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Reading: Intro. To Investing
ANSWER KEY: B C A D
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The Basics of Investing
Stocks, Bonds & Cash Accounts
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Why Invest Money? Purchasing power = amount of goods/services money buys Money loses purchasing power overtime Prices for goods rise on average +2.5% per year rising prices is called inflation Investors must earn more than the rate of inflation for purchasing power to rise
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Types of Investments: 4 Asset Classes
Stocks: Over 5000 stocks to choose from! Bonds: Government bonds, corporate bonds, mortgage bonds Cash Accounts: Checking account, CD’s, money markets Real Estate Residential, commercial, houses, apartments, etc….
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Returns before inflation = nominal return
Real & Nominal return per year by Asset Class Returns before inflation = nominal return . = real return Savings Account
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Risk vs. Reward? Holding period = when do you need your money back?
Time horizon determines which asset class you should invest in The longer the holding period----the more risk you should take! Stocks = long term investment (5-years or longer) Bonds = medium term investment ( 1-3 years) Bank CD’s = short term investment (30 days to 2 years)
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Process of picking sectors to invest in
Asset Allocation Process of picking sectors to invest in I think I’m brilliant very high risk Cash Account Bonds Stocks no risk med. risk high risk
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How Money Grows! Money grows exponentially as it compounds
The power of compound interest! $10,000 invested at 4% return for 30-Years: $33,000 $10,000 invested at 15% return for 30-years $875,000
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Rule of “70” 70/INVESTMENT RETURN = approx. # Years for prices to double 70/2% = 35 years 70/5% = 14 years 70/10% = 7 years 70/15% = years You can also Use this to calculate Investment returns
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Bonds Bonds: are a loan to a Gov’t or business where you earn interest every year until you are paid back. If the company goes bankrupt => you usually will not be paid back! You buy a Bond U.S. Gov’t 5-Year Bond $1,000 Gov’t pays you 2% interest per year $20 per year Plus $1,000 in 5 years $1,000 turns into $1,100 over 5 Years
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Stocks Investors buy shares (stock) in a company and then become part owners A company will issue stock to raise money to expand their business Some companies pay dividends on their stock (similar to interest on a bond) Investment Banks help companies issue stock IPO = initial public offering When a new company sells stock for the 1st time Many employees in an IPO own “stock options”
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Recent IPO’s
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Self Efficacy “False” Self Esteem Resiliency
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