Essential Standard 4.00

Understand the role of finance in business.

Objective 4.03

Understand saving and investing options for clients.

Topics

Saving and investing basicsSaving and investing optionsEvaluation factors for savings and

investing options

Forbes Richest 400

www.forbes.com/wealth/forbes-400/list

Complete Forbes 400 Wealthiest Individuals Activity

Saving and investing basics

Saving and Investing Basics Reasons money is borrowed by the

following: Individuals: to purchase large ticket

items such as homes and cars Businesses: to operate or expand their

business; purchase a building, replace old equipment or offering new products

Government: to improve or expand transportation, schools or other public services

Saving and Investing Basics

What is saving? Putting away money for future use Where?

What is investing? Using savings to earn more money for

future financial security Where?

Saving and Investing Basics

Saving influences on economic activity makes more money available to be used

by individuals, businesses and government

When the borrowed money is spent, the demand for goods and services increases which creates more jobs and spending for workers

Saving and Investing Basics continued

Main goals of savers and investors include making available immediate income and long-term growth

Saving and Investing Basics continued

Growth of savings is interest earned when other borrow your money Simple interest is the amount of $$

paid to saver on the amount deposited for a period of time

Compound interest is the amount of $$ paid to saver on the amount deposited AND interest previously earned for a period of time

Saving and Investing Basics continued

Impact of compound frequency on savings growth rate: the more times the interest is compounded the more growth in savings

How is simple interest calculated?

I = P*R*T

P = Principal (initial amount you borrow or deposit)

R= RateT = TimeI = Interest Rate

How is compound interest calculated?

A=P(1+r/n)nt

A = AmountP = Principal (initial amt. you borrow

or deposit)r = Annual rate of interestn = Number of times interest is

compoundedt = time in years

Savings Growth

Simple interest$1,000 at 10%

Year 1: $1,000 * .10 = $100

$1,000 + $100 = $1,100

Year 2:

$1,000 * .10 = $100$1,100 + $100 =

$1,200What would the

value be at the end of year 3?

Compound interest$1,000 at 10%

Year 1: $1,000 * .10 = $100

$1,000 + $100 = $1,100

Year 2:

$1,100 * .10 = $110$1,100 + $110 =

$1,210What would the value

be at the end of year 3?

DO THE MATH BEFORE CONTINUING….

Savings Growth

Simple Interest

$1,000 * .10 = $100$1,200 + $100 =

$1,300

Compound Interest

$1,210 * .10 = $121$1,210 + $121 =

$1,331

Savings Growth End of 3 Years Simple Interest I = P*R*T

1,000*.10*3 = 3001,000 + 300 =

$1,300

Compound InterestA=P(1+r/n)nt

1,000(1+.1/1)1*3

1,000(1.1)3 = $1,331

Savings Growth

Calculate simple interest on $5,000 after 5 years at 10% interest

Calculate compound interest on $5,000 after 5 years compounded monthly at 10% interest

DO THE MATH BEFORE CONTINUING….

SERIOUSLY, DO THE MATH BEFORE CONTINUING…..

REMEMBER: THE PERSON DOING THE WORK IS DOING THE LEARNING AND I EXPECT YOU TO LEARN

Savings Growth

Simple interest $5,000*.10*5 = $2,500

$5,000 + $2,500 = $7,500

Compound interest $5,000(1+.1/12)5*12

=

$8,226.55

Saving and investing options

Saving Options – Savings Plans

Savings account: usually allows a low or zero balance, deposit or withdrawals (without penalties) anytime and pays low interest rate.

Certificates of deposit (CDs): a minimum deposit remains for a set period of time; penalty is withdrawn early

Money market account: a minimum deposit, interest earned based on gov’t and corp securities; pays slightly higher interest than savings account

Complete How Savings Grow Activity Sheet

Main Categories of Investing Options

StocksBondsMutual Funds and Exchange-traded

FundsReal EstateCommoditiesCollectibles

Stock Investments

Two main categories of stock: Preferred stock pays dividends at a set

rate Common stock represents general

ownership in the company and sharing of profits

What are the major similarities and differences between preferred and common stocks?

