1.12.1.

G1
Introduction to Investing
"Take Charge of Your Finances"
Advanced Level

Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 2
Funded 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
Saving and Investing
Once an appropriate amount of
liquid assets are reached
Recommend refocusing goals from
saving to investing



Remember:
The
purpose of
savings is to
develop
financial
security
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 3
Funded 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?
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
accomplished
by investing?
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 4
Funded 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
Total return on investment expressed
as a percentage of the amount of
money invested

Total
Return
Amount
of
Money
Invested
Rate of
Return



Remember:
Return is the
profit or
income
generated by
savings and
investing
Investments usually earn higher
rates of return than savings tools
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 5
Funded 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 Mandys Rate of
Return?
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?
$110 $2,200
.05 =
5%
Mandys rate of return on investment is 5%
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 6
Funded 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 Dereks Rate of
Return?
Derek invested $900. When he withdrew
his money from the investment, he had a
total of $1,050. What is Dereks rate of
return?
$150 $900
.167 =
16.7%
Dereks rate of return on investment is 16.7%
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 7
Funded 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- uncertainty regarding the outcome of
a situation or event

Investment Risk- possibility that an
investment will fail to pay the expected
return or fail to pay a return at all
All investment tools carry some level of risk



What is the risk
level of savings
tools?
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 8
Funded 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
Inflation
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
Inflation risk is usually not a concern
with savings since the goal of savings
is to provide current financial security



Strive to have
the rate of
return on
investment be
higher than the
rate of inflation
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 9
Funded 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
Types of Investment
Tools
Stocks Bonds
Mutual
Funds
Index
Funds
Real
Estate
Speculative
Investments
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 10
Funded 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

Stockholder or
shareholder




Usually a
stockholder
owns a very
small part of a
company
A share of
ownership in
a company
Owner of the
stock
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 11
Funded 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
Dividends Market Price
Return on Stocks
If stock is sold for
a market price
higher than what
was paid
Share of profits
distributed in cash
to stockholders
Stockholder may
or may not
receive dividends-
depends on
company profit
Current price that a buyer
is willing to pay for stock
If stock is sold for
a market price
lower than what
was paid
Stockholder will
receive a return
Stockholder will
lose money
Definition
What is
received?
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 12
Funded 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
Form of lending to a
company or the government
(city, state, or federal)
Annual interest is paid to
investor
Once the maturity date is
reached, the principal is
repaid to the bondholder



Bonds are less
risky than
stocks but
usually do not
have the
potential to
earn as high of
a return
Definition
Return
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 13
Funded 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
Advantage Disadvantage
Mutual Funds
Mutual fund-
when a company
combines the funds of
many different
investors and then
invests that money in
a diversified portfolio
of stocks and bonds




Make sure to
research the
fees charged
by a mutual
fund
Reduces
investment
risk
Fees may be
high
Saves
investors
time
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 14
Funded 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
Index
Fund
A mutual fund
that invests in the
stocks and bonds
that make up an
index
A group of similar
stocks and bonds-
Standard and Poor 500
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 15
Funded 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



What is the
difference
between a
mutual fund
and an index
fund?
Advantage
Disadvantage
High
diversification
Usually charge
lower fees than
mutual funds
Still charge
fees
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 16
Funded 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
Any residential or commercial
property or land as well as the
rights accompanying that land
A family home is usually 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 Updated April 2011 Investing Unit Introduction to Investing Slide 17
Funded 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
Speculative Investments
High risk investments
Have the potential for significant fluctuations
in return over a short period of time
Futures Options
Commercial
Paper
Collectibles
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 18
Funded 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
Financial Risk Pyramid
Speculative
Investment
Tools Increasing
potential for
higher returns
Increasing risk
Savings
Tools
Checking
Account
Savings
Account
Money
Market
Deposit
Account
Certificate
of Deposit
Savings
Bonds
Investment
Tools
Bonds
Stocks
Mutual
Funds
Real Estate
Options Collectibles
Futures
Commercial
Paper
Index
Funds
The risk level for specific investment tools may vary
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 19
Funded 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 Philosophy
Everyone has a tolerance level for the
amount of risk they are willing to take on
Investment Philosophy- an individuals
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, aggressive
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 20
Funded 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
Portfolio Diversification
Portfolio Diversification- reduces risk by
spreading investment money among a
wide array of investment tools
Creates a collection of investments
that will provide an acceptable return
with an acceptable exposure to risk
Assists with investment
risk reduction



Referred to as
Building a
Portfolio
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 21
Funded 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
DISCOUNT
BROKER
Buying and Selling
Investments
Brokerage firm acts as a buying and selling agent
for an investor (except for real estate and certain
speculative investments)
FULL SERVICE
GENERAL
BROKERAGE
FIRM
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 Updated April 2011 Investing Unit Introduction to Investing Slide 22
Funded 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
Taxation
Profits earned on investments are
unearned income
Taxes are often owed on
unearned income
Taxes are due on most investment
returns in the year the unearned
income is received
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 23
Funded 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
Tax-Sheltered
Investments
Government tries to encourage certain
types of investments by making them tax-
sheltered




Tax-
sheltered
investments
are usually
not tax-free!


Tax-sheltered
investments-
eliminate, reduce,
defer, or adjust
the current year
tax liability
Retirement
Child/dependent care
Education expenses
Health care expenses
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 24
Funded 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
When are taxes for tax-sheltered
investments usually paid?
Money is invested and
taxes are paid
Money grows untaxed
with help from
compounding interest
Money is withdrawn
Money is invested
Money grows untaxed
with help from
compounding interest
Money is withdrawn
and taxes are paid
There are often limits to the amount
that can be invested
OR


What is the
benefit of a tax-
sheltered
investment if
taxes still have
to be paid?
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 25
Funded 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
Employer-Sponsored
Investment Accounts
Type of tax-sheltered investment
Money is automatically taken out of
employees paycheck
Employers often contribute a portion of
money to the investment with no
additional cost from the employee
Employee
contributes 7% of
paycheck to
investment
account
Example:
Employer contributes
the same amount of
money to the
employees
investment account
Employee
benefits from
having double the
amount of money
invested!
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 26
Funded 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
Advantages to Employer-
Sponsored Investments
Reduces
tax liability
Makes
investing
automatic
Possibility for
employer to match
investment



It is
recommended
that a person
utilize these
investment
tools as much
as possible if
they are
offered
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 27
Funded 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
Allows a person to easily calculate
when the future value of an
investment will double the principal
amount
72
Interest
Rate
Number of years
needed to double
the principal
investment
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 28
Funded 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 Updated April 2011 Investing Unit Introduction to Investing Slide 29
Funded 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
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 Updated April 2011 Investing Unit Introduction to Investing Slide 30
Funded 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
Only an approximation
Interest rate must remain constant
Interest rate is not converted to a
decimal
Equation does not allow for
additional payments to be made to
the original amount
Interest earned is reinvested
Tax deductions are not included
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 31
Funded 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
Dougs 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 Dougs investment to double?
72 6.5
11 years
to double
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 32
Funded 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
Jessicas 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?
72 18
4 years to
double
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 33
Funded 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
Jacobs 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?
72
4
years
18%
interest rate
Family Economics & Financial Education Updated April 2011 Investing Unit Introduction to Investing Slide 34
Funded 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
Summary
What is the Rule
of 72?
What is the
relationship
between risk
and return?
How can a
person reduce
investment risk?
What are the six
main investment
tools?
Who should a
person contact to
purchase
investment tools?
What is a tax-
sheltered
investment?