Investing Review

SavingInvesting EmergenciesLong-term goals More liquidLess liquid Limited riskHigher risk Lower returns (0-4%)Higher returns (8-12%) Financial securityNet worth Savings vs. Investing

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 Strive to have the rate of return on investment be higher than the rate of inflation

Risk Pyramid

Risk and Reward Lower risk = lower return Higher risk = higher potential return

Risk and Reward Lower risk = Insured bank accounts, CD’s, money market accounts, most bonds Medium risk: mutual funds Higher risk = stocks Very high risk: options, futures

Portfolio Diversification Portfolio diversification – reduces risk by spreading money among a wide array of investments “Don’t put all your eggs in one basket” Goal: create a collection of investments that will provide an acceptable return with an acceptable exposure to risk

Stock Stockholder or shareholder A share of ownership in a company Owner of the stock Usually a stockholder owns a very small part of a company

Stock Returns - Dividends Dividends Share of profits distributed in cash to stockholders Stockholder may or may not receive dividends

Stock Returns – Capital Gains Market Price Current price a buyer is willing to pay Stocks sells for a price higher than what was paid Capital gain – the amount of money you earn on an investment. It is called unearned income. You must pay capital gains tax on it. Stock sells for a price lower than what was paid Stockholder will lose money

Stock Split All publicly traded companies have a set number of outstanding shares Outstanding shares: stocks currently held by shareholders Stock split: Decision by board of directors to increase the number of shares that are outstanding.

Stock Split Example: – 2 for 1 stock split: Every shareholder with one stock is given an additional share – The stock price will also divided by 2 Apple: 7 for 1 stock split in June 2014

Growth Stock Companies who have a consistent record of relatively rapid growth and earnings in all economic conditions – Substantial chance for growth – Usually does not pay dividends (put revenue back into expansion of the company) – Usually newer companies with innovative products – Examples: Starbucks, Google

Blue-Chip Stock Nationally recognized companies with long records of profit, dividend payments, and a good reputation for management – Less risky – Grow at a consistent rate – Examples are McDonalds, AT&T, and General Electric, Coca-Cola, IBM

Bonds A bond is a loan. Sometimes companies want to raise money, but not lose ownership.

Bonds Bonds allow companies to borrow money and pay it back at a fixed rate. Paid back with interest called “coupon”

Who Issues Bonds? Corporations Government Federal Local Municipal

Mutual Funds What is Included Bonds Stocks Real Estate Speculative Investments Type of Returns Interest Dividends Rents Capital Gains When a company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds

Advantage Disadvantage Mutual Funds Reduces investment risk Fees may be high Saves investors time

Index Fund Type of mutual fund designed to reduce fees by investing in the stocks and bonds that make up the index Index Group of similar stocks and bonds Example Standard and Poor’s 500

Market Indicators Dow Jones Industrial Average (“The DOW”) – Average of 30 largest blue chip stocks traded on NYSE – Includes companies like Disney, Exxon, and Microsoft – Link to video:

Market Indicators Standard and Poor’s 500 Composite Index (S&P 500) – Covers market activity for 500 stocks – Commonly used benchmark for overall stock market – Link to video:

Market Indicators National Association of Security Dealers Automated Quotations Composite Index (“NASDAQ”) – Covers market activity for more than 3,000 stocks listed on the NASDAQ

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona American Stock Exchange American Stock Exchange (AMEX) – Located in New York City – Began in 1849 – 3 nd largest exchange by volume – Its requirements are not as strict as NYSE allowing younger, smaller companies to list – Now called NYSE MKT

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona NASDAQ National Association of Securities Dealers Automated Quotations – Stocks are traded in an over the counter electronic market; no physical location – Many technology companies – Stocks tend to be more “volatile” Refers to uncertainty about stock Higher volatility usually means higher risk

© Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona New York Stock Exchange New York Stock Exchange (NYSE) – Located in New York City on Wall Street – Oldest and largest exchange; began in 1792 – Open for trading M-F 9:30 – 4:00 (ET) – Largest and best-known companies’ stocks – Strict requirements

Ups and Downs The term bull market means the market is doing well because investors are optimistic about the economy and are purchasing stocks (Remember: Bull = Up) The term bear market means the market is doing poorly and investors are not purchasing stocks

Brokerage Firms Full-service Offer investment transactions and a financial advisor Financial advisor – trained professional that helps make investing decisions Discount Only completes orders to buy and sell investments Advice is not offered Stock broker: Someone who is licensed to buy and sell stock Brokerage firms facilitate the buying and selling of investments

Discount Brokerage Firm Fees Service fee Maintenance fee Inactivity fee Fees specific to an investment Will usually charge a fee for completing a buy/sell transaction Additional fees may include: Total fees are often lower, but an individual must have the knowledge and time to monitor their investments

Full-Service Brokerage Firm Fees Financial advisors are compensated for the time and knowledge they provide investors. Most charge fees using one of these methods. % of the Investment Value % of the Amount Invested Hourly Rate & Flat Fee In addition to fees, financial advisors may earn commissions paid by the company.

Retirement Accounts Employer Sponsored Similar plans 401(k) 403 (b) (tax- exempt organizations) Pay taxes upon retirement Personal Retirement Traditional IRA (taxes when money withdrawn) Roth IRA (taxes paid when money deposited) The trade- off to tax advantages is most accounts have penalties if money is withdrawn early