Stock Investments

PREFERRED STOCK

Investment risk and pays dividends

No voting power Pays dividend before

common stock Less risky than

common

COMMON STOCK

Investment risk and pays dividends

Invited to annual corporate meetings and one vote per share owned

Stock Investments

What are stockbrokers? People who buy and sell stocks and

bonds at a set price for a commission Stock exchange

Where the trading of securities takes place

What is market value of stock? The price for which a share of stock can

be purchased

NYSE – New York Stock Exchange

Located in New York City on Wall Street in lower Manhattan

www.nyse.comBuyers and sellers of securities meet

and compete for the best price for their customers. A trade takes place when the best bid meets the lowest offer to sell. Stock prices are determined by supply and demand.

Stock market terms

Initial public offering – the first time a company sells shares of itself to the public to raise capital

Bull market – when the prices of stocks are generally rising

Bear market – when the prices of stocks are generally declining

Stock market terms

Stockbroker – a professional who is licensed to buy and sell stock

Stock – A unit of ownership in a company

Dividend – profits paid to a stockholder as a return on investment

Capital – money needed to expand a company

Stock market terms

Supply – the quantity or amount of a product that is available

Bond – A loan or IOU that investors make to corporations and governments which pays interest over a fixed period of time

Demand – the quantity or amount of a product that buyers want to purchase

DJIA – Dow Jones Industrial Average

One of the best know and most widely cited indicators, the DJIA tracks the stock prices of 30 major “blue chip” companies

Invented by Charles Dow in 1896 as a way to gauge the performance of the stock market

DJIA

ALCOA Inc. American Express AT&T Boeing Co Bank of America Caterpillar Cisco Systems Coca-cola E.I. du Pont Exxon Mobile

General ElectricHewlett-PackardHome Depot Intel IBM Johnson & Johnson JPMorgan ChaseKraft Foods3M Company

DJIA

McDonald’sMerck & Co.MicrosoftPfizerProctor &

GambleTravelers Co.United

Technologies

VerizonWal-Mart StoresWalt Disney Co.

Stock Table

A B C D E F G H I

52 Week Sales

High Low Stock Div Yld PE Vol100s

High Low Last Chg

12 1/8 8 AAR .44 6.2 15 6 6 3/4 6 5/8 6 1/2 -1/8

49 1/2 31 1/4 ACF 1.76 7.4 7 477 36 1/4 37 5/8 37 +3/4

26 1/2 16 AMF 1.36 6.7 7 133 17 1/2 17 1/2 17 1/2 -3/8

6 1/8 3 1/8 ARA 2 7 8 10 33 7/8 33 7/8 33 -1

Stock table

A – highest and lowest price of stock during the past 52 weeks

B – Symbol used to represent the company and current dividend as dollars per share of stock

C – Dividend yield based on current selling price

D – Price-earning ratio

Stock table

E – Number of shares exchanged on trading day. The amount is listed in 100’s

F – Highest price of a share on trading day

G – Lowest price of a share on trading day

H – Closing price I – Change from previous trading

day’s closing price

Selecting Stock

Factors that could influence investors in selecting stock: Economic▪ Inflation▪ Interest rates▪ Consumer spending▪ Employment

Company▪ Dividend yield: dividend per share/mkt price

per sh▪ Price-earnings ratio: stock price/earnings per

share

Yield Calculations

Yield is usually calculated in the following way:current value – original value = yield

original value Current value=closing price for the day Original price=price paid for stock Yield=Interest earned For example: a stock is bought at $40 and

valued at $43:$43 – $40

$40 yield = 7.5%

Yield Calculations

Dividends also may be added to the calculation.

For example: a stock is bought at $40 and sold at $43, but also earned a $2 dividend during that time:

$43 + $2 – $40 $40

yield = 12.5%

Price/Earnings Ratio

Stock price/Earnings per share = P/E ratio A measure of market valuation

(capitalization) Affected by: growth rate of the company,

expectations of future growth rate, earnings, and other risk factors

Should use to compare companies within the same industry

Comparing Stocks Activity

Complete “Comparing Stocks Activity” using: www.freestockcharts.com

Bond Investments

What is a bond? A promissory note to pay back a specified

amount of money at a stated rate on a specific date; issued to lend funds to the organization selling the bond.

