1. Savings, Investments & the Stock Market

2. What To Do With Income? Pay taxes Spend it (consume today)
Save it (delay consumption to future)
Invest it
Using money you have saved to purchase a product that will create benefits in the future
Saving and investing involves trade-offs
Investment is the act of redirecting resources from being consumed today so that they may create benefits in the future. In short, investment is the use of assets to earn income or profit. When people save or invest their money, their funds become available for businesses to use to expand and grow. In this way, investment promotes economic growth.

3. Saving and Investment Saving Business Investment Personal investment
Not consuming all current income
Examples: Savings Account, Certificate of Deposit
Business Investment
Production and purchase of capital goods
Examples: machines, buildings and equipment that can be used to produce more goods and services in the future
Personal investment
Purchasing financial securities
Examples: stocks, bonds, real estate, mutual funds
Pay a higher rate of return in the long run than the interest paid on savings accounts.

4. What Do You Think You Know?
Savings
Personal Investment
Business Investment

5. Return, Risk and Liquidity
Rate of Return -Type of profit or loss you are getting on your investment (Interest on savings)
Liquidity – ease of turning assets into money
Return and Risk (direct relationship)
Greater risk, higher returns (NASDAQ stocks)
Less risk, lower returns (CD)
Return and Liquidity (inverse relationship)
Greater liquidity, lower return (CD)
Less liquidity, greater return (Bonds)
Risk
The possibility that you might gain or lose money. The greater the risk, the greater chance you will enjoy big gains OR big losses. The more variability in an investment’s present and future value, the greater the risk.
Return and Risk
Investing in a friend’s Internet company could double your money, but there is the risk of the company failing. In general, the higher potential return (the chance to earn a lot of money) of the investment, the greater the risk involved (chance of loss). In other words, greater risk can provide big returns, but also tends to end up in greater losses. Safer, less risky, more conservative investments will yield lower returns, but at least you can hopefully get your initial investment (principal) back along with a little bit of income (interest, capital gains, dividends).
Return and Liquidity
Savings accounts have greater liquidity, but in general have a lower rate of return, perhaps about 2 to 3 % points below a CD.
Alternatively, certificates of deposit (CDs) usually have a greater return but liquidity is reduced. Money market mutual funds are special types of mutual funds. Investors receive higher interest on a money market mutual fund than they would receive from a savings account or a CD. However, assets in money market mutual funds are not FDIC insured.
Bottom line: if you are willing to tie up your investments for longer periods of time (and therefore not be able to quickly convert it into cash), you can generally expect a greater return on your investments.

6. How Liquid Are You?
Very liquid
Somewhat liquid
Illiquid

7. Work with a Partner $20 Traveler’s Check
30 Day Treasury Bill
Share of Microsoft Stock
$5,000 Savings Account
Apartment Complex
$1 (Dollar) Bill
Gold bullion
IBM 20-year Bond
Share in money-market mutual fund
Credit card with $5,000 line of credit
Eurodollar savings account in a Swiss Bank
Your House
Oil painting by Monet
Categorize as “very liquid,” “somewhat liquid” or “illiquid”

8. Work with a Partner $20 Traveler’s Check 30 Day Treasury Bill
Share of Microsoft Stock
$5,000 Savings Account
Apartment Complex
$1 (Dollar) Bill
Gold bullion
IBM 20-year Bond
Share in money-market mutual fund
Credit card with $5,000 line of credit
Eurodollar savings account in a Swiss Bank
Your House
Oil painting by Monet
Very Liquid
$1.00 Bill
Credit Card
MM account
$20 Travelers Ck
- 4 – Savings Acct
Somewhat Liquid
- 2 – T-bill
- 3 – Microsoft Stock
- 8 – IBM Bond
- 7 – Gold Bullion
- 11 – Euro Savings Acct
Very Illiquid
- 13 – Oil painting
- 12 – Your House
- 5 – Apartment Complex
Categorize as “very liquid,” “somewhat liquid” or “illiquid”

9. Major Exchanges NYSE - New York Stock Exchange – “The Big Board”
Founded in 1792, the oldest and most prestigious stock exchange in the U.S. – 3,000 mostly large-cap companies
NASDAQ - National Association of Securities Dealers Automated Quotation System - computerized national trading system that lists more than 5300 small-cap & technology companies
AMEX - The American Stock Exchange founded in 1842 as the New York Curb Exchange – 700 companies
Over the Counter Bulletin Board – Home to penny stocks. Not really an exchange by itself, but a sub-section of the other exchanges. Risky

10. Blue Chips
Largest most consistently profitable companies that usually pay dividends
Coca-Cola
General Electric
McDonald’s
Exxon-Mobile
Wal-Mart
Gillette

11. Dividends
Portion of the company's profits paid out to its shareholders.
Investors buy stock for the dividend payments.
For example, if Company XYZ declares an annual dividend of $10.00 a share and you own 100 shares, you’ll earn $ a year, or, $ paid each quarter.

12. Who Decides Dividends?
A companies board of directors decides how large a dividend the company will pay, or whether it will pay one at all.
Quarterly dividend payments are the most common; annual and semiannual payments are less common.
Usually only large, established companies pay dividends.
This is because smaller companies need to reinvest their profits to continue growing.

