introduction to investing powerpoint presentation 1.12.1.g1

5/20/2018 Introduction to Investing PowerPoint Presentation 1.12.1.G1

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1.12.1.G1

Introduction to Investing

"Take Charge of Your Finances"

Advanced Level


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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 2Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.12.1.G1

Saving and Investing

Once an appropriate amount of

liquid assets are reached

Recommend refocusing goals fromsaving to investing

Remember:

The

purpose ofsavings is to

develop

financial

security


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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?


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1.12.1.G1

Rate of Return

Total return on investment expressedas a percentage of the amount of

money invested

TotalReturn

Amountof

MoneyInvested

Rate ofReturn

Remember:

Return is the

profit orincome

generated by

savings and

investing

Investments usually earn higher

rates of return than savings tools


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1.12.1.G1

What is Mandys Rate of

Return?

Mandy saved $2,200 in a money

market deposit account. After one

year, she has a return of $110.What is Mandys rate of return?

$110 $2,200.05 =

5%

Mandys rate of return on investment is 5%


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1.12.1.G1

What is Dereks Rate of

Return?

Derek invested $900. When he withdrew

his money from the investment, he had a

total of $1,050. What is Dereks rate ofreturn?

$150 $900.167 =

16.7%

Dereks rate of return on investment is 16.7%


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1.12.1.G1

Risk

POTENTIAL

RETURNRISK

Risk- uncertainty regarding the outcome ofa situation or event

Investment Risk- possibility that an

investment will fail to pay the expectedreturn or fail to pay a return at all

All investment tools carry some level of risk

What is the risk

level of savingstools?


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1.12.1.G1

Inflation

Inflation

Rise in the general level of prices

Inflation Risk

The danger that money wont be worth

as much in the future as it is today

Inflation risk is usually not a concern

with savings since the goal of savings

is to provide current financial security

Strive to have

the rate of

return on

investment be

higher than the

rate of inflation


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1.12.1.G1

Types of Investment

Tools

Stocks Bonds

MutualFunds

IndexFunds

RealEstate

SpeculativeInvestments


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1.12.1.G1

Stocks

Stock Stockholder orshareholder

Usually a

stockholderowns a very

small part of a

company

A share of

ownership ina company

Owner of the

stock


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1.12.1.G1

Dividends Market Price

Return on Stocks

If stock is sold for

a market price

higher than what

was paid

Share of profits

distributed in cashto stockholders

Stockholder may

or may notreceive dividends-

depends on

company profit

Current price that a buyer

is willing to pay for stock

If stock is sold for

a market price

lower than what

was paid

Stockholder will

receive a returnStockholder will

lose money

Definition

What isreceived?


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1.12.1.G1

Bonds

Form of lending to a

company or the government

(city, state, or federal)

Annual interest is paid to

investor

Once the maturity date is

reached, the principal is

repaid to the bondholder

Bonds are less

risky than

stocks butusually do not

have the

potential to

earn as high of

a return

Definition

Return


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1.12.1.G1

Advantage Disadvantage

Mutual Funds

Mutual fund-when a company

combines the funds of

many differentinvestors and then

invests that money in

a diversified portfolio

of stocks and bonds

Make sure to

research the

fees charged

by a mutual

fund

Reduces

investmentrisk

Fees may be

high

Saves

investors

time


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1.12.1.G1

Index Fund

Index

IndexFund

A mutual fund

that invests in the

stocks and bonds

that make up anindex

A group of similar

stocks and bonds-

Standard and Poor 500


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1.12.1.G1

Index Fund

What is the

differencebetween a

mutual fund

and an index

fund?

Advantage Disadvantage

High

diversification

Usually charge

lower fees than

mutual funds

Still charge

fees


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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

considered an investment asset

Can be risky and more time

consuming but has potential for

large returns

Examples of

real estate

investmentsinclude rental

units and

commercial

property


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1.12.1.G1

Speculative Investments

High risk investments

Have the potential for significant fluctuations

in return over a short period of time

FuturesOptions

Commercial

PaperCollectibles


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1.12.1.G1

Financial Risk Pyramid

Speculative

Investment

ToolsIncreasing

potential forhigher returns

Increasing risk

Savings

ToolsChecking

Account

Savings

Account

Money

Market

Deposit

Account

Certificate

of Deposit

Savings

Bonds

Investment

Tools

Bonds

Stocks

Mutual

Funds

Real Estate

Options Collectibles

Futures

Commercial

Paper

Index

Funds

The risk level for specific investment tools may vary

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1.12.1.G1

Investment Philosophy

Everyone has a tolerance level for theamount of risk they are willing to take on

Investment Philosophy- an individuals

general approach to investment riskThe greaterthe risk a

person is

willing to make

on an

investment,

the greater the

potential

return will be

Generally divided into three categories:

conservative, moderate, aggressive

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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 acceptable exposure to risk

