INVESTMENT 101 STOCKS, BONDS, & OTHER FINANCIAL ASSETS

LOOKING AHEAD • Unit 4 Test Average = 75%

• TEST CORRECTIONS DUE TUESDAY 4/17

• Unit 5 – Last Unit!

• A mash-up of all the singleton topics we need to cover

• Financial Economics

• Extending the AD-AS Model (long-run examination)

• International Trade

• AP Macro Test: May 16, 11:30 AM

• If you take the AP test, you are exempt from the final

LOOKING AHEAD

WHAT TO DO WITH YOUR MONEY?

• In economics, there are essentially two options

for what to do with income:

• Spend or Save

• If we save, what are our options? How do we

make the most of our money?

• Enter: Investment

• Investment decisions are based on risk v. reward

VARIOUS TYPES OF INVESTMENT

• Savings Accounts

• Bonds

• Certificates of Deposit (CD’s)

• Retirement Accounts

• Stocks

•Mutual Funds

SAVINGS ACCOUNTS

• A deposit account held at a bank

• Pros: easily accessible, highly liquid,

no fees, no limits on transactions,

no minimum balance, little to no risk –

insured/backed by FDIC

• Cons: very little interest is earned (fraction of a percent)

BONDS

• A loan, earning interest, in which you are the lender

and the govt or a corporation is the borrower

• Given for a pre-determined period of time

• At the end of that time (maturity date) lender

cashes in the bond to receive money back plus interest earned

• Pros: long-term investment, very little risk, especially government bonds which are

backed by US Treasury

• Cons: low interest rates, penalties for cashing in early, must wait until maturity date to

receive money (often 10+ years), usually fixed interest rates

CERTIFICATE OF DEPOSIT (CD)

• A savings certificate issued to you by the bank in exchange for money

•Given for a pre-determined period of time

• Pros: varied maturity terms – from 3 months to 7 years,

low risk since its backed by the bank, slightly higher interest rates than

bonds, slightly more flexible/varied interest rates

• Cons: still relatively low interest, penalties for cashing in early, no access

to money in the meantime

RETIREMENT ACCOUNTS

• 401K = an employer-established retirement plan,

where you contribute part of your salary to an

interest-earning account, often tax-free

• Individual Retirement Account (IRA) = a private

retirement account, earning interest

• Pros: slightly higher interest rates, often tax-free, contribution amounts are mostly

self-determined and can be changed

• Cons: slightly higher risk since only backed by private businesses, some 401Ks are

not portable, penalties for cashing in early, no access to money in the meantime,

often contribution minimums and maximums

STOCKS

• A very small slice, or share, of ownership in

a company

• Your share earns you a small part of the

earnings of that company

• Usually stocks change owners – constantly bought & sold on stock market

• Pros: offer highest possible return on investment, there is essentially no limit to the

profit, can be easily traded, bought or cashed in at any time, easy to monitor progress

• Cons: most risky type of investment because there is no ‘backing’ – if the company

loses money, you lose money and there’s no refunds.

MUTUAL FUNDS

• A company that sells a bundle of investments, like stocks and bonds, owned by a

group of investors rather than just one person

• Operated by one money manager, who invests money for the group, based on their

agreed upon parameters

• Pros: managed by a professional, allow for diverse types of investment, losses

divided equally amongst the group, varied types of mutual funds exist based on your

preferences/demands

• Cons: high risk, must pay fees to the

company/money manager, gains are divided equally

amongst the group