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Chapter 14: Savings and Investing Savings and Investing

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1 Chapter 14: Savings and Investing Savings and Investing
Consumers can use any money left over from purchasing goods and services toward savings or investing. Saving means putting money aside for future use. Investing is using savings to earn extra income. For most consumers, it is a good idea to combine both savings and investing in their financial plan. The Need for a Savings Plan A savings plan ensures that a certain amount of money is put aside on a regular basis to reach a financial goal. Why People Save People save for many reasons including emergency needs, short- and long-term goals, and security and future needs. Money deposited in a savings account earns interest and is protected against loss. If the interest rate is less than the inflation rate money loses its purchasing power. Examples of savings options are GICs, RRSPs, savings accounts, and term deposits. Investing Advantages: Often yields a higher rate of return. Investments can grow at or exceed the inflation rate. Investing Disadvantages: Yield is not guaranteed. Risk of losing part of or all the money. Examples of investing include stocks, mutual funds, bonds, and collectables. The combination of saving and investing depends on short and long term goals. THE NEED FOR A SAVINGS PLAN Employers and banks can help individuals save by taking part of their money and redirecting it into savings and investing. Emergency Needs: consists of unexpected events affecting the main income earner in the family. Insurance offers some protection against unexpected events, “Saving for a rainy day”. Three to 6 months in savings is recommended by financial planners. Short and Long Term: Short term is usually the purchase of an inexpensive item(s) within a year. Long term goals require saving periods of a year or more (for such things as post-secondary education, car, house, etc.). Security and Future Needs: Savings for emergencies, opportunities, and future needs gives people a sense of security and satisfaction. Having sufficient retirement savings can be achieved by saving at least 10% of earnings.

2 Chapter 14: Savings and Investing Selecting a Savings Plan
Benefits of Savings Plans Plans offered by financial institutions can offer interest, safety, and insure against loss. Protection against inflation and maintain purchasing power Earnings and Yield When money is deposited into an account at a financial institution, it is being lent to the institution so that it can also be lent to other borrowers. Interest is paid to the account holder for the use of the money. Interest is also paid by the person borrowing the money. Rate of return is interest expressed as a percent of the original investment. It is also called yield. ($1000 x .05 = $50) Rate of return is usually based on a one-year period. The time frame for interest calculations (for example daily, weekly, monthly, or annually) affects the amount of yield earned. Interest can be calculated with simple interest meaning based on the principal amount deposited. Interest can be compounded or calculated on the amount saved plus the interest on the interest already accumulated. See Table 14.1, “Calculating Compound Interest”, on page 439. Compounding makes your savings grow faster than simple interest. Individuals should seek out the best yields balanced with an acceptable level of risk. Now worth $1050

3 Chapter 14: Savings and Investing Selecting a Savings Plan
Safety Established in 1967, the Canadian Deposit Insurance Corporation (CDIC), an agency of the federal government, protects depositor’s funds to a maximum of $ Liquidity Liquidity is the ability to convert an asset or investment into cash quickly and easily. Safety The financial institution pays for the deposit insurance. The $ maximum is the total amount insured on deposits in all accounts at all branches of the same financial institution. Accounts at credit unions are also insured. Protection varies from province to province. Liquidity Many savings plans have liquidity whereas assets such as a home or collectables may take considerable time to convert into cash.

4 Money’s Changing Purchasing Power
Money is important to consumers because they accept that currency or money has a standard value that allows them to purchase items or invest. Since prices tend to rise, consumers’ money buys them less every year. Purchasing Power is measured by the CPI (Consumer Price Index.) CPI measures 600 common household goods what it cost to buy them in the past and what it costs to buy them today.

5 Chapter 14: Savings and Investing Common Savings Plans & Investments
There is a wide range of savings plans available to individuals from different institutions. Savings Accounts Savings accounts are the safest way to save and earn some interest or return on your money. Interest rates and calculation methods vary from one institution to the next, and fluctuate with economic conditions. Tax Free Savings Account Began in 2009 people over 18 can invest up to $5000 per year tax free Term Deposits and Guaranteed Investment Certificates Term deposits and guaranteed investment certificates (GICs) are savings plans in which a fixed sum of money is deposited over a specific length to time. Interest is calculated in different ways: Daily and paid at the end of each money On the average account balance during a specific period On the minimum monthly balance and paid semi-annually (April 30 and October 31) Interest paid on savings accounts is the lowest rate paid on all types of investments. Term Deposits and Guaranteed Investment Certificates Terms range from 30 days to 5 years. Shorter terms usually mean lower interest rates GICs are locked in for the term, or to an anniversary date, and term deposits can be cashed early.