Assists with investment

risk reduction

Referred to as

Building a

Portfolio

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1.12.1.G1

DISCOUNT

BROKER

Buying and Selling

InvestmentsBrokerage firm acts as a buying and selling agent

for an investor (except for real estate and certain

speculative investments)

FULL SERVICE

GENERAL

BROKERAGE

FIRM

Complete

investment

transactions

Offer investment

advice and one-

on-one attention

from a broker

Only complete

investment

transactions

Offer no advice to

investors but

charge 40-60%

less

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1.12.1.G1

Taxation

Profits earned on investments areunearned income

Taxes are often owed on

unearned income

Taxes are due on most investment

returns in the year the unearned

income is received

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1.12.1.G1

Tax-Sheltered

InvestmentsGovernment tries to encourage certain

types of investments by making them tax-

sheltered

Tax-

shelteredinvestments

are usually

not tax-free!

Tax-sheltered

investments-

eliminate, reduce,

defer, or adjustthe current year

tax liability

Retirement

Child/dependent care

Education expensesHealth care expenses

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1.12.1.G1

When are taxes for tax-sheltered

investments usually paid?

Money is invested andtaxes are paid

Money grows untaxedwith help from

compounding interest

Money is withdrawn

Money is invested

Money grows untaxedwith help from

compounding interest

Money is withdrawnand taxes are paid

There are often limits to the amount

that can be invested

OR

What is the

benefit of a tax-

sheltered

investment if

taxes still have

to be paid?

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1.12.1.G1

Employer-Sponsored

Investment Accounts Type of tax-sheltered investment

Money is automatically taken out of

employees paycheck

Employers often contribute a portion ofmoney to the investment with no

additional cost from the employee

Employeecontributes 7% ofpaycheck toinvestment

account

Example:

Employer contributes

the same amount of

money to the

employees

investment account

Employee

benefits from

having double the

amount of money

invested!

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1.12.1.G1

Advantages to Employer-

Sponsored Investments

Reduces

tax liability

Makes

investingautomatic

Possibility foremployer to match

investment

It is

recommended

that a person

utilize theseinvestment

tools as much

as possible if

they are

offered

1.12.1.G1


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1.12.1.G1

Rule of 72

Allows a person to easily calculatewhen the future value of an

investment will double the principal

amount

72

Interest

Rate

Number of yearsneeded to double

the principalinvestment

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1.12.1.G1

Albert Einstein

Credited for discoveringthe mathematical

equation for compounding

interest, thus the Rule of

72. At 10% interest rate,

money doubles every 7.2

years,

T=P(I+I/N)YNIt is the greatest

mathematical discovery of

all time.

1.12.1.G1
http://www.th.physik.uni-frankfurt.de/~jr/gif/phys/einstein4.jpg


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What Can the Rule of 72

Determine?

How many years it

will take an

investment to

double at a given

interest rate

How long it will

take debt to

double if no

payments aremade

The interest rate an

investment must

earn to double

within a specific

time period

How many times

money (or debt)

will double in a

specific time

period

1.12.1.G1


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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

1.12.1.G1


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Dougs Certificate of

Deposit

Invested $2,500

Interest Rate is 6.5%

Doug invested $2,500 into a Certificate of

Deposit earning a 6.5% interest rate. How long

will it take Dougs investment to double?

72 6.5 11 yearsto double

1.12.1.G1


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Jessicas Credit Card Debt

$2,200 balance on credit card

18% interest rate

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?

72 184 years to

double

1.12.1.G1


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Jacobs Car

$5,000 to invest

Wants investment to double in 4 years

Jacob currently has $5,000 to invest in a carafter graduation in 4 years. What interest

rate is required for him to double hisinvestment?

724

years18%

interest rate

1.12.1.G1


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Family Economics & Financial EducationUpdated April 2011Investing UnitIntroduction to InvestingSlide 34Funded by a grant from Take Charge America Inc to the Norton School of Family and Consumer Sciences at the University of Arizona

Summary

What is the Rule

of 72?

What is therelationship

between risk

and return?

How can aperson reduce

investment risk?

What are the six

main investment

tools?

Who should aperson contact to

purchase

investment tools?

What is a tax-

sheltered

investment?

introduction to investing powerpoint presentation 1.12.1.g1

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