Main Categories of Bonds Government bonds▪ Municipal bonds: issued by local and state gov’ts for

public service projects▪ U.S. savings bonds: Series EE, HH and I bonds▪ Treasury bills (91 days to 1 year) and notes (1 to 10

years) Corporate bonds: loaning money to a company

Bond investments

Lenders versus owners as it relates to investing in a company’s stocks and bonds Bonds = lender Stocks=owner

How does stated interest rate impact the value of a bond? Stated interest rate determines the price

investors want to pay for a bond

Bond investments

Bond sold at par value Ex. A bond’s stated interest rate is 5%

and the current market rate is 5%. Bond would be sold at par (100) A $10,000 bond would sell for $10,000

Bond investments

Bond sold at a premium Ex. A 10 year bond sells in 2005 for

$10,000 with a stated interest rate of 5% In 2007, the market interest rate is 3% Because your bond is paying a higher

interest rate than the market rate, you could sell you bond for more than the $10,000 face value (102) in order to realize a yield of 3%

A $10,000 bond would sell for $10,200

Bond investments

Bond sold at a discount Ex. A 10 year bond sells in 2005 for

$10,000 with a stated interest rate of 5% In 2007, the market interest rate is 7% Because your bond is paying a lower

interest rate than the market rate, a buyer would be willing to pay less than face value (98) in order to realize a yield of 7%

A $10,000 bond would sell for $9,800

Comparing bond investments

Current yield of a bond = Dollar amount of annual interest

income/current market valueEx. Annual interest income = $80

Current Market Value = $998$80/$998 = 8%• This bond is being sold at a discount

because the current market value is less than par (1000).

Bond Investments Activity

Use the following website to research the values of current bond offerings.

www.investingbonds.com/marketataglance.asp?catid-32

Mutual Funds

A portfolio of stocks, bonds or both grouped according to an investment strategy

Net asset value (NAV) is a per share value determined at the end of each trading day. A mutual fund is bought or sold at the NAV no matter if the trade takes place at 10 AM or 3 PM or any time in between opening and closing bell

Mutual Funds

Mutual Fund Companies’ major tasks in assisting investors of mutual funds

The mutual fund company studies companies stocks and bonds and then buys a variety of stocks and bonds to sell to investors based on their level of risk and investment strategies

Mutual Funds

Some examples of mutual fund categories Aggressive-growth stock funds: look for quick

growth but has a higher level of risk Income funds: look for stocks that pay

regular dividends International funds: stocks from around the

world Sector funds: companies in the same

industry Bond funds: corporate bonds Balanced funds: both stocks and bonds

Exchange-traded Fund (ETF)

An exchange-traded fund (ETF) is a portfolio of stocks, bonds or other investments that trade on a stock exchange like regular stock. Similar to a mutual fund except the

value changes during the day like a stock so an investor may pay a different price at 10 AM vs. 3 PM or any time between opening bell and closing bell

Other Investments

Real Estate: land and anything attached to it Advantages: tax benefits, increased

equity, pride of ownership Disadvantages: property taxes, interest

payments, property insurance, maintenance

Examples: house, condominium, mobile home park, farmland, commercial property, industrial property

Other investments

Commodities and futures: grain, livestock and precious metals; investors agree to buy and sell for an amount at a specified price in the future Examples: rice, cattle, gold, pork bellies

Collectibles: items collected over time that may increase in value Examples: art work, antique furniture,

autographed items, beanie babies

Evaluation factors for savings and investing options

Evaluation Factors

Safety and risk Safety is assurance that the money you

invested will be returned to you Risk is the chance that the money you

invested will not be returned to youPotential yield

The possible percentage of money earned on a savings or investment over a year

Higher yield = higher risk

Evaluation Factors

Liquidity The ease with which an investment can

be changed into cash without losing value

Taxes Amount the federal and state

governments require as payment based on type of investment, return of interest and gain or loss of principal amount

Mutual Fund Activity

Complete the “Right Type of Mutual Fund Activity” provided

Student Activity:

Using the “Comparing Mutual and Exchange - Traded Funds Activity”

Create a double bubble thinking map to compare and contrast Mutual Funds and ETFs