HOW DO YOU MAKE YOUR MONEY WORK FOR YOU? INVESTING

WHAT IS INVESTING? Simply put; taking resources from being consumed today so that they may create benefits in the future Use of assets to earn income or profit Using your money (or other things that are worth money) to earn income or profit

INVESTING When people invest, they are essentially lending funds to others…Allowing the someone else to borrow their money. When you lend a bank or other financial intermediaries (Bank, credit union, Finance company) money they will give a print out, or something else to prove that you gave them money…These are your financial assets. YOU NEED TO KEEP THESE THEY ARE YOUR PROOF IN COURT IF YOU DON’T GET PAID BACK

LIQUIDITY The liquidity is the ease with which people can convert an asset into cash

RISK How likely you are to lose your money The higher the risk the higher the potential return.

RETURN The money an investor receives above and beyond the sum of money initially invested. Initial investment $1,000 when you sell your stock worth $1,500 your return was $500

SAVINGS ACCOUNT Savings account Always at a bank/credit union Good way to save money and be able to get to it if you need it Not very high return Not very high risk…Why FDIC

Money Creation To determine how much money is actually created by a deposit, we use the money multiplier formula. The money multiplier formula is calculated as 1/RRR. You deposit $1,000 into your checking account. Your $1,000 deposit minus $100 in reserves is loaned to Elaine, who gives it to Joshua. $100 held in reserve $900 available for loans Joshua’s $900 deposit minus $90 in reserves is loaned to another customer. At this point, the money supply has increased by $2,710. $90 held in reserve $810 available for loans THE MONEY CREATION PROCESS

CERTIFICATE OF DEPOSIT Also know as CD’s (not compact disks) Higher interest rate than saving account BUT you are not able to touch the money for a certain period of time You promise to loan your money to the bank for a certain period of time the longer your loan the money the higher the interest rate they will offer Higher return than a savings account, but not as liquid as a savings account Interest rate still around 1% or less. ONLY OFFERED AT BANKS

CORPORATIONS Companies may incorporate in order to reduce their personal liability. Liability is who is responsible for debts etc. if the company fails.

CORPORATIONS With a corporation, the company itself is liable for it’s debts. So who owns a corporation??and why are we discussing this along with investments?

STOCKS STOCK HOLDERS OWN THE COMPANY!! Corporations sell stock or shares like little pieces of the company in order to raise money. You buy them on the stock market or stock exchange You can become a partial owner of a company! When a company becomes a corporation or INC. they GO PUBLIC or have an IPO an INITIAL PUBLIC OFFERING

LIKE A PUZZLE

A 300,000,000 PIECE PUZZLE!

MR. DEEDS

HOW IS THIS AN INVESTMENT? There are two ways to make money from stock investments One, by owning the stock the company may choose to divide the profit to all of the “owners” These are called dividend stocks What else can the company do with the profits? These are called growth stocks they invest the profit to help grow the company Two, you buy stock or shares of a company and hope you can sell them for more later. (This is how most people invest in stocks)

EXAMPLE: Buy a stock at $10 and sell it for $50 how much did you make? $40 per share Buy a stock for $10 and now it is worth $1 how much did you lose? $9 per share

STOCKS Return: Has potential to be high Risk: Stocks are considered one of the more risky investments you can make Liquidity: Stocks are considered to be fairly liquid.

BONDS…JAMES BONDS What are bonds? Basically they are IOU’s that represent debt that a company or the government will pay back Think of them like…thisthis

THREE COMPONENTS Coupon rate-interest rate Maturity-the time at which payment to a bondholder is due Face value-how much the bond holder pays to purchase the bond

TYPES OF BONDS Savings bonds Government bonds-You purchase a $50 bond for $25 and when the bond matures the government pays back the $25 plus $25 in interest.

MUNICIPAL BONDS Bond Issued by the state

CORPORATE BOND Bond issued by a company (typically large denominations) more moderate risk because they are not able to tax.

JUNK BOND High risk high return bond

BONDS Return: Varies depending upon the bond, but typically a moderate return Risk: Again this varies depending upon the bond rating but the risk is typically fairly low (especially for city, state, and national bonds) Liquidity: One of the least liquid investments, it takes a long time for a bond to mature, and if you cash it in early you won’t get the interest.

MUTUAL FUND What is it? Pools the saving of many individuals and invests the money in a variety of stocks, bonds and other financial assets. *More people invest in stocks and bonds through mutual funds than in any other way

MUTUAL FUNDS Risk: Typically lower risk than stocks alone but more risky than bonds alone. (Instant diversification) Return: Potentially good return, less return than a stock, but more than a bond. Liquidity: Typically about as liquid as a stock.

PORTFOLIO This is your collection of financial assets

DIVERSIFICATION Diversification (Spreading out investments to reduce risk) is the KEY You don’t want to have all of your money in one place…What will happen if that one investment fails.