Reasons money is borrowed by the following: Individuals: to purchase large ticket items such as homes and cars Businesses: to operate or expand their business; purchase a building, replace old equipment or offering new products Government: to improve or expand transportation, schools or other public services
What is saving? Putting away money for future use Where? What is investing? Using savings to earn more money for future financial security Where?
Saving influences on economic activity makes more money available to be used by individuals, businesses and government When the borrowed money is spent, the demand for goods and services increases which creates more jobs and spending for workers
Main goals of savers and investors include making available immediate income and long-term growth
Growth of savings is interest earned when other borrow your money Simple interest is the amount of $$ paid to saver on the amount deposited for a period of time Compound interest is the amount of $$ paid to saver on the amount deposited AND interest previously earned for a period of time
Impact of compound frequency on savings growth rate: the more times the interest is compounded the more growth in savings
I = P*R*T P = Principal (initial amount you borrow or deposit) R= Rate T = Time I = Interest Rate
A=P(1+r/n) nt A = Amount P = Principal (initial amt. you borrow or deposit) r = Annual rate of interest n = Number of times interest is compounded t = time in years
Simple interest $1,000 at 10% Year 1: $1,000 *.10 = $100 $1,000 + $100 = $1,100 Year 2: $1,000 *.10 = $100 $1,100 + $100 = $1,200 What would the value be at the end of year 3? Compound interest $1,000 at 10% Year 1: $1,000 *.10 = $100 $1,000 + $100 = $1,100 Year 2: $1,100 *.10 = $110 $1,100 + $110 = $1,210 What would the value be at the end of year 3?
Savings account: usually allows a low or zero balance, deposit or withdrawals (without penalties) anytime and pays low interest rate. Certificates of deposit (CDs): a minimum deposit remains for a set period of time; penalty is withdrawn early Money market account: a minimum deposit, interest earned based on gov’t and corp securities; pays slightly higher interest than savings account
Stocks Bonds Mutual Funds and Exchange-traded Funds Real Estate Commodities Collectibles
Two main categories of stock: Preferred stock pays dividends at a set rate Common stock represents general ownership in the company and sharing of profits What are the major similarities and differences between preferred and common stocks?
PREFERRED STOCK Investment risk and pays dividends No voting power Pays dividend before common stock Less risky than common COMMON STOCK Investment risk and pays dividends Invited to annual corporate meetings and one vote per share owned
What are stockbrokers? People who buy and sell stocks and bonds at a set price for a commission Stock exchange Where the trading of securities takes place What is market value of stock? The price for which a share of stock can be purchased
Located in New York City on Wall Street in lower Manhattan Buyers and sellers of securities meet and compete for the best price for their customers. A trade takes place when the best bid meets the lowest offer to sell. Stock prices are determined by supply and demand.
Initial public offering – the first time a company sells shares of itself to the public to raise capital Bull market – when the prices of stocks are generally rising Bear market – when the prices of stocks are generally declining
Stockbroker – a professional who is licensed to buy and sell stock Stock – A unit of ownership in a company Dividend – profits paid to a stockholder as a return on investment Capital – money needed to expand a company
Supply – the quantity or amount of a product that is available Bond – A loan or IOU that investors make to corporations and governments which pays interest over a fixed period of time Demand – the quantity or amount of a product that buyers want to purchase
One of the best know and most widely cited indicators, the DJIA tracks the stock prices of 30 major “blue chip” companies Invented by Charles Dow in 1896 as a way to gauge the performance of the stock market
ALCOA Inc. American Express AT&T Boeing Co Bank of America Caterpillar Cisco Systems Coca-cola E.I. du Pont Exxon Mobile General Electric Hewlett-Packard Home Depot Intel IBM Johnson & Johnson JPMorgan Chase Kraft Foods 3M Company
McDonald’s Merck & Co. Microsoft Pfizer Proctor & Gamble Travelers Co. United Technologies Verizon Wal-Mart Stores Walt Disney Co.
