The Fundamentals of Investing Part 2 Personal Finance

Saving and Investing The process of setting aside money and putting it to work by having it earn ______________or dividends or gain __________ in the equities market with the idea of having additional funds to use in the future is described as saving and investing.

Treasury Bills (T-Bills) ___________ issued and guaranteed by the Federal Government Buying a Treasury Bill (T-Bill) is best for investors who are looking for a ________________________ investment. They are considered risk-free since they are backed by the ____________ Government. http://www.investopedia.com/video/play/treasury-bill/

Real Estate _______________of residential or commercial property or land Potential for Returns _________________ (selling the property for more than what was paid) ____________ (charging others for use of the property) Real estate can be time consuming but the potential for returns is _____________

Real Estate When renting as an investment, you have the ________ that if your property is not rented, you will lose your ____________. As the landlord, you are responsible for maintenance of the property. These ________________ can generally be deducted from your taxes. http://www.investopedia.com/video/play/intro-to-investment-real-estate/

Speculative Investments ____________ risk investments Have the potential for significant fluctuations in return over a ____________ period of time Futures Options Collectibles Type of return depends on the investment

Futures A futures contract is a type of derivative instrument, or financial contract, in which two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. If you buy a futures contract, you are basically agreeing to buy something that a seller has not yet produced for a set price. But participating in the futures market does not necessarily mean that you will be responsible for receiving or delivering large inventories of physical commodities - remember, buyers and sellers in the futures market primarily enter into futures contracts to hedge risk or speculate rather than to exchange physical goods (which is the primary activity of the cash/spot market). That is why futures are used as financial instruments by not only producers and consumers but also speculators. 

Futures vs. Options The primary difference between options and futures is that options give the holder the right to buy or sell the underlying asset at expiration, while the holder of a futures contract is obligated to fulfill the terms of his/her contract.  In real life, the actual delivery rate of the underlying goods specified in futures contracts is very low. This is a result of the fact that the hedging or speculating benefits of the contracts can be had largely without actually holding the contract until expiry and delivering the good(s). For example, if you were long in a futures contract, you could go short in the same type of contract to offset your position. This serves to exit your position, much like selling a stock in the equity markets would close a trade.

Mutual Funds When a company raises money from investors and invests that money in stocks, bonds or other securities. An investment which holds a wide __________ of different investment instruments, providing __________________ (reducing your risk by investing in different types of securities) What is Included Bonds Stocks Real Estate Speculative Investments Type of Returns Interest Dividends Rents Capital Gains

Mutual Funds http://www.youtube.com/watch?v=-bLeRnOHq-8 Advantage Disadvantage Reduces investment risk Fees may be high Saves investors time

Ariana has $150 to Invest Option 1 - Stock B C D E F G Ariana invests in one company’s stock Company C has had a bad year and their market price drops significantly. Ariana may lose her $150 investment

Ariana Has $150 to Invest Option 2 – Mutual Fund B C D E F G Market price of companies C and F decreased Market price increased for all other companies Ariana has reduced her investment risk and may still earn money

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

Portfolio Diversification Portfolio ___________________ – reduces risk by spreading money among a wide array of investments Goal: create a collection of investments that will provide an acceptable _____________ with an acceptable exposure to ____________ Reduces investment ____________ Investing in a _________ fund is an automatic form of portfolio diversification

Tax-Advantaged Investments Government encourages people to invest in certain types of investments Savings and investments are a form of __________ income and therefore subject to income tax Tax-advantaged investments reduce, defer or adjust the current year ________ liability Most common: Retirement Education

When are taxes for tax-advantaged investments usually paid? Money is invested and taxes are __________ Money grows ____________ with help from compounding interest Money is ________________ Money is _________________ Money grows ___________ with help from compounding interest Money is withdrawn and taxes are ____________ OR

Investing for Retirement Choose an investment Usually ___________________________ Contribute money Typically tax-advantaged When possible, use an employer-sponsored plan Employer may __________ funds (up to a certain limit)

Retirement Accounts _____________ Sponsored Similar plans 401(k) 403 (b) (tax-exempt organizations) Personal Retirement _____________ IRA (taxes when money withdrawn) ____________ IRA (taxes paid when money deposited) The trade-off to tax advantages is most accounts have __________ if money is withdrawn early There are many other types of plans available

Defined contribution pension plan A company offers a defined-contribution ____________ plan which means that upon retirement the employee will receive the total amount of money contributed __________ investment earnings.

Roth IRA Under normal circumstances, _______________ from a Roth IRA before retirement age are subject to both _________ and a __________. However, use of funds for education, purchase of a first home and medical emergencies are three situations which permit the holder of the IRA to use savings in the funds _____________ incurring a penalty or paying taxes on the amount withdrawn. http://www.investopedia.com/video/play/roth-versus-ira/