6 Chapter 14: Savings and Investing Common Savings Plans & Investments
Registered Retirement Savings Plans p In 1957, the federal government introduced registered retirement savings plans (RRSPs) to encourage people to save for retirement. Read p.443 textbook Registered Education Savings Plans p Registered education savings plan (RESP) is a long term savings plan to help finance a child’s education. See some restrictions below. Income earned is tax-free until the child attends an approved post- secondary school full time. The amount is limited to $ (new legislation $50 000). There is no tax deduction for the contributor The Canadian Education Savings Grant (CESG) is 20% of the 1st $2000 (up to $400 per child per year). esg.shtml RESISTERED RETIREMENT SAVINGS PLANS RRSPs allow individuals to invest a portion of yearly income without paying income tax on it until they withdraw it. Since income tax is usually deducted off peoples pay cheques, those who invest in RRSPs receive the income tax paid when they file a return. The government limits that amount you can contribute to your RRSPs. RRSPs come in the form of mutual funds GICs, stocks, bonds, and even small business. Contributions made early in one’s life generate larger returns. See “Who wants to Become a Millionaire?” on page 443. REGISTERED EDUCTION SAVINGS PLANS Little or not tax is paid when the beneficiary withdraws the funds (students usually have low income levels).

7 Chapter 14: Savings and Investing Common Savings Plans & Investments
Investments, such as government or corporate bonds, stocks or mutual funds, real estate, and collectibles, have different levels of risk. Lower yields are associated with “safer” investments. Higher yields are associated with riskier investments. When someone diversifies their investment, they spread their investments across several types. Canada Savings Bonds A Canada Savings Bond (CSB) is a loan made by an individual to the government of Canada. On the maturity date, the government will repay the principal plus interest. Risky investments should only be considered when the investor is prepared for the lose of or part of their savings. Canada Savings Bonds The maturity date or due date of a bond is printed on its face. Provinces and municipalities also sell bonds. Advantages include: Guaranteed by the government of Canada Very liquid (cashed at any time) Only the face value is paid within the first three months after purchase Face values as small as $100 can be purchased through payroll deductions. The Canada Premium Bond is also available to consumers with a higher rate of interest, but can only be cashed on the anniversary of the issue date or during the 30 days after that.

8 Chapter 14: Savings and Investing Common Savings Plans & Investments
Corporate Bonds Businesses sometimes need money to increase production, expand operations, or introduce new products. Businesses sell securities— corporate bonds and shares of stock—to raise the necessary funds. A bond is a promise to repay borrowed money on a certain future date along with interest. Investing in Stocks When an individual buys stocks, they become part owner or a shareholder in the company. Shareholders share the risks and rewards of the company. A bull market occurs when the demand and price for most stocks is high. When demand and price for most stocks is low, it is a bear market. Corporate Bonds Securities is a general term for stocks and bonds that are sold by corporations and governments to raise large sums of money. Individuals who buy corporate bonds are lending money to the corporation. A bond is guaranteed by specific assets of the company issuing the bond. Bond holders get a fixed interest payment each year, dependent on the reputation and credit rating of the corporation and general interest rates. If a bondholder sells before the bond matures, it is usually sold at the current value or market value to other investors through investment dealers. Market value is the price at which a share or stock or a bond can be bought or sold. People who buy corporate bonds generally do so for the regular interest income. Investing in Stocks Companies sell shares to raise funds to establish themselves or to expand and grow. If a business is profitable, a portion of these profits may be divided and paid to the shareholders as dividends. Stocks do not have a maturity date. Stock prices fluctuate from day to day and even hour to hour. Stock prices should reflect the investor’s views on the company’s prospects including earnings and growth, news or new products or planned services, and economic conditions.

9 Chapter 14: Savings and Investing Common Savings Plans & Investments
Common Stock Common stock represents general ownership in a corporation, carries voting privileges, and includes a right to share in its profits. However, there are no fixed dividend rates. Common stock is always liquid—it can be bought or sold at any time on the open market. Preferred Stock Preferred stock has advantages over common stock due to the payment of fixed rate dividends. Shareholders have no voting privileges, and stock prices tend to be more stable. This type of stock is also liquid. Blue chip companies such as Weston and Imperial Oil are characterized by a long record of regular dividend payments, stable growth, and active trading. Common Stock Holders of common stock can attend the company’s annual meetings. One share equals one vote. Common shareholders are paid dividends only after obligations to bondholders and preferred shareholders are meet. During a bear market, when share values fall usually due to poor company performance, little or no dividends are paid. Preferred Stock Preferred stocks usually have a higher yield than common shares. Involve less risk and tend to be more stable and dividends are fixed. There are no voting rights and there is less of a chance of large gains if the company has high profits. Examples of blue chip companies include Bell Canada International, Imperial Oil, TransCanada Pipelines, and Weston. Growth companies, that have a higher risk, reinvest their profits rather than paying shareholders dividends. If a company goes out of business, common and preferred shareholders are only liable, or lose, the amount originally invested.

