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Splash Screen. Chapter Introduction Section 1: Why Save? Section 2: Investing: Taking Risks With Your Savings Section 3: Special Savings Plans and Goals Visual Summary. Chapter Menu. Governments and institutions help participants in a market economy accomplish their financial goals. - PowerPoint PPT PresentationTRANSCRIPT
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Chapter IntroductionSection 1: Why Save?
Section 2: Investing: Taking Risks With Your Savings
Section 3: Special Savings Plans and Goals
Visual Summary
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Governments and institutions help participants in a market economy accomplish their financial goals.
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In this chapter, read to learn about reasons for saving, as well as various investment possibilities and the risks associated with them.
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Section PreviewIn this section, you will learn about the benefits of saving and the types of savings accounts available to you.
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• saving• savings account • money market deposit account• time deposits• maturity• certificates of deposit
Content Vocabulary
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A. AB. BC. C
How important is saving money to you?A. Extremely important
B. Fairly important
C. Not important
A B C
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Deciding to Save (cont.)
• Economists define savings as the setting aside of income for a period of time so that it can be used later.
– A person receives interest on a savings plan for as long as the funds are in the account.
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Deciding to Save (cont.)
• Saving benefits the economy as a whole:
– It provides funds for others to invest or spend.
– It allows businesses to expand, which provides increased income for consumers and raises the standard of living.
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Deciding to Save (cont.)
• Some savings plans allow immediate access to your funds but pay a low rate of interest.
• Others pay higher interest and allow immediate use of your funds, but require a large minimum balance.
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A. AB. BC. CD. D A B C D
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All of the following are places to put your savings EXCEPT:A. A commercial bank
B. A savings and loanassociation
C. A credit union
D. A mortgage
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Savings Accounts and Time Deposits Savings accounts and time deposits offer a variety of maturities and are insured by agencies of the federal government.
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• Options for saving:
Savings Accounts and Time Deposits (cont.)
– A savings account pays interest, has no maturity date, and allows funds to be withdrawn at any time without penalty.
– Money market deposit account (MMDA) pays relatively high rates of interest, requires a minimum balance of $1,000 to $2,500, and allows immediate access to funds.
View: Savings Basics
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– Time deposits require savers to leave their funds on deposit for certain periods of time, or maturity.
Savings Accounts and Time Deposits (cont.)
– Time deposits are often called certificates of deposit (CDs), or savings certificates.
View: Savings Choices
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• After the stock market crash of 1929, the Federal Deposit Insurance Corporation (FDIC) was created to protect peoples’ funds.
Savings Accounts and Time Deposits (cont.)
– The National Credit Union Association (NCUA) is another federal agency that insures most banks and savings institutions.
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A. AB. B
Which type of account will pay you more in the long run?A. A regular savings
account
B. A CD
A B
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Section PreviewIn this section, you will learn about different types of investments and the risks that they carry.
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• stockholders• capital gain• capital loss• tax-exempt bonds • savings bonds • Treasury bills• Treasury notes
• Treasury bonds• broker• over-the-counter
market • stock market indexes• mutual fund• money market fund
Content Vocabulary
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A. AB. B
Would you keep your savings in a bank or would you buy stocks?A. Bank
B. Stock
A B
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Stocks and Bonds Stockholders are owners of a corporation, and bondholders are creditors of a corporation.
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Stocks and Bonds (cont.)
• Corporations are formed or can expand business by selling shares of stock.
– The person who buys this stock, becomes a stockholder, and is entitled to part of the future profits and assets of the corporation.
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Stocks and Bonds (cont.)
• Stockholders benefit from stock in two ways:
– Earn dividends or a return based on theamount of stock invested.
– Can sell stock for more than they paid for it.
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Stocks and Bonds (cont.)
• Profits made on the sale of stock is referred to as a capital gain.
• A decrease in value on the sale of the stock is referred to as a capital loss.
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Stocks and Bonds (cont.)
• Similar to stock, a bond is a certificate issued by a company or the government in exchange for borrowed funds.
– Bonds promise to pay a stated rate of interest over a stated period of time, in addition to repaying the borrowed amount in full at the maturity date.
