher performance, and lower fees than regular mutual funds

10. Types of Investments / Risks
Real Estate: most buy the house you live in, others buy houses, apartments, or commercial property; home price/values depend on supply/demand; purchase, management and sale of property can be time consuming and expensive but investment returns can be high
*Corporate/Municipal Bonds: these bonds are IOUs from corporations or local/state governments; they vary in quality and risk from AAA  D; higher rated bond = lower interest/less risk of default; lower rated bond = higher interest/greater risk of default; price of bonds depends on supply/demand and can be sold at any time

11. Investment Strategies
Warren Buffet: “Buy low-cost index funds and keep buying them regularly over time.”
Mutual Fund: collection of stocks, bonds, or other investments selected and managed by a fund manager to meet certain investment goals; investors buy shares for low price; investments are diversified; fund manager gets fee (1-3%)
Index Fund: mutual funds purchases all stocks/bonds that make up a market index; investments are diversified; fees are low (.15-.5) since manager is not required

12. Mutual Fund Fees Load: fee to purchase shares
Redemption: fee to sell shares
12b-1: fee to cover marketing and distribution costs
Management: fee to pay manager of the fund
No Load: no fees to buy and sell!
Use dollar cost averaging (buying a certain amount of the funds regularly) to maximize your return from a mutual fun!

13. Role of Government in Financial Markets
Securities and Exchange Commission (SEC): government regulator that protects investors and maintains the integrity of the securities market
6 Most Common Crimes
Insider trading
Misrepresenting or omitting important information about securities
Manipulating the market prices of securities
Stealing customers’ funds or securities
Violating brokers’/dealers’ responsibility to treat customers fairly
Selling securities without proper registration

14. How are stock prices determined?
All prices in a market economy are determined by supply and demand!
Demand describes the inverse relationship between price and quantity demanded (Law of Demand: Price increases  Quantity Demanded Decreases and vice versa)
Supply describes the positive relationship between price and quantity supplied (Law of Supply: Price increases  Quantity Supplied Increases and vice versa)
Equilibrium Price: Market Price at which quantity supplied equals quantity demanded (all that is sold is bought—no surplus or shortage)
Generally, any time Demand increases  Equilibrium Price Increases and vice versa.
Generally, any time Supply increases  Equilbirum Price decreases and vice versa.

15. Business Cycle

16. Phases of the Business Cycle
Expansion: The economy is growing. GDP, income and employment increase. Consumption and investment increase. Businesses are expanding. Interest rates may rise. There may be concerns about inflation.
Peak: This is the high point of the expansion, and also a turning point. After a peak, the economy begins to contract.
Contraction: The economy is declining. GDP, income and employment decrease. Consumption and investment decrease. Business sales decline. Interest rates and prices may fall.
Trough: This is the low point of the contraction, and also a turning point. After a trough, the economy begins to expand.
Recession: A period of significant decline in total output, income and employment, usually lasting from six months to a year.

17. 10 Leading Indicators Average weekly hours, manufacturing. (+)
Average weekly initial claims for unemployment insurance. (-)
Manufacturers’ new orders, consumer goods and materials. (+)
Vendor performance diffusion index. (+)
Manufacturers’ new orders, non-defense capital goods. (+)
Building permits, new private housing units. (+)
Stock prices, 500 common stocks. (+)
Money supply, M2. (+)
Interest rate spread, 10-year Treasury bonds less federal funds. (+)
Index of consumer expectations. (+)