A – highest and lowest price of stock during the past 52 weeks B – Symbol used to represent the company and current dividend as dollars per share of stock C – Dividend yield based on current selling price D – Price-earning ratio
E – Number of shares exchanged on trading day. The amount is listed in 100’s F – Highest price of a share on trading day G – Lowest price of a share on trading day H – Closing price I – Change from previous trading day’s closing price
Factors that could influence investors in selecting stock: Economic ▪ Inflation ▪ Interest rates ▪ Consumer spending ▪ Employment Company ▪ Dividend yield: dividend per share/mkt price per sh ▪ Price-earnings ratio: stock price/earnings per share
Yield is usually calculated in the following way: current value – original value = yield original value Current value=closing price for the day Original price=price paid for stock Yield=Interest earned For example: a stock is bought at $40 and valued at $43: $43 – $40 $40 yield = 7.5%
Dividends also may be added to the calculation. For example: a stock is bought at $40 and sold at $43, but also earned a $2 dividend during that time: $43 + $2 – $40 $40 yield = 12.5%
Stock price/Earnings per share = P/E ratio A measure of market valuation (capitalization) Affected by: growth rate of the company, expectations of future growth rate, earnings, and other risk factors Should use to compare companies within the same industry
Complete “Comparing Stocks Activity” using:
What is a bond? A promissory note to pay back a specified amount of money at a stated rate on a specific date; issued to lend funds to the organization selling the bond. Main Categories of Bonds Government bonds ▪ Municipal bonds: issued by local and state gov’ts for public service projects ▪ U.S. savings bonds: Series EE, HH and I bonds ▪ Treasury bills (91 days to 1 year) and notes (1 to 10 years) Corporate bonds: loaning money to a company
Lenders versus owners as it relates to investing in a company’s stocks and bonds Bonds = lenderStocks=owner How does stated interest rate impact the value of a bond? Stated interest rate determines the price investors want to pay for a bond
Bond sold at par value Ex. A bond’s stated interest rate is 5% and the current market rate is 5%. Bond would be sold at par (100) A $10,000 bond would sell for $10,000
Bond sold at a premium Ex. A 10 year bond sells in 2005 for $10,000 with a stated interest rate of 5% In 2007, the market interest rate is 3% Because your bond is paying a higher interest rate than the market rate, you could sell you bond for more than the $10,000 face value (102) in order to realize a yield of 3% A $10,000 bond would sell for $10,200
Bond sold at a discount Ex. A 10 year bond sells in 2005 for $10,000 with a stated interest rate of 5% In 2007, the market interest rate is 7% Because your bond is paying a lower interest rate than the market rate, a buyer would be willing to pay less than face value (98) in order to realize a yield of 7% A $10,000 bond would sell for $9,800
Current yield of a bond = Dollar amount of annual interest income/current market value Ex. Annual interest income = $80 Current Market Value = $998 $80/$998 = 8% This bond is being sold at a discount because the current market value is less than par (1000).
Use the following website to research the values of current bond offerings. atid-32 atid-32
A portfolio of stocks, bonds or both grouped according to an investment strategy Net asset value (NAV) is a per share value determined at the end of each trading day. A mutual fund is bought or sold at the NAV no matter if the trade takes place at 10 AM or 3 PM or any time in between opening and closing bell
Mutual Fund Companies’ major tasks in assisting investors of mutual funds The mutual fund company studies companies stocks and bonds and then buys a variety of stocks and bonds to sell to investors based on their level of risk and investment strategies
Some examples of mutual fund categories Aggressive-growth stock funds: look for quick growth but has a higher level of risk Income funds: look for stocks that pay regular dividends International funds: stocks from around the world Sector funds: companies in the same industry Bond funds: corporate bonds Balanced funds: both stocks and bonds
An exchange-traded fund (ETF) is a portfolio of stocks, bonds or other investments that trade on a stock exchange like regular stock. Similar to a mutual fund except the value changes during the day like a stock so an investor may pay a different price at 10 AM vs. 3 PM or any time between opening bell and closing bell
Real Estate: land and anything attached to it Advantages: tax benefits, increased equity, pride of ownership Disadvantages: property taxes, interest payments, property insurance, maintenance Examples: house, condominium, mobile home park, farmland, commercial property, industrial property
Commodities and futures: grain, livestock and precious metals; investors agree to buy and sell for an amount at a specified price in the future Examples: rice, cattle, gold, pork bellies Collectibles: items collected over time that may increase in value Examples: art work, antique furniture, autographed items, beanie babies
Evaluation factors for savings and investing options
Safety and risk Safety is assurance that the money you invested will be returned to you Risk is the chance that the money you invested will not be returned to you Potential yield The possible percentage of money earned on a savings or investment over a year Higher yield = higher risk
Liquidity The ease with which an investment can be changed into cash without losing value Taxes Amount the federal and state governments require as payment based on type of investment, return of interest and gain or loss of principal amount
Complete the “Right Type of Mutual Fund Activity” provided