Bell Ringer

“It seems to be a law of nature, inflexible and inexorable, that those who will not risk cannot win.”

-U.S. Admiral John Paul Jones

What does the quote mean?

Restate the quote in your own words.

When was a time when this applied to your life?

Draw from personal experience.

Objectives

1. Describe the benefits and risks associated with investing.

2. Identify the four basic types of risk.

Introduction

What are the benefits and risks of saving and investing?

Savings you deposit in a bank will grow (a little) with almost no risk at all.

Investing, while more risky, may yield a larger return for your investment.

It may also prove to be financially devastating if it is ill-timed or mismanaged.

Introduction

The simple truth is… you will all invest at some point in your lives.

College

House

Car

Children

Retirement

Diversification

Diversification is a risk management technique that spreads out your money across a variety of investments.

“Don’t put all your eggs in one basket!”

Spreading out risk helps prevent losing everything on a bad investment.

Liquidity

Liquidity is the ability of property, capital, or investments to be used as or converted into cash.

This determines how easily people can access their money when they need it, depending on how liquid the investment is.

Return and Risk

In general, the higher the potential risk, the higher the return.

The lower the potential risk, the lower the return.

Whenever people evaluate their potential investments, they must balance the risks involved with the rewards they expect to gain.

Sean Parker

In 2005, 24 year-old Sean Parker (founder of Napster) learned about a new website, thefacebook.com

He met with the site’s founder, Mark Zuckerberg, and decided to invest $12 million in the company’s start-up.

Parker, now 38 years old, is worth an estimated $2.6 billion

Mark Brunell

Quarterback Mark Brunell (Jaguars, Redskins) played 18 years in the NFL and earned $52 million over his career

Founded a company, Champion LLC, with other NFL players for real estate investments

In 2010, Brunell filed for Chapter 11 bankruptcy after owing more than $25 million to investors.

Types of Risk

1.Credit risk Borrowers may not pay off the money

they have borrowed, or they may be late in making payments

2.Inflation rate risk Inflation rates erode the value

of your assets

3.Liquidity risk You may not be able to convert the

investment back into cash quickly enough for your needs

4.Time risk You may have to pass up other, more

profitable investment opportunities… aka, opportunity cost

“What’s the Risk?”

Certificates of deposit function like a savings account, except you can’t withdraw your money until a set future date.

Mutual funds are a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, and other assets.

Bell Ringer

Why do people need to diversifytheir investments?

What are the four types of risk?

Objectives

1. Describe the characteristics of bonds as financial assets.

2. Identify different types of bonds.

Bonds

What is a bond?

Bonds are a form of debt investment where an investor loans money to a business or government entity.

They are loans to institutions or to the government, but you serve as the bank.

Bonds as an Investment

Why are bonds sold?

Bonds are sold by governments and/or corporations to finance projects.

Why are bonds purchased?

They offer investors higher rate of return than a savings account and are generally a non-risky investment.

Components of Bonds

Bonds have three basic components:Coupon rate - the interest rate

that a bond issuer will pay to a bondholder

Maturity – when payment is dueto a bondholder

Par value - the amount to be paid to the bondholder at maturity

Advantages and Disadvantages

Once a bond is sold, the coupon rate remains the same. (Stability)

The return for a bond investment is predictable.

Once a bond is sold, the coupon rate remains the same. (Low returns)

A company/government does not have to share profits with bondholders if it is doing well.

Municipal Bonds

State and local governments issue municipal bonds to finance such projects as highways, libraries, parks, and schools.

These are attractive to long-term investments and are relatively safe.

Why are they a safe investment?

Corporate and Junk Bonds

Corporate bonds are issued by corporation to help raise money to expand business.

These bonds have a moderate risk level because investors must depend on the corporation’s success.

Junk bonds are bonds with a high risk and a potentially high return.

Investors in junk bonds face a strong possibility that some of the issuing firms will default on their debt.

Why would someone want to buy a junk bond?

“Weighing the Risks”

Treasury Bonds, T-bills, and T-notes are issued by the U.S. Treasury Department (and therefore don’t have a credit rating).

Certificates of Deposit function like a savings account, except you can’t withdraw your money until the date of maturity.

Key Terms

coupon rate: the interest rate that a bond issuer will pay to the bondholder

maturity: the time at which payment to a bondholder is due

par value: a bond’s stated value, to be paid to the bondholder at maturity

Key Terms, cont.

municipal bond: a bond issued by a state or local government or a municipality to finance a public project

corporate bond: a bond issued by a corporation to help raise money for an expansion

junk bond: a bond with high risk and potentially high yield

Objectives

1. Define what stocks are, how they are traded, and how their performance is measured.

2. Describe the Great Crash of 1929 and more recent stock market events.

Review

Stocks, or ownership shares in a company, are traded on a stock exchange.

Investors typically hire stockbrokers to handle these transactions.

The two largest stock exchanges in the world are the NYSE and Nasdaq.

Benefits of Buying Stock

The two ways of making money from buying stock are:Dividends —part of the firm’s profits, usually paid quarterly/annually

Capital gains —selling the stock for more than you paid for it“Buy low, sell high”

Measuring Stock Performance

When the stock market rises steadily over a period of time it is known as a bull market.

When the stock market falls or stagnates for a significant period it is a bear market.

The Great Crash

“The Stock Market Crash of 1929”

http://www.youtube.com/watch?v=z9i4t6Be4eQ

The Great Crash

The U.S. enjoyed a decade-long bull market following World War I.

The market value of all stocks rose from $27 billion in 1925 to $87 billion by late 1929.

The Great Crash

However, the income was spread unequally throughout society, making the economic growth unsound.

Consumer debt rose exponentially throughout the 1920s. Stock brokers encouraged the practice of buying on margin (making high-risk investments using borrowed money). By August 1929, nearly 40% of all money loaned in the

U.S. was used to buy stocks!

The Great Crash

The Dow began steadily dropping in September 1929. People began to liquidate their shares in a panic, sending the prices of stocks into a free-fall.

On October 29, 1929, a record 16.4 million shares were sold and the market crashed (aka, Black Tuesday). The NYSE lost $14 billion in investments ($200 billion today)

The Crash led to the Great Depression.

The Aftermath

For decades after the Great Depression, many people were scared to invest in the stock market.

By the 1980s, with the development of mutual funds & ETFs (a pool of funds placed in diversified investments and professionally managed), Americans became more comfortable with stock ownership once again.

The Stock Market Today

In 2008, the stock market began falling, causing a major economic crisis in the United States once again (aka, The Great Recession).

Although some business sectors are still struggling, the stock market has rebounded and is currently in a bull market.

On October 3, 2018, the DJIA closed at a record high of 26,828.39.

Stock Market Worth

If you combined the value of all stocks traded on all of the stock exchanges worldwide, including the value of their derivatives, how much is the stock market worth?

Stock Market Worth

One quadrillion dollars

=1,000 trillion dollars

=$1,000,000,000,000,000

By contrast, there is only $75 trillion in the total global money supply!

Key Terms, cont.

share: a portion of stock

capital gain: the difference between the selling price and purchase price that results in a financial gain for the seller

stockbroker: a person who links buyers and sellers of stock, typically for a fee

bull market: a steady rise in the stock market over a period of time

bear market: a steady drop or stagnation in the stock market over a period of time