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InvestmentsInvestments

+Learning Objectives

Students will know investment options.

Students will be able to identify relative risk, return and liquidity of the investment options.

Students will understand the basic terminology of stocks.

Students will understand the basics of 401k, IRA and Roth IRA retirement accounts.

+Purpose of Investments

Investments constitute something that is purchased for future benefit (money, experience)

Promotes economic growth and contributes to a nation’s wealth

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Financial System Is a network of savers, investors, and financial

institutions that work together to transfer savings to investors.

+Financial Intermediaries

Financial Intermediaries –are financial institutions that lend the funds that savers provide to borrows.

Commercial Banks

Savings & Loans

Credit Unions

Savings Banks

Mutual Savings Banks

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+Investing “Trade-Offs”

Liquidity- (How easy is it to access your money) Savings accounts are good for immediate cash, but pay a low interest rate

Return- (How much will you make) (the money an investor receives over and above their initial investment

Risk- (How likely are you to lose your investment) Anything insured by the gov’t carries no risk compared to investments with high risks (but greater rewards), such as investing in the stock market

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Mutual FundsMutual Funds

An investment company that pools money to invest in several different stocks on behalf of a group of investors. The fund is managed by a professional investment manager. (Includes Pension Funds- IRA’s)

+Mutual Funds

Benefits: Good for Beginning Investors Relatively Safe due to Diversification Professional Management of Fund Adapts it to meet the

changing Market

Drawbacks: Have to pay an annual fee to the Mutual Fund managing

company

+ Certificates of Deposit

Savings account that delivers a higher rate of interest than a traditional account over a fixed period of time

Benefits: Insured by FDIC Person can chose length of maturity Cost as little as $100

Drawbacks: Penalties if withdrawn prior to the maturity period

+BondBond

An investment in a corporation or a government body through a loan. If you purchase a bond, you are loaning money with the expectation of interest compounded on your investment.

Bonds have three basic components:1. The coupon rate — the interest rate that the issuer will pay the bondholder.2. The maturity — the time when payment to the bondholder is due. 3. The par value — the amount that an investor pays to purchase the bond and that will be repaid to the investor at

maturity.

Savings Bonds, Municipal Bonds, Corporate Bonds, Junk Bonds

+Bond Ratings

Standard & Poor’s and Moody’s rate bonds on a number of factors, including the issuer’s ability to make future payments and to repay the principal when the bond matures.

Bond Ratings

Standard & Poor’s

Highest investment grade

High grade

Upper medium grade

Medium grade

Lower medium grade

Speculative

Vulnerable to default

Subordinated to other debt rated CCC

Subordinated to CC debt

Bond in default

AAA

AA

A

BBB

BB

B

CCC

CC

C

D

Moody’s

Best quality

High quality

Upper medium grade

Medium grade

Possesses speculative elements

Generally not desirable

Poor, possibly in default

Highly speculative, often in default

Income bonds not paying income

Interest and principal payments in default

Aaa

Aa

A

Baa

Ba

B

Caa

Ca

C

D

+Advantages of Bonds

Bonds are desirable from the investor’s point of view for two main reasons:

1. Once the bond is sold, the coupon rate for that bond will not go up or down.

2. They are relatively safe investments (Especially Government Bonds)

+Disadvantages of Bonds

If you purchase Corporate or Junk bonds you then run the risk of the business going out of business

You money is tied up for an specified amount of time—NOT ALL BONDS HAVE LIQUIDITY Liquidity: Ability to turn a financial asset (Bonds, stock,

accounts into cash)

+What is a Stock?What is a Stock?

Ownership of shares in a corporation. Stockholders share a portion of the profit or loss incurred by the company.

+Stock

Stock: A.K.A. Equities…claims of ownership in a company Issued in portions called SHARESSHARES

There are TWO ways to make money with stock: WHAT ARE THEY?

+Common vs Preferred

Common Stock Given a Vote in the Company A group can work together to own

enough to control the firm

Preferred Stock NON-voting member Receive Dividends before Common

Stockholders If business goes under they also

get paid back first

+STOCK EXCHANGE How Does One Buy Stock?

Most often through a STOCKBROKER who links buyers and sellers of stock

Work for Brokerage Firms Common Brokerage Firms?

+STOCK EXCHANGE

What is a STOCK EXCHANGE? Place where a company sells its stock

Two Most common stock exchanges? NYSE NASDAQ

National Association of Securities Dealers Automated Quotations

No Trading Floor like the NYSE all done through computers

+Regulation of the Stock Market

The Stock market is regulated by the S.E.C. Securities and

Exchange Commission

+Individual Retirement Accounts (IRA’s) Retirement Account (usually associated with a Mutual

Fund) that encourages people to save today for retirement Two Types:

Traditional: You invest the money in the account and pay taxes later when you withdrawal the money

ROTH: Invest money after it has already been taxed so when you withdrawal money later it is tax free

+Individual Retirement Accounts (IRA’s) Benefits:

Either type have tax benefits Traditional: Pay less tax because you are probably in

lower tax bracket Roth: No tax on capital gains or money withdrawn

Drawbacks: Traditional IRA’s are non-transferable Large penalties exist if you withdrawal your money prior to

reaching a certain age

+401ks

Retirement Account through your place of work (usually associated with a Mutual Fund) that encourages people to save today for retirement Two Types:

Traditional: You invest the money in the account and pay taxes later when you withdrawal the money

ROTH: Invest money after it has already been taxed so when you withdrawal money later it is tax free

+Advantages/Disadvantages

Benefits: Either type have tax benefits

Traditional: Pay less tax because you are probably in lower tax bracket

Roth: No tax on capital gains or money withdrawn EMPLOYER MAY MATCH your contributions

Drawbacks: Traditional IRA’s are non-transferable Large penalties exist if you withdrawal your money prior to

reaching a certain age FEES paid to investment company