10 Chapter 14: Savings and Investing Common Savings Plans & Investments
The Stock Exchange Investors buy and sell stocks often with the help of stockbrokers or by using online services through the stock exchange. The Toronto Stock Exchange (TSX) handles about $5 billion worth of shares a day—the largest trading volume of any stock market in Canada. The TSX and TSX Venture Exchange have over 110 members made up of mostly investment bankers and brokerage firms. Other well-known stock exchanges include NYSE New York Stock Exchange (New York City, USA) NASDAQ National Association of Securities Dealers Automated Quotations (New York City, USA) London Stock Exchange (London, England) Hong Kong Stock Exchange (Hong Kong, China) The Stock Exchange The TSX was created on October 25, 1861, it listed 18 securities, and membership was $5. In 2003 the TSX listed 1340 stocks, listing fees where between $ and $ The total market capitalization (number of shares times share price) was $1.3 trillion. Members provide advice to clients, guarantee new issues, and provide corporate finance services. TSX profits are generated in three ways: Collects brokerage fees Collects fees from list companies Sells stock data EASDAQ is the European equivalent of the NASDAQ Other major stock exchanges include the London Stock Exchange, the Tokyo Stock Exchange, Euronect, Frankfurt Stock Exchange, and the Hong Kong Stock Exchange. Because of the internet and the different stock exchanges available the future of the TSX is uncertain; a merger may be in its future.

11 Chapter 14: Savings and Investing Common Savings Plans & Investments
Buying and Selling Stocks Stockbrokers and investment dealers are licensed financial experts who advise buyers on which stocks to buy and sell and when to complete these transactions. Online investing, the buying and selling of stocks on the Internet, is growing in popularity due to convenience and low associated costs. Stock Quotations The bid price is the highest price anyone is currently willing to pay for a stock. The ask price is the lowest selling price that another investor is willing to accept for the stock. Both make up a stock quotation. Buying and Selling Stocks Licensed financial experts charge a fee, or commission, which serves as their salary and for services that the firm provides. Fees vary so shop around. When investing online, individuals should make sure to do their research from sources such as annual reports, financial statements, and company news and background on stock performance. Stock Quotations Stock quotations usually list the following information: The highest and lowest price paid for the stock during the current year The highest and lowest price paid for the stock the previous day The last, of closing price of the stock that day The change in price from the previous day’s closing price The number of shares traded during the most recent trading session

12 Chapter 14: Savings and Investing Savings and Investing
Mutual Funds Mutual funds are pools of money from many investors that are set up and managed by an investment company to buy and sell securities from other corporations. Real Estate Real estate is land and anything attached to it. Besides buying a home as a form of investment in real estate, some people buy income property. Collectibles Collectibles are items of personal interest to a collector. A collectible may increase in value over time due to the scarcity of the item or the demand in the market. Mutual Funds Professional investment managers, who make the day-to-day fund decisions are paid management fees and fees when funds are bought or sold. No-load funds do not involve fees. Buy selecting investments from many different companies the risk is spread over a large number of securities. Mutual funds are not covered by the Canada Deposit Insurance Corporation (CDIC). Fund types include growth funds, balanced funds, global funds, money market funds, and real estate funds. Even with the professional management, individuals should still follow to see how funds are doing. Daily newspaper financial sections usually report mutual fund performance. REAL ESTATE Real estate includes a house, cottage, condominium, or a piece of property. Income property is the purchase of an apartment, house, or commercial buildings, and renting it to tenants. COLLECTIBLES Examples of collectibles include sports cards, comic books, stamps, coins, antique furniture, vintage cars, etc. Returns beyond the original price paid for the collectible is not realized until it is sold (no interest or dividends).

13 Diversified Portfolio’s
There are many different investment options It is important to have a well balanced investment portfolio to match your risk tolerance and meet your expected returns. Owning a combination of investment alternatives (a portfolio) helps spread out the risk. Some investments do well and if others do not you won’t lose all your money. The riskier the investments the greater the potential returns but the greater the potential losses as well The safer the investment the lesser the return but this is more secure

14 Chapter 14: Savings and Investing Business Investments
Three Main Reasons Why Businesses Invest Businesses can invest excess cash (usually at a low risk but highly liquid) until it is needed. Excess cash can be invested to generate income. Business can invest strategically by purchasing another business. BUSINESS INVESTMENTS Low risk, liquid investment could include: High-rate savings accounts Treasury bills that are short-term government bonds, usually in large denominations, available for short-term investing, but difficult to cash in before the maturity date. Purchase back their own company shares it the shares are perceived as undervalued. Profits can be used to increase profits. One way is to buy preferred shares because of the consistent dividend payments. The purchase of another business can expand the customer base, eliminate competitors, or ensure the supply of raw materials. Activity “The Pepsi Puzzle” Handout

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