1. UNIT 1 FINANCIAL LITERACY: Savings & Investment

2. OBJECTIVES
PO 3. Determine short- and long-term financial goals and plans, including income, spending, saving, and investing.
PO 4. Compare the advantages and disadvantages of using various forms of credit and the determinants of credit history.
PO 5. Explain the risk, return, and liquidity of short- and long-term saving and investment vehicles.
PO 6. Identify investment options, (e.g., stocks, bonds, mutual funds) available to individuals and households.

3. Should you Invest? Why did you come to school today?
Besides having a burning desire to learn economics, you expect to get some benefit (or return) for your investment of time and energy.
Return is the money an investor receives above and beyond the sum of money initially invested.
You came to school because you know that graduating significantly increased the chances of getting a good-paying job .
People invest their money for similar reasons!
THEY WANT A RETURN ON INVESTMENT (ROI)

4. A College Education is a Smart Investment
High School Graduate
$25,000
Some College
$30,000
Associate’s Degree
$32,000
Bachelor’s Degree
$41,000
Master’s Degree
$51,000
Doctorate Degree
$67,000
Professional Degree
$77,000
Whether you are seeking a Bachelor’s, Master’s or professional degree, completing college is crucial to greater earning power. In fact, the average Bachelor’s degree holder earns over 64% more than the average high school graduate. And the number rises for graduate and professional degree holders with the average professional degree holder earning more than three times the income of the average high school graduate.

5. Investing Your Money: Things you need to know

6. Interest Amount of money paid to the holder of a loan, stock, or bond.
Interest rate is the rate at which the lender will charge the borrower OR it is the rate of return an investor receives for investing in an equity (stock), ETF, mutual fund or bond.

7. Example 1
You borrow $100 from the bank. They charge you an annual interest rate of 5% every year. You will pay the loan back in two years. How much TOTAL interest will you have paid back at the end of year two?

8. Example 2
You put $100 in a savings account that earns 5% compounding interest every year. You save your money in this account for two years. What is your total balance at the end of year two?
Interest Calculator

9. The Math of Investing
The rule of 72 – A method to estimate the number of years it will take for a financial investment (or debt) to double in value at a given annual interest rate.
Almost always for compounding interest.

10. FOR EXAMPLE
72 ÷ 5(percent) = 14.4

11. The Rule of 72

12. Types of Investments

13. Why are some investments more profitable?
Return and Liquidity
Savings accounts have greater liquidity, but in general have a lower rate of return.
Certificates of deposit usually have a greater return but liquidity is reduced.
Return and Risk
Investing in a friend’s Internet company could double your money, but there is the risk of the company failing.
There is a clear relationship between risk and return…

14. Risks vs. Rate of Return
Nearly all investments share one characteristic…
…the less risk, the less return.
…the greater the risk, the greater the return.

15. Mr. K’s Portfolio
Please don’t laugh!

16. Types of Investments Stock and Bond Reading Read Pages 651—656
Focus on:
Corporate Stock
Different Stock Exchanges
Diversification
Corporate Bonds
Blue Chips (why are they a safe bet?)

17. Quick Reading Quiz
Explain the difference between a common stock and a preferred stock.
What is a blue chip stock?
Explain how one would diversify their portfolio.
What is the NYSE?
Define a mutual fund?
What are some of the risks associated with owning a corporate bond?

18. Types of Investments
Let’s use an example to demonstrate three types of investments.
Pretend you are going to start a lemonade stand. You need some money to get your stand started. What do you do?
You ask your grandmother to lend you $100 and write this down on a piece of paper: "I owe you (IOU) $100, and I will pay you back in a year plus 5% interest."
Your grandmother just bought a BOND (IOU) by lending money to your "company" named Lemo. Now you need more money…
To get more money, you sell half of your company for $50 to your brother Tom. You put this transaction in writing: "Lemo will issue 100 shares of STOCK. Tom will buy 50 shares for $50." Tom has just bought 50% of the shares of stock from Lemo.

19. Revenue – Costs = Profit
You sell $500 worth of lemonade. Business is good. Your costs for setting up the stand are $150, plus you pay yourself $100 for the hours you work. The company makes a profit of…
Revenue – Costs = Profit
$500 - $250 = $250
After one year, from the $250 profits, you pay back your grandmother $100 plus $5 interest. You pay $72.50 to Tom and yourself, shareholders. This $72.50 paid to the owners is called a dividend.
You decide to put the dividend money in the bank. Banking (savings account) the money is a SHORT-TERM INVESTMENT.
We just covered three types of investments: Bonds, Stocks, and Short-term Investments.

