Introduction to Investing

Take Charge of Your Finances

Family Economics and Financial Education

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 2Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1Saving and

Investing

Once an appropriate amount of liquid assets are reached

Refocus goals from savings to investing

Remember: The purpose

of savings is

to develop financial security.

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 3Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1

What is Investing?• The purchase of assets with the

goal of increasing future income• Focuses on wealth accumulation• Appropriate for long-term goals

What are examples of long-term goals that

can be accomplish

ed by investing?

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 4Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1

Rate of Return

• Investments usually earn higher rates of return than savings tools

• Rate of Return–The total return on an

investment expressed as a percentage of the amount of money invested

Remember: Return is the profit or income generated by savings

and investing.

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 5Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1What is Mandy’s

Rate of Return?Mandy saved $2,200 in a money

market deposit account. After one year, she has a return of $110. What is Mandy’s rate of return?

Mandy’s rate of return on investment is 5%

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 6Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1What is Derek’s

Rate of Return?Derek invested $900. When he withdrew his money from the

investment, he had a total of $1,050. What is Derek’s rate of return?

Derek’s rate of return on investment is 16.7%

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 7Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1

Risk

POTENTIAL

RETURN

RISK

Risk• The uncertainty regarding the outcome

of a situation or event

Investment Risk• The possibility that an investment will

fail to pay the expected return or fail to pay a return at all

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 8Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1

Investment Risk

• Risk is a trade-off for the potential to receive high returns

• All investments carry some level of risk

Financial Risk PyramidIllustrates the trade-offs between risk

and return for a number of saving and investing tools

What is the risk level of

savings tools?

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 9Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1Financial Risk

Pyramid

Speculation

Increasing potential for

higher returns

Increasing risk

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 10Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1

InflationInflation

The rise in the general level of prices

Inflation RiskThe danger that money won’t be

worth as much in the future as it is today

Inflation risk should not be a concern with savings since the

goal of savings is to provide current financial security

The rate of return on an investment should be

higher than the rate of inflation.

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 11Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1Investment

PhilosophyEach individual has a tolerance

level for the amount of risk they are willing to take on

Investment PhilosophyAn individual’s general

approach to investment risk

The greater the risk a person is willing to

make on an investment, the greater

the potential return will

be.

Generally divided into three categories: conservative, moderate, and aggressive

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 12Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1Portfolio

DiversificationPortfolio Diversification-

reduces risk by spreading investment money among a

wide array of investment toolsCreates a collection of

investments that will provide an acceptable

return with an acceptable exposure to riskAssists with investment

risk reduction

Referred to as “Building a Portfolio.”

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 13Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1Types of

Investment Tools

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 14Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1

Stocks

• Stock–A share of ownership in a

company• Stockholder or shareholder–Owner of the stock

Usually a stockholder owns a very small part

of a company.

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 15Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1

Return on Stocks

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 16Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1

Bonds

• A form of lending to a company or the government (city, state, or federal)

• The company or government pays annual interest to the investor until the maturity date is reached– The specified time in the future when

the principal (or initial investment) amount of the bond is repaid to the bondholder

Bonds are less risky

than stocks but do not have the

potential to earn as

much as a stock.

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 17Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1

Mutual Funds• Mutual fund- Created when a

company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds

Always research the fees

charged by a mutual

fund.

Reduces investment

risk by helping people

diversify their

portfolio

Fees can be high

Saves investors time

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 18Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1

Index Fund

• Index fund– A mutual fund that was designed to

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

• Index- a group of similar stocks and bonds– Examples- Standard and Poor 500,

Wilshire 5000• Offer high diversification with low fees

What is the difference between a

mutual fund and an

index fund?

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 19Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1

Real Estate

• Includes any residential or commercial property or land as well as the rights accompanying that land

• A family home is not considered an investment asset

• Can be risky and more time consuming but has potential for large returns

Examples of real estate

investments include

rental units and

commercial property.

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 20Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1Speculative

Investments• Have the potential for significant

fluctuations in return over a short period of time–Examples- future, options,

commercial paper, collectibles• Recommended for people with

an aggressive investment philosophy and a high level of financial security

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 21Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1Buying and Selling

InvestmentsInvestors must utilize a brokerage firm that acts as a buying and selling agent

for the investor (except for when buying real estate and certain speculative

investments).

Complete investment

transactions

Offer investment advice and one-on-one attention

from a broker

Only complete

investment transactions

Offer no advice to investors

but charge 40-60% less

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 22Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1

TaxationProfits earned on investments are considered to be unearned

income

Income taxes MUST be paid on this money

Includes all forms of returns: interest, dividends, and price

appreciation

Taxes are due on most investment returns in the year

the unearned income is received

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 23Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1Tax-Sheltered

Investments• The government tries to

encourage certain types of investments by making them tax-sheltered

• Tax-sheltered investments– Eliminate, reduce, defer, or adjust

the current year tax liability• Examples- retirement,

child/dependent care, education expenses, health care expenses

Tax-sheltered investments are not tax-free!

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 24Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1Tax-Sheltered

Investments• Taxes are either paid when the

money is put into the account or when the money is taken out of the account

• There are limits to the amount of money that can be invested

• An individual should invest as much money as possible in tax-sheltered investments

What is the benefit of a

tax-sheltered

investment if taxes still have to be

paid?

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 25Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1

Employee-Sponsored Investment Accounts• Allow employees to reduce

their tax liability and make investing automatic

• Money is automatically taken out of an employee’s paycheck

• Employers often contribute a portion of money to the investment with no additional cost from the employee

It is recommend

ed that a person

utilize these investment

tools as much as

possible if they are offered.

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 26Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1

Rule of 72

Rule of 72Allows a person to easily calculate when the future

value of an investment will double the principal amount

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 27Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1

Albert Einstein

Credited for discovering the mathematical equation for

compounding interest, thus the

“Rule of 72.” At 10% interest rate, money

doubles every 7.2 years,

T=P(I+I/N)YN

“It is the greatest mathematical

discovery of all time.”

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 28Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1

What Can the “Rule of 72” Determine?

How many years it will take an investment to

double at a given interest

rate using compounding

interest

How long it will take debt to double if

no payments are made

The interest rate an

investment must earn to double within a specific time

period

How many times money (or debt) will double in a

specific time period

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 29Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1

“Rule of 72” FYI

• The rule is only an approximation

• The interest rate must remain constant

• The equation does not allow for additional payments to be made to the original amount

• Interest earned is reinvested• Tax deductions are not

included within the equation

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 30Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1Doug’s Certificate

of Deposit

• Invested $2,500• Interest Rate is 6.5%

Doug invested $2,500 into a Certificate of Deposit earning a 6.5% interest rate. How long will it take

Doug’s investment to double?

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 31Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1Jessica’s Credit

Card Debt

• $2,200 balance on credit card• 18% interest rate

Jessica has a $2,200 balance on her credit card with an 18% interest rate. If Jessica chooses to not make any payments and does not receive late charges, how long will it take for her

balance to double?

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 32Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of

Arizona

1.12.1.G1

Jacob’s Car

• $5,000 to invest• Wants investment to double in 4

years

Jacob currently has $5,000 to invest in a car after graduation in 4 years. What interest rate is required for

him to double his investment?

ANY QUESTIONS?