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Chapter IntroductionSection 1: Why Save?
Section 2: Investing: Taking Risks With Your Savings
Section 3: Special Savings Plans and Goals
Visual Summary
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Governments and institutions help participants in a market economy accomplish their financial goals.
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In this chapter, read to learn about reasons for saving, as well as various investment possibilities and the risks associated with them.
Section PreviewIn this section, you will learn about the benefits of saving and the types of savings accounts available to you.
• saving• savings account • money market deposit account• time deposits• maturity• certificates of deposit
Content Vocabulary
A. AB. BC. C
How important is saving money to you?A. Extremely important
B. Fairly important
C. Not important
A B C
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Deciding to Save (cont.)
• Economists define savings as the setting aside of income for a period of time so that it can be used later.
– A person receives interest on a savings plan for as long as the funds are in the account.
Deciding to Save (cont.)
• Saving benefits the economy as a whole:
– It provides funds for others to invest or spend.
– It allows businesses to expand, which provides increased income for consumers and raises the standard of living.
Deciding to Save (cont.)
• Some savings plans allow immediate access to your funds but pay a low rate of interest.
• Others pay higher interest and allow immediate use of your funds, but require a large minimum balance.
A. AB. BC. CD. D A B C D
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All of the following are places to put your savings EXCEPT:A. A commercial bank
B. A savings and loanassociation
C. A credit union
D. A mortgage
Savings Accounts and Time Deposits Savings accounts and time deposits offer a variety of maturities and are insured by agencies of the federal government.
• Options for saving:
Savings Accounts and Time Deposits (cont.)
– A savings account pays interest, has no maturity date, and allows funds to be withdrawn at any time without penalty.
– Money market deposit account (MMDA) pays relatively high rates of interest, requires a minimum balance of $1,000 to $2,500, and allows immediate access to funds.
View: Savings Basics
– Time deposits require savers to leave their funds on deposit for certain periods of time, or maturity.
Savings Accounts and Time Deposits (cont.)
– Time deposits are often called certificates of deposit (CDs), or savings certificates.
View: Savings Choices
• After the stock market crash of 1929, the Federal Deposit Insurance Corporation (FDIC) was created to protect peoples’ funds.
Savings Accounts and Time Deposits (cont.)
– The National Credit Union Association (NCUA) is another federal agency that insures most banks and savings institutions.
A. AB. B
Which type of account will pay you more in the long run?A. A regular savings
account
B. A CD
A B
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Section PreviewIn this section, you will learn about different types of investments and the risks that they carry.
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• stockholders• capital gain• capital loss• tax-exempt bonds • savings bonds • Treasury bills• Treasury notes
• Treasury bonds• broker• over-the-counter
market • stock market indexes• mutual fund• money market fund
Content Vocabulary
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A. AB. B
Would you keep your savings in a bank or would you buy stocks?A. Bank
B. Stock
A B
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Stocks and Bonds Stockholders are owners of a corporation, and bondholders are creditors of a corporation.
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Stocks and Bonds (cont.)
• Corporations are formed or can expand business by selling shares of stock.
– The person who buys this stock, becomes a stockholder, and is entitled to part of the future profits and assets of the corporation.
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Stocks and Bonds (cont.)
• Stockholders benefit from stock in two ways:
– Earn dividends or a return based on theamount of stock invested.
– Can sell stock for more than they paid for it.
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Stocks and Bonds (cont.)
• Profits made on the sale of stock is referred to as a capital gain.
• A decrease in value on the sale of the stock is referred to as a capital loss.
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Stocks and Bonds (cont.)
• Similar to stock, a bond is a certificate issued by a company or the government in exchange for borrowed funds.
– Bonds promise to pay a stated rate of interest over a stated period of time, in addition to repaying the borrowed amount in full at the maturity date.
– A bond does not make a bondholder part owner of the company.
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Stocks and Bonds (cont.)
• Tax-exempt bonds are sold by local and state governments: interest paid on the bond is not taxed by the federal government.