13. Types of Stocks Stock – a certificate of ownership in an organization
Common Stock
Basic form of ownership to an investor
Chance to profit via dividends and capital gains
Designates that you own a fraction of the company

14. Preferred Stock
They receive their dividends before common stock owners
If the company goes out of business, preferred stockholders are paid back the money they invested before the common stockholders
For these reasons, preferred stock is generally less risky than common stock
The main drawback of preferred stock is that it cannot benefit as much from company profits because it only pays a fixed dividend

15. Capital Gains
A profit made when selling stock at a higher price than they paid for it. Most people buy stock to make money from capital gains.
For example, if you buy 100 shares of Company XYZ at $ a share (a total $10,000 investment) and sold it for $ a share ($12,500), you’ve realized a capital gain of $25.00 a share, or $2,

16. IPO – Initial Public Offerings
The first time a company issues stock to the public
It is a source of pride, an opportunity for business growth, and a serious legal responsibility
Great way to get growth money for expansion
Downside – give up control
Only time company gets money

17. Why Invest in Stock? Earn regular income – dividend payments
Buy low, sell high…hopefully ☺
Sell at higher price than you bought?
Capital gain
Sell at lower price than you bought?
Capital loss
When do you reap the benefits?

18. Market Cycles Ups and Downs
Throughout its history, the stock market has tended to move in cycles of activity.
The stock market is greatly affected by economics, social, and political factors.
While it's impossible to predict the market's future activity, one thing is certain: The stock market will continue to experience ups and downs.

19. Bull and Bear Markets Bull: attacks by thrusting horns up (positive)
Prices rising or expected to rise
Optimistic outlook, investor confidence
Can apply to anything that is traded
Bear: attacks by swiping paw down (negative)
Prices falling or expected to fall
Enter a downturn of 15-20% in multiple indexes
Psychological effects & speculation

20. Diversify
Purchase different investments to minimize your risk of loss in the market
You are not an expert, nor do you have the time to do the research to make expert choices
If one or two investments go down, the chances of all of them tanking are slim if you have them in different industries

21. Indexes
Each exchange calculates an index, or benchmark, based on the activity of its member companies' stock prices.
"The market's up" or “the market's down," refers to the Dow Jones Industrial Average, which is an Index composite of 30 companies. It is considered a reliable indicator of the strength, or weakness, of stocks in general.

22. Market Indices & Averages
A short list of the major U.S. indices:
Dow Jones Industrial Average (DJIA)
Dow Transports (DJTA)
Dow Utilities (DJUA)
DJ Wilshire 5000
NASDAQ Composite / NASDAQ 100
S&P 500 Index (S&P 500) / S&P 100
Russell 2000
NYSE and AMEX Composites

23. Circuit Breakers
After the 1987 stock market crash, the NYSE instituted automatic thresholds to reduce market volatility caused by program trading.
These thresholds, know as "circuit breakers," are updated quarterly and use the Dow Jones Industrial Average as their benchmark. The current thresholds are:

24. Three Thresholds 800 Point Drop
An 800-point drop will halt trading for one hour if it occurs before 2:00 pm; 30 minutes if between 2:00 pm and 2:30 pm; the drop will have no effect between 2:30 pm and 4:00 pm
1,600 Point Drop
A 1600-point drop will halt trading for two hours if it occurs between 1:00pm; one hour if it occurs between 1:00 and 2:00 pm; and halt trading for the day after 2:00 pm.
2,350 Point Drop
A 2350-point drop will halt trading for the remainder of the day, regardless of the time it occurs.

25. Days with Greatest Percentage Lost
Rank
Date
Closed
Net Change
% Change 1
10/19/1987
-22.61 2
10/28/1929
260.64
-38.33
-12.82 3
10/29/1929
230.07
-30.57
-11.73 4
11/06/1929
232.13
-25.55
-9.92 5
12/18/1899
58.27
-5.57
-8.72 6
08/12/1932
63.11
-5.79
-8.40 7
03/14/1907
76.23
-6.89
-8.29 8
10/26/1987
-8.04 9
07/21/1933
88.71
-7.55
-7.84 10
10/15/2008
-8.54

26. Mutual Funds Video What is a mutual fund?
Diversification of a portfolio all under one fund
Several businesses to spread risk
NOT insured by FDIC
NOT guaranteed by banks
Mutual funds carry risk, including the possible loss of principal.
A mutual fund is fundamentally different than traditional bank deposits. These funds are not insured by the FDIC. Mutual funds are a pool of money managed by a professional investor (fund manager) that invests this pool of money in a combination of stocks, bonds and other financial instruments acroos numerous companies and indexes.
The single biggest difference between a mutual fund and traditional bank deposits is that mutual funds are NOT insured by the FDIC.

27. Reading Financial Papers
Refer to Investopedia Tutorial handout
How to Read A Stock Table/Quote, pp. 10, 11
QUIZ – How to Read a Stock Table – NEXT TIME

28. Let’s Get Started You will pick one stock and invest $5000.
You will pick one mutual fund and invest 5000.
It is your responsibility to check the price of each of your investments, as well as the Dow Jones Industrial Average, weekly and record it on your investment sheet.
At the end of the semester you will do an analysis of your purchases and the market in general.

29. Finance.yahoo.com http://finance.yahoo.com/ Stock app on phone
Stock (code)
LAST (Last traded amount)
Mutual (code)
NAV (Net Asset Value - Last traded amount)

30. Mutual Fund Choices MCHFX CGMFX HABDX PRFDX DODFX FAIRX PRMSX OAKIX
MUHLX