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Advanced Level

2.4.4.G1

Investments - Financial
Plan
assets purchased
with the goal of
providing Savings
additional income
from the asset
itself but with the Investments
risk of loss
Take Charge Today August 2013 The Fundamentals of Investing Slide 2
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2.4.4.G1

Return
Trade off
Profit or income
Investment Risk
generated by Higher returns
saving and
Possibility that an
investing
investment will fail
Higher risk
to pay the expected
(chance of loss)
return

Investments have the potential for higher returns


Take Charge Today August 2013 The Fundamentals of Investing Slide 3
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2.4.4.G1

Savings Tools = Monetary Assets


(liquid quickly and easily
converted to cash)

Investment Tools = Investment Assets


(may not be easily converted to cash or
penalties charged to access the funds
early)
Investments
are less
liquid than
savings
Take Charge Today August 2013 The Fundamentals of Investing Slide 4
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2.4.4.G1

Money invested is usually


It is
used to pay for long-term recommended
goals that at least
10% of net
income is
dedicated to
savings and
investments
Buying a House Higher Education Retirement each time
income is
received
Take Charge Today August 2013 The Fundamentals of Investing Slide 5
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Saving vs. Investing


Saving Investing
Emergencies Long-term goals
More liquid Less liquid
Limited risk Higher risk
Lower returns (0-4%) Higher returns (8-12%)
Financial security Net worth

What types of feelings result from saving and investing?


Take Charge Today August 2013 The Fundamentals of Investing Slide 6
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Total return on investment expressed as a


percentage of the amount of money saved

Total Amount of Rate of


Money
Return Invested Return

Take Charge Today August 2013 The Fundamentals of Investing Slide 7


Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Mandy saved $2,200 in a money market


deposit account. After one year, she has a
return of $110.
What is Mandys rate of return?

.05 =
$110 $2,200
5%

Mandys rate of return on investment is 5%


Take Charge Today August 2013 The Fundamentals of Investing Slide 8
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Inflation
Rise in the general level of prices
Inflation Risk
The danger that money wont be worth
as much in the future as it is today
Strive to have
the rate of
return on
investment be
How does inflation relate to investing?
higher than the
Take Charge Today August 2013 The Fundamentals of Investing Slide 9
rate of inflation
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Bond Stock Real Estate

Speculative Mutual
Investments
Index Funds
Funds

What do you already know about each investment tool?


Take Charge Today August 2013 The Fundamentals of Investing Slide 10
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Investment
Definition Description Return
Risk
Form of Organization Least
lending to a pays interest amount
Fixed
company or to the lender (typically) interest
the (purchaser)
until the Depends on rate
government maturity date the type of
is reached bond

Maturity date specified time in the future when the


principal amount of the bond is repaid to the bondholder
Take Charge Today August 2013 The Fundamentals of Investing Slide 11
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Stock Stockholder or
shareholder

A share of
ownership in Owner of the
a company stock

Usually a stockholder owns a very


small part of a company
Take Charge Today August 2013 The Fundamentals of Investing Slide 12
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Share of
Stockholder
profits
may or may
Dividends distributed in
not receive
cash to
dividends
stockholders

Take Charge Today August 2013 The Fundamentals of Investing Slide 13


Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Market Price
Current price a buyer is
willing to pay

Stocks sells for a Stock sells for a


price higher than price lower than
what was paid what was paid

Capital gain unearned


income received from the Stockholder will lose
sale of an asset above its money
purchase price Take Charge Today August 2013 The Fundamentals of Investing Slide 14
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Ownership of residential or commercial property or land

Capital gains
Rent
Potential for (selling the property
(charging others for
Returns for more than what
use of the property)
was paid)

Real estate can be time consuming but the


potential for returns is high Take Charge Today August 2013 The Fundamentals of Investing Slide 15
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

High risk investments


Have the potential for significant fluctuations in
return over a short period of time

Futures Options Collectibles

Type of return depends on the investment


Take Charge Today August 2013 The Fundamentals of Investing Slide 16
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

When a company combines the funds of many different


investors and then invests that money in a diversified portfolio
of stocks and bonds

What is Included
Type of Returns
Bonds
Stocks Interest
Real Estate Dividends
Speculative Investments Rents
Capital Gains

Take Charge Today August 2013 The Fundamentals of Investing Slide 17


Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Advantage Disadvantage

Reduces
investment
risk
Fees may be
Saves
high
investors
time

Take Charge Today August 2013 The Fundamentals of Investing Slide 18


Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

A Ariana invests in
one companys
G B stock

Company C has
had a bad year
and their market
F C price drops
significantly.