– A bond does not make a bondholder part owner of the company.
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Stocks and Bonds (cont.)
• Tax-exempt bonds are sold by local and state governments: interest paid on the bond is not taxed by the federal government.
– Interest that you earn on bonds your own city or state issues is also exempt from city and state income taxes.
View: Differences Between Stocks and Bonds
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Stocks and Bonds (cont.)
• Savings bonds are issued by the federal government as a way of borrowing money.
– These are safe.
– Interest earned is not taxed until the bond is turned in for cash.
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Stocks and Bonds (cont.)
• The Treasury Department of the US Government sells several types of larger investments. They include:
– Treasury bills (T-bills)
– Treasury notes (T-notes)
– Treasury bonds (T-bonds)
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A. AB. B
Is the following description of a stock or a bond?These represent ownership, do not have a fixed dividend rate, and do not have a maturity date.
A. Stock
B. Bond
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Stock and Bond Markets Ownership of stocks and bonds can be transferred on centralized exchanges or in decentralized markets.
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Stock and Bond Markets (cont.)
• Stocks are bought and sold through brokers or through Internet brokerage firms.
• Brokerage houses communicate with the busy floors of the stock exchanges.
– The largest stock exchange, or stock market, is the New York Stock Exchange (NYSE). Others include the Chicago Exchange, London Exchange and Tokyo Exchange.
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Stock and Bond Markets (cont.)
• Stocks can also be sold on the over-the-counter market, an electronic marketplace.
• The largest volume of these smaller company stocks are quoted on the National Association of Securities Dealers Automated Quotations (NASDAQ) national market system.
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Stock and Bond Markets (cont.)
• Nearly every weekday, news is given about the activity to the stock market indexes.
– Dow Jones Industrial Average or “The Dow” is the most well-known index.
• The New York Exchange Bond Market and the American Exchange Bond Market are the two largest bond exchanges.
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Stock and Bond Markets (cont.)
• Many people invest in the stock market by placing savings in a mutual fund.
– The long-run return from index funds is higher than can be expected from almost any other investment.
– A managed mutual fund is one in which the managers adjust the mix of stocks and move in and out of the market to try to generate the highest total return.
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Stock and Bond Markets (cont.)
• Money market fund is one type of mutual fund.
– The investor can write checks (above some minimum amount) against their account.
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Stock and Bond Markets (cont.)
• Banks and savings and loan associations offer money market deposit accounts (MMDA).
• The advantage to MMDAs is that the federal government insures them against loss.
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A. AB. BC. CD. D A B C D
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If you had to choose how to invest your money, which one of these would you pick?A. Stocks
B. Bonds
C. Mutual fund
D. Money market fund
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Government Regulations Securities markets are heavily regulated to protect investors.
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Government Regulations (cont.)
• The Securities and Exchange Commission (SEC) is responsible for administering all federal securities laws.
• It also investigates any dealings among corporations.
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Government Regulations (cont.)
• Congress passed the Securities and Exchange Act after the stock market crash of 1929.
• The SEC requires any institution issuing stocks or bonds:
– To file a registration statement with the federal government
– Give a prospectus (brief description) to each potential buyer of stocks or bonds
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Government Regulations (cont.)
• States also have securities laws which protect small investors.
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After you have accumulated savings funds, you may want to invest some of it to try to earn greater returns.
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Section PreviewIn this section, you will learn about special types of investment plans and how to decide what portion of your income to save and invest.
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• pension plans• Keogh plan • individual retirement account (IRA) • Roth IRA• diversification
Content Vocabulary
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A. AB. BC. CD. D A B C D
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What do you think would be most important to save for?A. A house
B. Your child’s college fund
C. Retirement
D. Travel, shopping, cars (fun things)
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Investing for Retirement Retirement is a major reason for saving and investing.
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Investing for Retirement (cont.)
• It is important for a person to save for and invest in his or her own retirement.
• Retirement savings plans can include:
– A pension plan is a company supported plan like a 401(k) that is not taxed until used.
– A Keogh plan is a retirement plan for self-employed individuals.
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Investing for Retirement (cont.)
