Savings and Investment

Why do we invest?

Spend It

Save It

Put It In The Bank

Invest It

If we have money we can...

What are What are the the

Advantages/Advantages/Risks of Risks of

each option?each option?

Investment - redirecting resources from being consumed today so that they may create

benefits in the futureIf you If you had had

$1,000$1,000

Spend it now, take advantage of the utility and value of your

money. Or, invest your money now in order to receive benefits in

the future.

Ways to Invest:Ways to Invest:

- Save money in a bank - Save money in a bank and collect interestand collect interest

- Buy Stock- Buy Stock- Buy Bonds- Buy Bonds

Return - the money an investor receives above and beyond the sum of money initially invested.

You Could...You Could...

Ways to Invest

Savings in the Bank

Bonds - Government, Municipal, Corporate

Shares of Stock

Saving in BankRather than save money hidden in your house, you can save your money in a bank, where it is still easily accessible if you need it, but safe, insured, and collecting interest.

Interest gained on money saved in the bank is based on an Annual Percentage Rate (APR).

Typically, the interest percentage an individual earns on savings accounts is about 2%

The catch is that you have to leave your money in the savings account so that the bank can use it.

How You and Banks make Money

• You open a savings account at the bank.

• The bank pays you interest on the money that you deposit and leave in that account.

• The bank then loans that money out to other people, only they charge a slightly higher interest rate on the loan than what they pay you for your account.

BondsBond - A formal contract to repay borrowed money with interest at a fixed intervals

Essentially a loan taken out by a government, municipality, or company, that is funded by the buyers of bonds.

Generally considered a long-term investment, but bonds can mature in various time periods, from months to over ten years.

Types of BondsGovernment Bond - Issued by a government in order to acquire money to pay their bills and finance programs. The more stable the issuing government, the less risk in the investment.

Corporate Bond - Issued by businesses to help pay expenses or fund growth. Risk is determined by the stability and future of the company

Municipal Bond - Issued by a state, city, county, or district, in order to raise funds and finance projects such as hospitals, power plants, streets, schools, or airports.

Intro Question –

• 10/27/15 – Intro – How do you decide what to invest your money in when buying stocks?

The Stock Market

What are stocks?• Corporations can raise money by issuing

stock, which represents ownership in the corporation.

• A portion of stock is called a share (aka: equities)

• You Earn Profits by capital gains. This 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.

Stock Splits and Stock RisksStock Splits

• A stock split is the division of a single share of stock into more than one share.

• Stock splits occur when the price of a stock becomes so high that it discourages potential investors from buying it.

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.

Buying Stocks

How do you buy stocks?Stockbroker - someone who brings together buyers and sellers of stock to make a trade.

Brokerage Firms - Brokerage firms are companies that specialize in trading stocks and employ stockbrokers.

Stock ExchangeStock Exchange - A market for buying and selling stock

NYSE - New York Stock Exchange. The country’s largest and most powerful exchange. NYSE handles transactions for only the largest and most established companies.

Does the Performance of Does the Performance of one companyone company’’s Stock s Stock

Represent the Health of Represent the Health of the Economy?the Economy?

How Can We Determine How Can We Determine the Health of the the Health of the

Economy through the Economy through the Stock Markets?Stock Markets?

Dow Jones Industrial Average - Tracks the performance of stock from 30 of the country’s largest companies in various industries. Used to measure the health of the country’s economy as a whole.

Is This Analysis Accurate?How might we more accurately

analyze stock performance and the economy?

S & P 500 - Standard & Poor’s 500

gives a broader picture of stock performance. Tracks 500 companies and measures overall stock market

performance.Bull Market - When the stock

market rises steadily over a period of time

Bear Market - When the stock market falls for a

period of time

Investment - Risk and Advantages

As a general rule:

Long Term = Less RiskLong Term = Less RiskShort Term = Greater RiskShort Term = Greater Risk

Long Term = Smaller ReturnsLong Term = Smaller ReturnsShort Term = Chance of Greater Short Term = Chance of Greater

ReturnsReturnsHowever...

Long Term Investments also have less liquidity

Short-Term Investments have greater liquidity as their resources more easily accessed.

ItIt’’s all about Trade Ofs all about Trade Offf ’’ss

How can we Minimize Risk in Investment?

DiversificatioDiversificationn

The strategy of spreading out investments to reduce risk.

Buy Stock In:Buy Stock In:

British British PetroleumPetroleum

Royal Dutch Royal Dutch ShellShell

ChevronChevron

Buy Stock In:Buy Stock In:

British British PetroleumPetroleumMicrosoftMicrosoft

TargetTarget

Buy:Buy:

British Petroleum StockBritish Petroleum StockA Government BondA Government Bond

Money in Savings Money in Savings AccountAccount

If I wanted to invest my money I could...

OR OR

Pair/Share -

How does investment allow your money to “work for you?”