1. 1.12.1.G1 Introduction to Investing Financial Literacy

2. Saving and Investing We need to have enough money to meet our needs and provide emergency funds Once an appropriate amount of liquid assets are reached Recommend refocusing goals from saving to investing Remember: The purpose of savings is to develop financial security

3. 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?

4. Risk POTENTIAL RETURN RISK Risk- uncertainty regarding the outcome of a situation or event Investment Risk- possibility that an investment will fail to pay the expected return or fail to pay a return at all All investment tools carry some level of risk What is the risk level of savings tools?

5. Inflation Rise in the general level of prices Inflation Risk The danger that money won’t 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

6. Types of Investment Tools StocksBonds Mutual Funds Index Funds Real Estate Speculative Investments

7. Stocks StockStockholder or shareholder Usually a stockholder owns a very small part of a company A share of ownership in a company Owner of the stock

8. DividendsMarket Price Return on Stocks If stock is sold for a market price higher than what was paid Share of profits distributed in cash to stockholders Dividends may or may not be paid; it depends on company profit and policy 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 return Stockholder will lose money Definition What is received?

9. 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 but usually do not have the potential to earn as high of a return Definition Return

10. Advantage Disadvantage Mutual Funds Mutual fund- when a company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds – Mutual funds charge a fee for the administration of the fund, even if they lose money Make sure to research the fees charged by a mutual fund Reduces investment risk Fees may be high Saves investors time

11. Index Fund Index: Index Fund: A mutual fund that invests in ALL the stocks and bonds that make up an index A group of similar stocks and bonds such as the S & P 500, Dow Jones Industrial Average, and Nasdaq

12. Index Fund What is the difference between a mutual fund and an index fund? Advantage Disadvantage High diversification Usually charge lower fees than mutual funds Still charge fees

13. 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 investments include rental units and commercial property

14. Speculative Investments High risk investments Have the potential for significant fluctuations in return over a short period of time Futures Options Commercial Paper Collectibles

15. Financial Risk Pyramid Speculative Investment Tools Increasing potential for higher returns Increasing risk Savings Tools Checking Account Savings Account Money Market Deposit Account Certificate of Deposit Savings Bonds Investment Tools Bonds Stocks Mutual Funds Real Estate OptionsCollectibles Futures Commercial Paper Index Funds The risk level for specific investment tools may vary

16. Investment Philosophy Everyone has a tolerance level for the amount of risk they are willing to take on Investment Philosophy- an individual’s general approach to investment risk The greater the 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

17. 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”

18. DISCOUNT BROKER (EXAMPLE: SCOTRADE) Buying and Selling Investments Brokerage firm acts as a buying and selling agent for an investor (except for real estate and certain speculative investments) FULL SERVICE GENERAL BROKERAGE FIRM (EXAMPLE: CHARLES SCHWAB) 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

19. Taxation Profits earned on investments are unearned income (not from working at a job) Taxes are often owed on unearned income Taxes are due on most investment returns in the year the unearned income is received, such as interest earned on a savings account

20. Tax-Sheltered Investments Government tries to encourage certain types of investments by making them tax- sheltered, or protected from taxes Tax- sheltered investments are usually not tax-free! Tax-sheltered investments- eliminate, reduce, defer, or adjust the current year tax liability Retirement Child/dependent care Education expenses Health care expenses

21. When are taxes for tax-sheltered investments usually paid? Money is invested after taxes are paid Example: Roth IRA Money grows untaxed with help from compounding interest Money is withdrawn at retirement but NOT EVER TAXED Money is invested but not taxed at the time of investment Examples: 401(k) and IRA Money grows untaxed with help from compounding interest Money is withdrawn at retirement and 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?

22. Difference in Ending Balance With Tax Sheltering $100,000 investment for 36 years at 6% Tax Sheltered: Will double in value every 12 years (72/6 = 12) Year 1:100,000 Year 12:200,000 Year 24:400,000 Year 36:800,000 Not Tax Sheltered with 2% paid in taxes every year: Will double in value every 18 years (72/4 = 18) Year 1:100,000 Year 18:200,000 Year 36:400,000 You end up with DOUBLE the ending amount of money!!

23. Types of Tax-Sheltered Investments 401(k): – employer sponsored, employer may match employee contribution – Money invested is before taxes are calculated, so you save on taxes NOW – Investment can grow tax free until retirement – When funds are withdrawn, taxes are paid

24. Types of Tax-Sheltered Investments IRA (Individual Retirement Account) – Anyone can have an IRA – Not connected to your job – Money invested is before tax – Investment can grow tax-free until retirement – Taxes are paid when money is withdrawn at retirement

25. Types of Tax-Sheltered Investments Roth IRA – Anyone can have a Roth IRA – Money invested is after taxes are paid – Investment can grow tax-free until retirement – NO TAXES are paid on original investment or increase in principal EVER (this is a big advantage to taxpayer)

26. Advantages of Employer- Sponsored Investments: 401(k) Reduces tax liability Makes investing automatic Possibility for employer to match investment It is recommended that a person utilize these investment tools as much as possible if they are offered