– An individual retirement account (IRA) is a private retirement plan for individuals.
• Contributions are deductible from taxable income.
• Taxed when taken out.
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Investing for Retirement (cont.)
– A Roth IRA is a private plan for individuals.
• Taxes income before it is saved. • Does not tax interest on that income
when funds are used upon retirement.
View: Retirement Plan Options
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Investing for Retirement (cont.)
• Buying real estate, such as land and buildings, is another form of long term investing.
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A. AB. BC. CD. D A B C D
0% 0%0%0%
Which type of plan would you feel most comfortable with?A. 401(k)
B. Keogh
C. IRA
D. Roth IRA
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How Much to Save and Invest? How much to save and invest is determined by each individual’s income, risk tolerance, and values.
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How Much to Save and Invest? (cont.)
• The higher the promised return on an investment, the greater the risk.
View: Savings Considerations
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How Much to Save and Invest? (cont.)
• When you have very little income, you should probably put your savings into lower risk accounts.
• It is important to practice diversification to lower your overall risk.
View: Risk and Return
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How Much to Save and Invest? (cont.)
• Your values may also determine where you invest your savings.
• You might want to invest locally, choose to invest in environmentally responsible companies or choose to invest in companies that have aggressive equal opportunity programs.
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A. AB. BC. CD. D A B C D
0% 0%0%0%
In general, what three things determine how you should save?A. Time, income, and job.
B. Income, job, andinheritance.
C. Income, risk tolerance,and values.
D. Values, risk tolerance,and time.
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Saving some of your income allows you to earn interest and put away funds for future purchases.
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It is important to diversify your saving and investing, especially when looking toward retirement. In general, the greater the risk involved in any venture, the greater the potential return.
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saving: setting aside income for a period of time so that it can be used later
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savings account: account that pays interest, has no maturity date, and from which funds can be withdrawn at any time without penalty
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money market deposit account: account that pays relatively high rates of interest, requires a minimum balance, and allows immediate access to funds
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time deposits: savings plans that require savers to leave their funds on deposit for certain periods of time
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maturity: period of time at the end of which time deposits will pay a stated rate of interest
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certificates of deposit: time deposits that state the amount of the deposit, maturity, and rate of interest being paid
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stockholders: people who have invested in a corporation and own some of its shares of stock
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capital gain: increase in value of an asset from the time it was bought to the time it was sold
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capital loss: decrease in value of an asset from the time it was bought to the time it was sold
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tax-exempt bonds: bonds sold by local and state governments; interest paid on the bond is not taxed by the federal government
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savings bonds: bonds issued by the federal government as a way of borrowing money; they are purchased at half the face value and increase every 6 months until full face value is reached
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Treasury bills: certificates issued by the U.S. Treasury in exchange for a minimum amount of $1,000 and maturing in a few days up to 26 weeks
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Treasury notes: certificates issued by the U.S. Treasury in exchange for minimum amounts of $1,000 and maturing in 2 to 10 years
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Treasury bonds: certificates issued by the U.S. Treasury in exchange for minimum amounts of $1,000 and maturing in 30 years
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broker: person who acts as a go-between for buyers and sellersof stocks and bonds
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over-the-counter market: electronic purchase and sale of stocks and bonds, often of smaller companies, which often takes place outside the organized stock exchanges
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stock market indexes: measures of what is happening to a given set of stock prices for a specified list of companies; the most well known is the Dow Jones Industrial Average
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mutual fund: investment company that pools the funds of many individuals to buy stocks, bonds, or other investments
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money market fund: type of mutual fund that uses investors’ funds to make short-term loans to businesses and banks
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pension plans: company plans that provide retirement income for their workers
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Keogh plan: retirement plan that allows self-employed individuals to save a maximum of 15 percent of their income up to a specified amount each year, and to deduct that amount from their yearly taxable income
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individual retirement account (IRA): private retirement plan that allows individuals or married couples to save a certain amount of untaxed earnings per year with the interest being tax-deferred
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Roth IRA: private retirement plan that taxes income before it is saved, but which does not tax interest on that income when funds are used upon retirement
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diversification: spreading of investments among several different types to lower overall risk
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