# Understand the role of finance in business.. Understand saving and investing options for clients.

## Presentation on theme: "Understand the role of finance in business.. Understand saving and investing options for clients."— Presentation transcript:

Understand the role of finance in business.

Understand saving and investing options for clients.

 Saving and investing basics  Saving and investing options  Evaluation factors for savings and investing options

 www.forbes.com/wealth/forbes-400/list www.forbes.com/wealth/forbes-400/list Complete Forbes 400 Wealthiest Individuals Activity

 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?

Simple Interest \$1,000 *.10 = \$100 \$1,200 + \$100 = \$1,300 Compound Interest \$1,210 *.10 = \$121 \$1,210 + \$121 = \$1,331

 Simple Interest I = P*R*T 1,000*.10*3 = 300 1,000 + 300 = \$1,300  Compound Interest A=P(1+r/n) nt 1,000(1+.1/1) 1*3 1,000(1.1) 3 = \$1,331

 Calculate simple interest on \$5,000 after 5 years at 10% interest  Calculate compound interest on \$5,000 after 5 years compounded monthly at 10% interest

 SERIOUSLY, DO THE MATH BEFORE CONTINUING…..  REMEMBER: THE PERSON DOING THE WORK IS DOING THE LEARNING AND I EXPECT YOU TO LEARN

 Simple interest \$5,000*.10*5 = \$2,500  \$5,000 + \$2,500 = \$7,500  Compound interest \$5,000(1+.1/12) 5*12 =  \$8,226.55

 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  www.nyse.com www.nyse.com  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.

ABCDEFGHI 52 WeekSales HighLowStockDivYldPEVol 100s HighLowLastChg 12 1/8 8AAR.446.215 6 6 3/4 6 5/8 6 1/2-1/8 49 1/231 1/4ACF1.767.4 747736 1/437 5/8 37+3/4 26 1/216AMF1.366.7 713317 1/2 -3/8 6 1/8 3 1/8ARA 2 7 8 1033 7/8 33

 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: www.freestockcharts.com www.freestockcharts.com

 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.  www.investingbonds.com/marketataglance.asp?c atid-32 www.investingbonds.com/marketataglance.asp?c 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