Download - Investing your money (1)
Investing Your Money -Savings Accounts
-Stock Market(Buy on Margin)
-Mattress
In 1929 -513 Millionaires in Americaby 1932 - 20
Savings Accounts- Guaranteed Profit- Safe
Stock Market- Chance for Larger Profits- Greater Risk
Buying Stocks – On Margin(Loan-on credit)- Very Risky- Chance for Large Profits will only a small
amount of cash
Mattress- No Profit- No Risk
Saving AccountsSay You have $10,000 but you don’t want to invest in the Stock Market because you want a reliable income by investing your
money in the Bank• Simple InterestRate per year – 6%
YEAR 110,000 x .06(6%) = $600
YEAR 210,000 x .06(6%) = $600
YEAR 310,000 x .06(6%) = $600
Total Money Saved after 3 yrs = $1,800 + 10,000
• Compound InterestRate per year – 6%
YEAR 110,000 X .06(6%) = $600
YEAR 210,600 x .06(6%) = $636
YEAR 311,236 x .06(6%) = $674.16
Total Money Saved after 3 years = $1,910.16 + 10,000
• In the 1920’s business used advertising
• This convinced consumers that they would be happier if they bought their product
• Many began to buy on
credit(installment plans)
Advertising played a role
How does the stock market work?You buy 100 shares of stock of
x $5.00 per shareHow much money have you invested? $500.00 (initial investment)
Scenario #1
stock increases to $20 per share
100 shares of stockx $20.00 per share
How much are your 100 shares of stock now worth?
$2,000.00
How much profit have you made?
$2,000.00 stock value
- $500.00 initial investment
$1,500.00 net profit
Millions of Americans invested in the BULL MARKET, becoming rich as stock prices rose.
Stocks Surge
How does the stock market work?You buy 100 shares of stock of
x $5.00 per shareHow much money have you invested? $500.00 (initial investment)
Scenario #2stock decreases to $1 per share
100 shares of stockx $1 per share
How much are your 100 shares of stock now worth?
$100.00
How much money have you lost? $100.00 stock value
- $500.00 initial investment
$400.00 net loss
* Unquestioned faith in the bull market helped lead to the GREAT DEPRESSION!
Some people began to buy stocks on margin, which is similar to installment buying (on Credit)
Credit and the Stock Market
The Federal Reserve • The board of the Federal Reserve, the nation’s central bank, worried about the nation’s interest in stock and decided to make it harder for brokers to offer margin loans to investors.
• Their move was successful, until money came from a new source: American corporations who were willing to give brokers money for margin loans.
• Buying continued to rise.
Investors increasingly used credit to buy stocks as the market rose.
Buying on Margin• Investors were buying on margin,
or buying stocks with loans from stockbrokers, intending to pay brokers back when they sold the stock.
• As the market rose, brokers required less margin, or investors’ money, for stocks and gave bigger loans to investors.
• Buying on margin was risky, because fallen stocks left investors in debt with no money.
• If stocks fell, brokers could ask for their loans back, which was called a margin call.
The stock market:people invest in a co. by
purchasing stocks; in return for this they expect a profit
With booming economy of the 1920's, $ was plentiful, so banks were quick to make loans to investors
also investors had to pay as little as 10% of the stock's actual value at time of purchasethis is called? BUYING ON MARGIN, and
the balance was paid at a later date
Buying Stocks on Margin: Scenario A
investor stock broker
Hello, sir. I would like topurchase 100
shares of stock in Ford. How
much is it going to cost me?
Buying Stocks on Margin: Scenario A
investor stock broker
Well, Ford stock costs
$10 per share. You
want tobuy 100 shares?
Figure it out yourself,
smartguy!
Buying Stocks on Margin: Scenario A
investor stock broker
Ummm…100 shares
x $10 per share
= $1,000.00
Oh, well. I only have $200. I can’t afford 100 shares.
Buying Stocks on Margin: Scenario A
investor stock broker
No, problem! Just give me $200 and you can owe me
the rest!
Buying Stocks on Margin: Scenario A
investor stock broker
Like, how muchwould that be? Let me think…
$1,000 worth of stock - $200 paid
= $800 owed
Alright, it’s a deal!!
Buying Stocks on Margin: Scenario A
investor stock broker
Six months later, Ford stock doubles to $20 per share.
Sell Out Mr. Broker Sir.
My 100 shares are now worth...
100 shares x $20 per share $2,000
Buying Stocks on Margin: Scenario A
investor stock broker
That’s great! Now pay me the $800 you
owe me!
Buying Stocks on Margin: Scenario A
investor stock broker
No problemo! It was a pleasure doing business
with you!
Buying Stocks on Margin: Scenario A
investor
Now let’s figure out how much money I made!
$2,000 net worth - $800 owed to Broker $1,200 -- money on hand
- $200 initial investment
$1,000 net profit
Buying Stocks on Margin: Scenario B-Investor didn’t sell
investor stock broker
Six months later, Ford stock decreases to $1 per share.
My 100 shares are now worth...
100 shares x $1 per share
$100 net worth
Buying Stocks on Margin: Scenario A
investor stock broker
Too bad, hotshot! You still owe me
$800!
Buying Stocks on Margin: Scenario A
investor stock broker
But I’m broke! What am I going
to do!
Buying Stocks on Margin: Scenario A
investor stock broker
I don’t care what you do as long as you pay
me back!
Unquestioned faith in the Bull market helped lead to the GREAT DEPRESSION!
Many Buy stocks on margin, which is similar to installment buying