Ariana may lose


E D
Take Charge Today August 2013 The Fundamentals of Investing Slide 19
her $150
investment
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Market price of
A companies C
and F
G B decreased
Market price
increased for
all other
companies

F C Ariana has
reduced her
investment risk
E D
Take Charge Today August 2013 The Fundamentals of Investing Slide 20
and may still earn
money
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Index Type of mutual fund designed to


reduce fees by investing in the stocks
Fund and bonds that make up the index

Index Group of similar stocks


and bonds
Standard
and
Example Poors
500

Take Charge Today August 2013 The Fundamentals of Investing Slide 21


Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

When investing, consumers either lend money to the


company/organization or they own the asset
Examples Returns

Lending Bonds Interest

Stock
Dividends
Real Estate
Owning Speculative
Rents
Capital Gains
investments
Take Charge Today August 2013 The Fundamentals of Investing Slide 22
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Lending Owning

Type of Capital
Interest Dividends Rents
return Gains

Bonds Stock Stock


Type of Mutual Mutual
Real Estate
Mutual
Investment Fund Fund Mutual Fund
Fund
Index Fund Index Fund Index Fund

Decreased Increased potential for high returns


inflation risk Increased investment risk

Take Charge Today August 2013 The Fundamentals of Investing Slide 23


Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Order cards from lowest to highest


Speculative
Investment Risk

Stock and
Order cards from lowest to highest Real Estate

Potential Returns Mutual Funds


and Index Funds
Order cards from lowest to highest
Bonds
Inflation Risk

Take Charge Today August 2013 The Fundamentals of Investing Slide 24


Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Everyone has a tolerance level for the amount of risk


they are willing to take on

Generally divided into three categories:


conservative, moderate, aggressive

Time may influence investment philosophy

If someone was an aggressive investor, what types of investment


Take Charge Today August 2013 The Fundamentals of Investing Slide 25
tools would they primarily have in their portfolio?
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Portfolio diversification reduces


risk by spreading money among a
wide array of investments

Goal: create a collection of


investments that will provide an
acceptable return with an
acceptable exposure to risk

Investing in a
mutual fund is
Reduces investment risk an automatic
form of
portfolio
Take Charge Today August 2013 The Fundamentals of Investing Slide 26 diversification
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Investments are purchased from a stock exchange


(except for real estate and some speculative investments)

Stock exchange
provides an A limited number
organized, central of people are
Worldwide, there
service to buy and allowed to buy
are many different
sell all stocks, and sell directly
stock exchanges
bonds and other from each stock
investments that exchange
are traded

Take Charge Today August 2013 The Fundamentals of Investing Slide 27


Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Brokerage firms facilitate the buying and selling of investments


on the stock exchange

Discount Full-service

Only completes Offer investment


orders to buy and transactions and a
sell investments financial advisor

Financial advisor
trained professional
Advice is not offered
that helps make
investing decisions
Take Charge Today August 2013 The Fundamentals of Investing Slide 28
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Will usually charge a fee for completing a buy/sell transaction

Additional fees may include:

Maintenance
Service fee
fee Total fees are
often lower, but
an individual
Fees specific must have the
Inactivity fee to an knowledge and
time to monitor
investment their
investments
Take Charge Today August 2013 The Fundamentals of Investing Slide 29
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

% of the
Investment
Financial advisors are Value
compensated for the
time and knowledge
they provide % of the
investors. Amount
Invested
Most charge fees In addition to
fees, financial
using one of these advisors may
methods. earn
Hourly Rate
commissions
& Flat Fee paid by the
Take Charge Today August 2013 The Fundamentals of Investing Slide 30
company.
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Important to research the financial advisor and firm he/she


works for
Questions How are the firms financial advisors
to ask: compensated?
How long has the firm been in business?

Does the firm have a history of positive


reviews and success?
How does the firm rank in comparison to
other brokerage firms?
Take Charge Today August 2013 The Fundamentals of Investing Slide 31
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Government encourages people to invest in certain


types of investments

Tax-advantaged
Savings and
investments
investments Most common:
reduce, defer or
are a form of Retirement
unearned adjust the current
Education
income and year tax liability
therefore
subject to
income tax

Take Charge Today August 2013 The Fundamentals of Investing Slide 32


Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Money is invested
Money is invested
and taxes are paid

Money grows
Money grows untaxed untaxed with help
with help from OR from compounding
compounding interest interest

Money is withdrawn
Money is withdrawn and taxes are paid
Take Charge Today August 2013 The Fundamentals of Investing Slide 33
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Choose an investment
Contribute money When possible, use
Usually mutual an employer-
funds Typically tax- sponsored plan
advantaged Employer may
match funds (up
to a certain limit)

Take Charge Today August 2013 The Fundamentals of Investing Slide 34


Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

Employer Personal
Sponsored Retirement
Similar plans Traditional IRA The trade-
401(k) (taxes when off to tax
money advantages
403 (b) (tax- is most
exempt withdrawn) accounts
Roth IRA (taxes have
organizations) penalties if
paid when money is
money withdrawn
early
deposited)
There are many other types of plans available
Take Charge Today August 2013 The Fundamentals of Investing Slide 35
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.4.4.G1

A trade-off to
Investments are
higher returns is
important to
lower liquidity and
building net worth
higher risk

Investments are Take advantage of


ideal for the long- portfolio
term diversification

Use tax-advantaged
Discuss your goals
investments &
with a financial
employer-
advisor
sponsored plan
Take Charge Today August 2013 The Fundamentals of Investing Slide 36
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona