1.12.1.

G1

Introduction to Investing

"Take Charge of Your Finances"

Advanced Level
 1.12.1.G1

SAVING AND
INVESTING
Once an appropriate amount of
liquid assets are reached

Remember:
The
purpose of
savings is Recommend refocusing goals
to develop
financial from saving to investing
security
 1.12.1.G1

WHAT IS INVESTING?
●Purchase of assets with the
goal of increasing future income
●Focuses on wealth
accumulation
●Appropriate for long-term goals
What are
examples of
long-term
goals that can
be
accomplished
by investing?
 1.12.1.G1

RATE OF RETURN
Total return on investment
expressed as a percentage of the
amount of money invested

Remember:
Return is the
profit or
income
generated by Investments usually earn
savings and
investing
higher rates of return than
savings tools
 1.12.1.G1

WHAT IS MANDY’S
RATE OF RETURN?
Mandy saved $2,200 in a money
market deposit account. After
one year, she has a return of
$110. What is Mandy’s rate of
return?

Mandy’s rate of return on investment is

5%
 1.12.1.G1

WHAT IS DEREK’S
RATE OF RETURN?
Derek invested $900. When he
withdrew his money from the
investment, he had a total of $1,050.
What is Derek’s rate of return?

Derek’s rate of return on investment is

16.7%
 1.12.1.G1

RISK
RISK POTENTIAL
RETURN

Risk- uncertainty regarding the

outcome of a situation or event
What is the
risk level of
Investment Risk- possibility that an
savings tools? investment will fail to pay the
expected return or fail to pay a return
at all
All investment tools carry some level
of risk
 1.12.1.G1

INFLATION
Inflation
Rise in the general level of prices

Inflation Risk
The danger that money won’t be
Strive to have
the rate of
worth as much in the future as it is
return on today
investment be
higher than Inflation risk is usually not a
the rate of concern with savings since the
inflation
goal of savings is to provide
current financial security
 1.12.1.G1

TYPES OF
INVESTMENT TOOLS
 1.12.1.G1

STOCKS

A share of
Owner of the
ownership in
stock
a company
Usually a
stockholder
owns a very
small part of
a company
 1.12.1.G1

RETURN ON STOCKS

Share of profits Current price that a

Definition distributed in cash buyer is willing to pay
to stockholders for stock
If stock is sold If stock is sold
Stockholder may for a market for a market
price higher price lower than
What is or may not than what was what was paid
receive dividends- paid
received?
depends on Stockholder Stockholder
company profit will receive a will lose money
return
 1.12.1.G1

BONDS
Form of lending to a
Definition company or the gov't
(city, state, or federal)
Annual interest is paid to
investor
Bonds are
less risky Return
Once the maturity date is
than stocks
but usually reached, the principal is
do not have repaid to the bondholder
the potential
to earn as
high of a
return
 1.12.1.G1

MUTUAL FUNDS
Mutual fund-
when a company
combines the Reduces
funds of many investment
different investors risk
and then invests Saves Fees may
Make sure to that money in a
research the investors be high
fees charged
diversified portfolio time
by a mutual of stocks and
fund bonds
 1.12.1.G1

INDEX FUND
A group of similar
stocks and bonds-
Standard and Poor
500
A mutual fund that
invests in the
stocks and bonds
that make up an
index
 1.12.1.G1

INDEX FUND

High
diversification

What is the Usually Still charge

difference charge lower fees
between a fees than
mutual fund mutual funds
and an index
fund?
 1.12.1.G1

REAL ESTATE
●Any residential or commercial
property or land as well as the
rights accompanying that land
●A family home is usually not
Examples of
considered an investment asset
real estate ●Can be risky and more time
investments
include rental consuming but has potential for
units and large returns
commercial
property
 1.12.1.G1

SPECULATIVE
INVESTMENTS

Commercial Collectibles
Futures Options
Paper
 FINANCIAL RISK 1.12.1.G1

PYRAMID
The risk level for specific investment tools may vary

Speculative
Futures
Investment
Commercial
Increasing Paper Tools
potential for Options Collectible
higher s
Stocks Real Estate
returns Mutual Index Investmen
Increasing Funds Funds t Tools
risk Bonds
Money
Market Certificate Savings Savings
Checking Savings
Account Account
Deposit of Deposit Bonds Tools
Account
 1.12.1.G1

INVESTMENT
PHILOSOPHY
Everyone has a tolerance level for the
amount of risk they are willing to
take on