– Interest that you earn on bonds your own city or state issues is also exempt from city and state income taxes.
View: Differences Between Stocks and Bonds
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Stocks and Bonds (cont.)
• Savings bonds are issued by the federal government as a way of borrowing money.
– These are safe.
– Interest earned is not taxed until the bond is turned in for cash.
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Stocks and Bonds (cont.)
• The Treasury Department of the US Government sells several types of larger investments. They include:
– Treasury bills (T-bills)
– Treasury notes (T-notes)
– Treasury bonds (T-bonds)
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A. AB. B
Is the following description of a stock or a bond?These represent ownership, do not have a fixed dividend rate, and do not have a maturity date.
A. Stock
B. Bond
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Stock and Bond Markets Ownership of stocks and bonds can be transferred on centralized exchanges or in decentralized markets.
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Stock and Bond Markets (cont.)
• Stocks are bought and sold through brokers or through Internet brokerage firms.
• Brokerage houses communicate with the busy floors of the stock exchanges.
– The largest stock exchange, or stock market, is the New York Stock Exchange (NYSE). Others include the Chicago Exchange, London Exchange and Tokyo Exchange.
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Stock and Bond Markets (cont.)
• Stocks can also be sold on the over-the-counter market, an electronic marketplace.
• The largest volume of these smaller company stocks are quoted on the National Association of Securities Dealers Automated Quotations (NASDAQ) national market system.
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Stock and Bond Markets (cont.)
• Nearly every weekday, news is given about the activity to the stock market indexes.
– Dow Jones Industrial Average or “The Dow” is the most well-known index.
• The New York Exchange Bond Market and the American Exchange Bond Market are the two largest bond exchanges.
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Stock and Bond Markets (cont.)
• Many people invest in the stock market by placing savings in a mutual fund.
– The long-run return from index funds is higher than can be expected from almost any other investment.
– A managed mutual fund is one in which the managers adjust the mix of stocks and move in and out of the market to try to generate the highest total return.
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Stock and Bond Markets (cont.)
• Money market fund is one type of mutual fund.
– The investor can write checks (above some minimum amount) against their account.
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Stock and Bond Markets (cont.)
• Banks and savings and loan associations offer money market deposit accounts (MMDA).
• The advantage to MMDAs is that the federal government insures them against loss.
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A. AB. BC. CD. D A B C D
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If you had to choose how to invest your money, which one of these would you pick?A. Stocks
B. Bonds
C. Mutual fund
D. Money market fund
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Government Regulations Securities markets are heavily regulated to protect investors.
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Government Regulations (cont.)
• The Securities and Exchange Commission (SEC) is responsible for administering all federal securities laws.
• It also investigates any dealings among corporations.
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Government Regulations (cont.)
• Congress passed the Securities and Exchange Act after the stock market crash of 1929.
• The SEC requires any institution issuing stocks or bonds:
– To file a registration statement with the federal government
– Give a prospectus (brief description) to each potential buyer of stocks or bonds
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Government Regulations (cont.)
• States also have securities laws which protect small investors.
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After you have accumulated savings funds, you may want to invest some of it to try to earn greater returns.
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Section PreviewIn this section, you will learn about special types of investment plans and how to decide what portion of your income to save and invest.
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• pension plans• Keogh plan • individual retirement account (IRA) • Roth IRA• diversification
Content Vocabulary
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A. AB. BC. CD. D A B C D
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What do you think would be most important to save for?A. A house
B. Your child’s college fund
C. Retirement
D. Travel, shopping, cars (fun things)
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Investing for Retirement Retirement is a major reason for saving and investing.
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Investing for Retirement (cont.)
• It is important for a person to save for and invest in his or her own retirement.
• Retirement savings plans can include:
– A pension plan is a company supported plan like a 401(k) that is not taxed until used.
– A Keogh plan is a retirement plan for self-employed individuals.
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Investing for Retirement (cont.)
– An individual retirement account (IRA) is a private retirement plan for individuals.
• Contributions are deductible from taxable income.
