9.01Summarize the various types of short-term and long-term investments.

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InvestingInvesting Putting your money to use in order to make

money on it. Simple Interest vs. Compound Interest

Simple – interest that is computed only on the amount saved.

Compound – interest that is computed on the amount saved plus interest previously earned.

Securities refers to bonds, stocks, and other documents sold by corporations and governments to raise large sums of money.

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Savings is money put aside for future use. Most common reasons to save are:

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–Major purchases

–Emergencies•Saves money for a “rainy day”

–Retirement

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•Savings Account –Simplest form of saving

–Offered by all institutions (banks, credit unions, etc.)

–Generally, a low minimum deposit is required

–Interest is low and varies from institution to institution

•Certificate of Deposit–Requires a minimum deposit for a minimum amount of time

–Interest rates are higher than a savings account

Investing Through BanksContinued

Money Market Fund

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–Kind of mutual fund, or pool of money, put into a variety of short-term debt by business and government.

9.02 Summarize the investing in stocks and bonds.

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Investing in Bonds Bonds

Promise to pay a definite amount of money at a stated interest rate on a specified maturity date.

Bondholder Individual who lends money to a

corporation.

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Bond Terms Face Value

Amount being borrowed by the seller of the bond.

Coupon Rate Rate of interest on the bond.

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Types of Bonds Corporate Bonds

Issued by corporations Used to finance buildings and equipment.

Municipal Bonds Issued by local and state governments. Used to finance schools, roads, airports,

etc.

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Types of BondsTreasury Bonds

Issued by federal government. Known as Savings or Federal Bonds Types:

Series EE Bonds Cost half the face value. After a specified number of years the bond becomes

worth the face value. Treasury Bills

Issued for three months to one year. Treasury Notes

Issued for two to ten years. Treasury Bonds

Issued for ten or more years.

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Investing in Stocks Stock

Share of ownership in a business. Stock Certificate

Proof of ownership in a corporation Market Value

Price at which a stock can be bought or sold.

Dividends Part of profits shared with stockholders.

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Types of Stocks Preferred

Priority over common stockholders in the payment of dividends.

No voting rights. Common

General ownership in a corporation and a right to share in the corporation’s profits

Right to vote at shareholder meetings One vote per share.

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Reading a Stock Quotation Table 52 Week Hi – Highest price during

previous 52 weeks 52 Week Lo – Lowest price during

previous 52 weeks Stock – Company name abbreviated Stock Symbol – Ticker symbol Dividend – Current dividend in dollars per

share based on the last dividend paid Yield – Dividend yield based on the

current selling prices per share

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Reading a Stock Quotation Table PE – (Price/Earnings ratio, comparing the price

of the stock with earnings per share). Volume – Number of shares traded. High – Highest price during the day. Low – Lowest price during the day. Close – Closing price for the day. Net Change – Change in the closing price

today compared with closing price on the previous day.

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2. Floor broker (buyer) goes to the trading post at which time this specific stock is traded. It is traded with the floor broker (seller) who has an order to buy.

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Typical transactions follow these steps:

1. Account executive receives your order to sell stock and relays to the brokerage firm’s representative at the stock exchange.

3. A clerk signals the transaction to a floor broker on the stock exchange floor.

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5. The sale appears on the price board, and a confirmation is relayed back to your account executive, who then notifies you of the completed transaction.

4. Floor broker (buyer) signals the transaction back to the clerk. Then a floor reporter – an employee of the exchange – collects the information about the transaction and inputs it into the ticker system.

Brokerage FirmSells stocks for consumers Broker

Person who acts as a go between for buyers and sellers of securities.

Commission Fee charged by a brokerage firm for the

buying and/or selling of a security.

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Stock Exchanges Marketplace where brokers who

represent investors meet to buy and sell securities.

Examples: NYSE NASDAQ AMEX Exchanges in San Francisco, Boston,

Chicago

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Types of Markets Bull Market

Occurs when investors are optimistic about the economy.

Bear Market Occurs when investors are pessimistic

about the economy.

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Numerical Measures for a Corporation Current Yield

Annual dividend divided by current market value.

Price/Earnings Ratio Price of one share of stock divided by the

earnings per share.

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Selling a Stock Total Return

Calculation that includes the annual dividend as well as any increase or decrease in the original purchase price of the investment.

Capital Gains Profit from the sale of an asset such as stocks,

bonds, or real estate. Taxed as income. Capital Loss

Sale of an investment for less than its purchase price. Subtract up to $3,000 in losses from your income.

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9.03 Summarize other types of investments.

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Investing Through Insurance Life Insurance

Cash-value insurance provides both savings and death benefits.

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Investing in Your Future Pension

Series of regular payments made to a retired worker under an organized plan.

Individual Retirement Account (IRA) Tax sheltered retirement plan in which people can

annually invest earnings. Types:

401k or 403b contributions are tax deductible and funds are taxed as regular income when they are withdrawn after age 59 ½.

Roth IRA contributions are not tax deductible, but investment gains and all funds on which taxes are prepaid are tax free when they are withdrawn after age 59 ½.

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Investing in Your Future

Annuity Amount of money that an insurance company

will pay at definite intervals to a person who has previously deposited money with the company.