Investment Philosophy- an
The greater
individual’s general approach to
the risk a investment risk
person is
willing to
make on an Generally divided into three
investment, categories: conservative, moderate,
the greater
the potential aggressive
return will be
 1.12.1.G1

PORTFOLIO
DIVERSIFICATION
Portfolio Diversification- reduces risk
by spreading investment money
among a wide array of investment
tools
Creates a collection of
investments that will provide an
acceptable return with an
Referred to as acceptable exposure to risk
“Building a
Portfolio”
Assists with investment
risk reduction
 BUYING AND 1.12.1.G1

SELLING
BrokerageINVESTMENTS
firm acts as a buying and selling
agent for an investor (except for real estate
and certain speculative investments)

Offer investment Only complete Offer no advice

Complete
advice and one- investment to investors but
investment
on-one attention transactions charge 40-60%
transactions from a broker less
 1.12.1.G1

TAXATION
Profits earned on investments
are unearned income

Taxes are often owed on

unearned income

Taxes are due on most investment

returns in the year the unearned
income is received
 1.12.1.G1

TAX-SHELTERED
INVESTMENTS
Government tries to encourage
certain types of investments by
making them tax-sheltered

Tax-sheltered
investments- ●Retirement
eliminate, ●Child/dependent care
Tax- reduce, defer, ●Education expenses
sheltered or adjust the ●Health care expenses
investments
are usually current year tax
not tax-free! liability
 WHEN ARE TAXES FOR TAX-
1.12.1.G1

SHELTERED INVESTMENTS
USUALLY PAID?

O
R
What is the
benefit of a
tax-sheltered
investment if
taxes still
have to be There are often limits to the amount
paid? that can be invested
 1.12.1.G1

EMPLOYER-SPONSORED
INVESTMENT ACCOUNTS
●Type of tax-sheltered investment
●Money is automatically taken out of
employee’s paycheck
●Employers often contribute a
portion of money to the investment
Example: with no additional cost from the
employee Employer Employee
contributes the benefits from
same amount of having double
money to the the amount of
employee’s money invested!
investment
account
 1.12.1.G1

ADVANTAGES TO
EMPLOYER-SPONSORED
INVESTMENTS

Reduces Makes
tax investing
liability automatic
It is
recommended
that a person
Possibility for
utilize these employer to
investment
tools as much
match
as possible if investment
they are
offered
 1.12.1.G1

RULE OF 72
Allows a person to easily calculate
when the future value of an
investment will double the principal
amount
 1.12.1.G1

ALBERT EINSTEIN
Credited for discovering
the mathematical
equation for
compounding interest,
thus the “Rule of 72.” At
10% interest rate,
money doubles every
“It is the greatest
mathematical discovery of
7.2 years,
all time.”
A=P(1+i)n
 1.12.1.G1

WHAT CAN THE “RULE

OF 72” DETERMINE?
How many years it How long it will
will take an take debt to
investment to double if no
double at a given payments are
interest rate made

The interest rate How many times

an investment money (or debt)
must earn to will double in a
double within a specific time
specific time period
period
 1.12.1.G1

“RULE OF 72” FYI

●Only an approximation
●Interest rate must remain
constant
●Interest rate is not converted to a
decimal
●Equation does not allow for
additional payments to be made to
the original amount
●Interest earned is reinvested
●Tax deductions are not included
 DOUG’S 1.12.1.G1

CERTIFICATE OF
DEPOSIT
Doug invested $2,500 into a Certificate of
Deposit earning a 6.5% interest rate. How
long will it take Doug’s investment to
double?
●Invested $2,500
●Interest Rate is 6.5%
 1.12.1.G1

JESSICA’S CREDIT
CARD DEBT
Jessica has a $2,200 balance on her
credit card with an 18% interest rate. If
Jessica chooses to not make any payments
and does not receive late charges, how long
will it take for her balance to double?
●$2,200 balance on credit card
●18% interest rate
 1.12.1.G1

JACOB’S CAR
Jacob currently has $5,000 to invest in a
car after graduation in 4 years. What
interest rate is required for him to double
his investment?
●$5,000 to invest
●Wants investment to double in 4 years
 1.12.1.G1

SUMMARY
What is the
How can a
relationship
person reduce
between risk
investment
and return?
risk?
What are the Who should a
six main person contact to
investment purchase
investment tools?
tools?

What is a tax-
What is the
sheltered
Rule of 72?
investment?