20. Most bonds are low risk, which means… …low returns (4-5% Returns)
What are Bonds?
Bonds are basically loans, or IOUs, that represent debt that the government or a corporation must repay to an investor.
Ex: War Bonds During World War II
The person who writes the IOU is the issuer
The person who gets the IOU is the holder
Most bonds are low risk, which means…
…low returns (4-5% Returns)

21. How do bonds work? Bonds have three basic components: Example:
1. The coupon rate is the interest rate that the bond issuer will pay to the bondholder (varies!).
2. A bond’s maturity is the time at which payment to the bondholder is due (lump sum or couponing?).
3. A bond’s par value is the amount that an investor pays to purchase the bond and that will be repaid to the investor at maturity.
Example:
A company called Callahan Auto wants to create a new break pads division so they sell bonds to get money.
You buy a bond for $500

22. Example The Par Value= $500 Coupon Rate= 10% annually
Maturity= 5 Years
How much would you earn from the bond in 5 Years?
10% (coupon rate) of $500 = _____ is paid each year
$50 x 5 = ____
$250 (a 50 % return)
What happens when the bond reaches maturity?
The firm pays you back the par value--$500. 50

23. Advantages and Disadvantages to Bond Issuers
Bonds are desirable from the issuer’s point of view for two main reasons:
1. Once the bond is sold, the coupon rate for that bond will not go up or down.
2. Unlike stock, bonds are not shares of ownership in a company.
Bonds also have two main disadvantages to the issuer:
1. The company must make fixed interest payments, even in bad years when it does not make money.
2. If the issuer does not maintain financial health, its bonds may get a lower bond rating. This makes it harder to sell future bonds.

24. There are several different types of bonds
High or Low Risk?
High or Low Returns?

25. There are several different types of bonds (pg 280)
High or Low Risk?
High or Low Returns?

26. There are several different types of bonds (pg 280)
High or Low Risk?
High or Low Returns?

27. There are several different types of bonds (pg 280)
High or Low Risk?
High or Low Returns?

28. There are several different types of bonds (pg 280)
High or Low Risk?
High or Low Returns?

29. The Stock Market

30. A portion of stock is called a share (aka: equities)
Buying Stock
Corporations can raise money by issuing stock, which represents ownership in the corporation.
A portion of stock is called a share (aka: equities)
Stockowners can earn a profit in two ways:
1. Dividends, which are portions of a corporation’s profits, are paid out to stockholders of many corporations.
The higher the corporate profit, the higher the dividend.
2. A capital gain is earned when a stockholder sells stock for more than he or she paid for it. A stockholder that sells stock at a lower price than the purchase price suffers a capital loss.

31. Decision-Making Differences
Types of Stock
Stocks may be classified by…
whether or not they pay dividends
whether or not the stockholder has a say in the corporation’s affairs.
Dividend Differences
Income stock pays dividends at regular times during the year.
Growth stock pays few or no dividends. Instead, the issuing company reinvests earnings into its business.
Decision-Making Differences
Investors who buy common stock are voting owners of the company.
Preferred stock owners are nonvoting owners of the company, but receive dividends before the owners of common stock.

32. Stock Risks Risks of Buying Stock
Purchasing stock is risky because the firm selling the stock may encounter economic downturns
That force dividends down or reduce the stock’s value. It is considered a riskier investment than bonds.

33. How are stocks traded? What is a stockbroker?
a person who links buyers and sellers of stock.
Stockbrokers work for brokerage firms, or businesses that specialize in trading stock.
Some stock is bought and sold on stock exchanges, or markets for buying and selling stock.

34. Stock Exchanges The New York Stock Exchange (NYSE) NASDAQ-AMEX
The NYSE is the country’s largest stock exchange. Only stocks for the largest and most established companies are traded on the NYSE.
NASDAQ-AMEX
NASDAQ-AMEX is an exchange that specializes in high-tech and energy stock.
The OTC Market
The OTC market (over-the-counter) is an electronic marketplace for stock that is not listed or traded on an organized exchange.
Daytrading
Daytraders use computer programs to try and predict minute-by-minute price changes in hopes of earning a profit.

36. Diversified Funds:
Mutual Fund: A large fund for small investors. Allows the “common” investor the ability to own many different equities, bonds, etc. Many fees!
Index Fund: Like a mutual fund but tracks the ups-and-downs of one of the stock market indexes (e.g. DOW, S&P 500). Low fees!
ETF: Much like a mutual fund, but trades like a stock. Low fees!
What is a 'Mutual Fund'
A mutual fund is an investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.

37. Retirement Funds
401k: This is an employer based retirement fund. It’s basically a mutual fund through your employer
Roth Individual Retirement Account (IRA): Taxed at contribution. But not at withdrawal. Is a retirement fund
Traditional IRA: Deductible at contribution but taxed at withdrawal.

38. Measuring Stock Performance
Bull and Bear Markets
When the stock market rises steadily over time, a bull market exists.
Conversely, when the stock market falls over a period of time, it’s called a bear market.
Stock Performance Indexes
The Dow Jones Industrial Average
The Dow is an index that shows how stocks of 30 companies in various industries have changed in value.
The S & P 500
The S & P 500 is an index that tracks the performance of 500 different stocks.