Presentation on theme: "Lesson 10-2 Principles of Saving and Investing LEARNING GOALS: -DISCUSS THE CONCEPT OF RISK VERSUS RETURN. -LIST AND EXPLAIN THE TYPES OF RISK THAT ARE."— Presentation transcript:
Lesson 10-2 Principles of Saving and Investing LEARNING GOALS: -DISCUSS THE CONCEPT OF RISK VERSUS RETURN. -LIST AND EXPLAIN THE TYPES OF RISK THAT ARE FACED BY INDIVIDUAL INVESTORS. -DESCRIBE THE TAX ADVANTAGES AVAILABLE WITH CERTAIN TYPES OF INVESTMENTS.
Risk vs. Return When selecting an investment, you must weigh the risk involved against the possible return expected. Generally the higher the risk, the greater you possible return will be. The ideal investment would have all of these features: The principal is safe (no risk) The rate of return (earnings) is high. The investment is liquid (you can get your money quickly without penalty). You can invest quickly and easily. The costs of investing are low, both in terms of the amount invested as well as investment fees. The earnings and long-term gains from the investment are tax-free or tax deferred.
Growth of Principal and Return on Investment When money is set aside for savings, it should be growing. The principle grows through the compounding of interest. When you put money into savings or an investment, you expect the value of the savings or investments to grow. Return on investment (ROI) is a measurement of return expressed as a percentage. To find (ROI), divide the amount you gained by the amount you invested. The gain could also include other amounts you received such as dividends.
Types of Risk Investment risk is the potential for change in the value of an investment. Inflation Risk is the chance that the rate of inflation will be higher than your investment rate of return. When this occurs, your investment loses value. Industry Risk is the chance that factors affecting an industry as a whole will negatively affect the value of an investment. Political Risk is the chance that a political event (such as a new law or policy, war, or an election) will affect the value of an investment. When news is good, stock prices tend to rise. When news is bad, stock prices tend to fall. Stock Risk is the chance that activities or events that affect a company will change the value of an investment. Investment Risk vs. Gambling A game of chance, or gambling, is hardly ever a good investment. “When you can’t afford to lose, then you can’t afford to play.” Games of Chance should be considered entertainment only – not ways to make money.
Tax Advantages of Investing Tax Deferral is a postponement of taxes to be paid. There is no taxes on gains until the money is withdrawn from the account. Also, the tax on the money contributed to the account may not have to be paid until later. Tax-exempt means they are not subject to taxation. Interest on Series EE and Series I savings bonds are tax free if they are used for education. Interest earned on municipal bonds may be free from federal income tax. Those under 18 can earn up to $1,900 of investment income tax-free Employer sponsored retirement plans are tax deferred.
Lesson 10-3 Strategies for Saving and Investing LEARNING GOALS: -EXPLAIN THE CONCEPT OF SYSTEMATIC SAVING AND INVESTING -DESCRIBE HOW YOU CAN LOWER INVESTMENT RISK THROUGH DIVERSIFYING AND BUILDING AN INVESTMENT PORTFOLIO -EXPLAIN HOW YOU CAN MAXIMIZE INVESTMENT RETURN BY UNDERSTANDING THE FINANCIAL MARKETPLACE AND THE ECONOMY
Systematic Savings and Investing Systematic means regular, orderly, or done according to a plan. Systematic saving is a strategy that involves regularly setting aside cash that can be used to achieve goals. Once money is set aside in savings, it should remain there until used to meet a planned goal. The amount should be the most you can comfortably afford to pay each period. Systematic investing is a strategy that involves a planned approach to making investments on a regular basis. When you first start investing, you may wish to buy safe and liquid investments. Later years, you may want to take more risk so your principal can grow faster over time.
Systematic Saving and Investing Strategies Long-Term Focus – A systematic saving and investing plan is designed for growth in the long run, not for short-term results. Investors may need to hold investments for 20 or more years to get the returns they want. In a given year, investments may actually lose money but over time gain. Investment Tracking is a technique for making investment choices by following the prices of stocks and other investments over time. Market Timing involves buying and selling stocks based on what the market is expected to do. Dollar-cost Averaging is when a person invests the same amount of money on a regular basis, such as monthly, regardless of market conditions. Overall, the dollar cost per share may be less than the average price.
Reducing Investment Risk Diversify Diversification involves holding a variety of investments for the purpose of reducing overall risk. Build a Portfolio – all of a person’s savings and investments make up that person’s investment portfolio. An investment portfolio is a collection of assets that provides diversification for an investor. The portfolio should be diversified.
Maximize Investment Return Financial market refers to any place where investments are bought and sold. Bull Market exists in the stock market when prices are steadily increasing. During a Bull market, price increases are often followed by profit-taking. Profit-Taking occurs when people who own stocks that have increased in price sell those stocks Bear market exists in the stock market when prices are steadily decreasing. This is a good time to buy stocks that are sound investments. Economic Conditions When the economy is in a period of general growth, the market for many investments is growing. When the economy is in a period of general slowdown, the market for investments is declining.
Assignments Do problems 1-11, 15, 17 on pg. 329 Do problems 1-9, 17 & 18 on pg. 337