goals: explain the relationship between risk and return when investing. describe how to evaluate...
TRANSCRIPT
9.1 INVESTING BASICS
SECTION 9.1- INVESTING BASICS
Goals: Explain the relationship between risk and
return when investing. Describe how to evaluate the level of risk
you should accept when investing.
KEY TERMS
Investing Risk Return Diversification
WHAT IS INVESTING?
Deposit in a savings account Buying a car for personal use Putting money under your mattress
Which one of these is an investment? Depositing in a savings account- WHY? Because you are earning money!
WHAT IS INVESTING?
Investing is saving in a way that earns income. Let’s name all the examples of
investments that we can think of!
If you compare all of these investment options what conclusion can you draw? Some investments are riskier than others
RISK AND RATE OF RETURN
The chance that an investment will decrease in value is risk.
FDIC savings account vs. stock market
The income you earn on an investment is called your return.
CALCULATING YOUR RATE OF RETURN Your rate of return is measured as a
percentage of the amount invested. Suppose you invest $1000 in a new
coffee shop business. At the end of one year, you receive $100 as your share of the company’s profit.
What is your return? $100 What is your rate of return? 10%
EVALUATE YOUR RISKS
The general rule of investing is “the higher the potential rate of return, the greater the risk.” Rate of return
High
Risk
High
HOW CAN YOU LIMIT RISK WHEN INVESTING?
Have you ever heard the saying “don’t put all your eggs in one basket”? What does this mean and how does it apply to investing?
When investing you should not put all your money in one place. If that investment fails, you lose all of your money.
LIMIT RISK THROUGH DIVERSIFICATION A better choice is to distribute your money
among a variety of investments. Investing in various businesses with different levels of risk is called diversification.
When you diversify, you reduce your overall risk of loss. For example if one investment goes badly, the
others might do well and you can still end up with a good overall return.
UNDERSTANDING RISK
During your life span, when is a better time to take risks? When you are younger as you have many
income-earning years left and more time to recover from any losses.
If you are older and have most of the money you will need for retirement you may not need or want to take risks.
DON’T MAKE RISKY INVESTMENTS WITH MONEY YOU CANNOT AFFORD TO LOSE!