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Investing Through Other Sources Real Estate

Land and anything that is attached to it. Mortgage

Legal document giving the lender a claim against the property.

Home Equity Difference between the price at which you could

currently sell your house and the amount owed on the mortgage.

Appreciation – general increase in value of a property. Depreciation – general decrease in value of a property.

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Investing Through Other Sources Types of Property Undeveloped Property (Land)

Unused land intended only for investment purposes.

Commercial Property Land and buildings that produce lease or rental

income. Real Estate Investment Trusts (REITs)

Works like a mutual fund. Combines funds to invest in real estate.

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Collectibles Items of personal interest to collectors. Rare coins, works of art, antiques,

stamps, rare books, comic books, sports memorabilia, rugs, ceramics, paintings, and other items that appeal to collector and investors.

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Commodities Include grain, livestock, precious

metals, currency, and financial instruments.

Futures Commodity contract purchased in

anticipation of higher market prices for the commodity in the near future.

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Investing With Others Investment Clubs

Small group of people who organize to study stocks and to invest their money.

Mutual Fund Created by an investment company that

raises money from many shareholders and invests it in a variety of stocks. Limit risk by diversifying investment.

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Speculative Investment Speculator

One that has an unusually high risk.

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9.04 Analyze the factors that affect the rate of return on a given savings or investment plan and calculate the rate of return.

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Savings Plan Putting money aside in a systematic order. Ways to put money aside:

Regular deposit Automatic deposit Electronic funds transfer

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Starting a ProgramFactors determining a program

Safety Assurance that the money you have invested will be

returned to you. Liquidity

Ease with which an investment can be changed into cash without losing any of its value.

Yield Rate of return (percentage of interest that will be added to

you r savings over a period of time). Diversification

Process of spreading your assets among several different types of investments to lessen risk.

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Factors That Affect the Rate of Return on an Investment

Risk - Chance of loss.Rate of Return (yield)

Amount of money the investment earns. Compounding frequency is the interest computed on

the amount saved plus the interest previously earned. Liquidity

Ease with which an investment can be changed into cash.

Resistance to inflation Will rate of return keep up with inflation?

Tax considerations

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Factors that Affect the Selection of Financial Institutions

Services offered

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• Business hours

• Location

• On line services

Financial Security Investments (low risk)

Cash Savings Accounts Money Market Accounts Certificate of Deposit US Government Bonds Retirement Accounts

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Safety and Income Investments

US Treasury Securities Conservative Corporate Bonds State and Municipal Bonds Income and Utility Stocks

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Growth Investments

Income and Growth Stocks Mutual Funds Real Estate Convertible Bonds

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Speculation Investments (high risk)

Options Commodities Precious Metals and Gems Speculative Stocks Junk Bonds Collectibles

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Calculating Rate of Return Rate of Return = Total Interest Earned divide

by Original Deposit Example:

If you deposited $100 in account that paid $6.18 interest for one year. What is the rate of return?

$6.18/$100 = .0618 = 6.18%

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9.05 Analyze how saving and investing influences economic growth.

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Savings and Economic Growth

Individual savings allow: Businesses to expand and create more jobs. Demand for goods and services to increase.

Failure to save will cause less money to be invested and the economy may slow as a result.

Savings contribute to our economic stability Government uses savings to build highways,

schools, and public services

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9.06 Describe wills and other legal documents.

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WillsLegal document that specifies how you

want your property to be distributed after your death.

Intestate Die without a legal will State will step in and control the distribution of

your estate.Probate

Legal procedure of proving a will to be valid or invalid.

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Wills Simple Will

Leaves everything to your spouse Formal Will

Prepared by an attorney. Holographic Will

Handwritten will that you prepare yourself Needs to be written, dated, and signed

entirely in your own handwriting.

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Other Legal DocumentsTrusts

Legal arrangement that helps manage the assets of your estate for you benefit or that of your beneficiaries.

Living Will Document in which you state whether you want

to be kept alive by artificial means if you become terminally ill and unable to make such a decision.

Power of Attorney Legal document that authorizes someone to act

on your behalf.

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Guardian

Person who accepts the responsibility of: 1. Providing children with personal care

after their parents’ death 2. Managing the parents’ estate for the

children until they reach a certain age

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9.07 Explain how agencies regulate financial markets and protect investors.

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RegulatorsSecurities and Exchange Commission (www.sec.gov) Protect investors and maintain the

integrity of the securities markets.

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RegulatorsNASD (www.nasd.com)

Registers member firms, writes rules to govern their behavior, examines them for compliance and disciplines those that fail to comply.

Largest private sector provider of financial regulatory services.

Has helped bring integrity to the markets and confidence in investors.

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Protecting InvestorsDepartment of the Secretary of State

(www.secretary.state.nc.us /sec ) State Securities Laws

Known as “blue sky” laws Intent of laws is to protect the investing public by

requiring a satisfactory investigation of both the people who offer securities as investments and of the securities themselves.

Securities division addresses investor complaints concerning securities brokers and dealers , investment advisers and commodity dealers as well as complaints about offerings of particular investment vehicles.

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