• Taxed when taken out.
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Investing for Retirement (cont.)
– A Roth IRA is a private plan for individuals.
• Taxes income before it is saved. • Does not tax interest on that income
when funds are used upon retirement.
View: Retirement Plan Options
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Investing for Retirement (cont.)
• Buying real estate, such as land and buildings, is another form of long term investing.
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A. AB. BC. CD. D A B C D
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Which type of plan would you feel most comfortable with?A. 401(k)
B. Keogh
C. IRA
D. Roth IRA
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How Much to Save and Invest? How much to save and invest is determined by each individual’s income, risk tolerance, and values.
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How Much to Save and Invest? (cont.)
• The higher the promised return on an investment, the greater the risk.
View: Savings Considerations
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How Much to Save and Invest? (cont.)
• When you have very little income, you should probably put your savings into lower risk accounts.
• It is important to practice diversification to lower your overall risk.
View: Risk and Return
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How Much to Save and Invest? (cont.)
• Your values may also determine where you invest your savings.
• You might want to invest locally, choose to invest in environmentally responsible companies or choose to invest in companies that have aggressive equal opportunity programs.
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A. AB. BC. CD. D A B C D
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In general, what three things determine how you should save?A. Time, income, and job.
B. Income, job, andinheritance.
C. Income, risk tolerance,and values.
D. Values, risk tolerance,and time.
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Saving some of your income allows you to earn interest and put away funds for future purchases.
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It is important to diversify your saving and investing, especially when looking toward retirement. In general, the greater the risk involved in any venture, the greater the potential return.
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saving: setting aside income for a period of time so that it can be used later
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savings account: account that pays interest, has no maturity date, and from which funds can be withdrawn at any time without penalty
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money market deposit account: account that pays relatively high rates of interest, requires a minimum balance, and allows immediate access to funds
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time deposits: savings plans that require savers to leave their funds on deposit for certain periods of time
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maturity: period of time at the end of which time deposits will pay a stated rate of interest
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certificates of deposit: time deposits that state the amount of the deposit, maturity, and rate of interest being paid
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stockholders: people who have invested in a corporation and own some of its shares of stock
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capital gain: increase in value of an asset from the time it was bought to the time it was sold
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capital loss: decrease in value of an asset from the time it was bought to the time it was sold
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tax-exempt bonds: bonds sold by local and state governments; interest paid on the bond is not taxed by the federal government
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savings bonds: bonds issued by the federal government as a way of borrowing money; they are purchased at half the face value and increase every 6 months until full face value is reached
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Treasury bills: certificates issued by the U.S. Treasury in exchange for a minimum amount of $1,000 and maturing in a few days up to 26 weeks
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Treasury notes: certificates issued by the U.S. Treasury in exchange for minimum amounts of $1,000 and maturing in 2 to 10 years
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Treasury bonds: certificates issued by the U.S. Treasury in exchange for minimum amounts of $1,000 and maturing in 30 years
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broker: person who acts as a go-between for buyers and sellersof stocks and bonds
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over-the-counter market: electronic purchase and sale of stocks and bonds, often of smaller companies, which often takes place outside the organized stock exchanges
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stock market indexes: measures of what is happening to a given set of stock prices for a specified list of companies; the most well known is the Dow Jones Industrial Average
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mutual fund: investment company that pools the funds of many individuals to buy stocks, bonds, or other investments
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money market fund: type of mutual fund that uses investors’ funds to make short-term loans to businesses and banks
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pension plans: company plans that provide retirement income for their workers
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Keogh plan: retirement plan that allows self-employed individuals to save a maximum of 15 percent of their income up to a specified amount each year, and to deduct that amount from their yearly taxable income
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individual retirement account (IRA): private retirement plan that allows individuals or married couples to save a certain amount of untaxed earnings per year with the interest being tax-deferred
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Roth IRA: private retirement plan that taxes income before it is saved, but which does not tax interest on that income when funds are used upon retirement
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diversification: spreading of investments among several different types to lower overall risk
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