Monday, February 10th
• Warm Up: Please answer these questions on your warm up:– How would you explain the power of
“compounding” to someone?– How does opportunity cost relate to a class
on building wealth?– Define “RISK”
Today’s Goals …
• Explain the relationship between risk and return
• Categorize investments as lending or owning investments
Investors take a risk for the potential return.Investors take a risk for the potential return.
Why Risk It?Why Risk It?
Risk = possibility of lossRisk = possibility of loss
Return = potential reward or Return = potential reward or benefitbenefit
• High potential return High potential return →→ high risk high risk
• Moderate potential return → moderate risk Moderate potential return → moderate risk
• Low potential return → low risk Low potential return → low risk
Risk and ReturnRisk and Return
What determines how much What determines how much risk you can handle?risk you can handle?
What you want to What you want to accomplishaccomplish
How much time you have How much time you have
Your personalityYour personality
Handling RiskHandling Risk
Protect Your Initial InvestmentProtect Your Initial Investment
• High risk High risk →→ Initial investment may be lost. Initial investment may be lost.
• No risk → Initial investment is secure. No risk → Initial investment is secure.
• Use the risk pyramid to compare investments.Use the risk pyramid to compare investments.
• Categories:Categories:
See Your Risk in PerspectiveSee Your Risk in Perspective
HighHigh ModerateModerate
LowLow
Peak Peak → most risky→ most risky
Base → most reliableBase → most reliable
Categorize investments as lending or owning investments
Securities = legal lending Securities = legal lending or owning agreementsor owning agreements
SecuritiesSecurities
OWNING INVESTM
ENTS LENDIN
G IN
VESTMENTS
SECURITIES
• LendingLending
• OwningOwning
Categories:Categories:
• Lending investment = lending Lending investment = lending money for a pricemoney for a price
Lending InvestmentsLending Investments
Savings accountSavings account
Lending Investments—TypesLending Investments—Types
Certificate of depositCertificate of deposit
Money market accountMoney market account
• Lend money to a bankLend money to a bank• Lend money to a Lend money to a government or corporationgovernment or corporation
BondsBonds
Lending Investments
• Are lending investments right for you?
• Here’s why I like them …– More secure/ less risk– Easy Access– Several options
Ownership investment = ownersOwnership investment = owners’’ rights rights
High or moderate riskHigh or moderate risk
Ownership InvestmentsOwnership Investments
• Stock mutual fund = owning Stock mutual fund = owning pieces of several corporationspieces of several corporations
Ownership Investments—TypesOwnership Investments—Types
• Stock = owning a piece of a Stock = owning a piece of a corporationcorporation
• Real estate = owning propertyReal estate = owning property
• Collectible = owning an item Collectible = owning an item valuable to you or someone elsevaluable to you or someone else
Owning Investments
• Are owning investments right for you?
• Here’s why I like them …– More reward (which does mean more risk)– Easy access for stocks, stock mutual funds– Several options, with a variety of risk levels– TONS of information available to learn
about them
• Use the risk pyramid to compare investments.Use the risk pyramid to compare investments.
• Categories:Categories:
See Your Risk in PerspectiveSee Your Risk in Perspective
HighHigh ModerateModerate
LowLow
Stocks, MF, Stocks, MF, CollectiblesCollectibles
Real Estate,Real Estate,Stocks, Mutual FundsStocks, Mutual Funds
Savings Accounts,Savings Accounts,MMAs, CDs, and BondsMMAs, CDs, and Bonds
Peak Peak → most risky→ most risky
Base → most reliableBase → most reliable
In Summary …
• Two categories of securities (or investments)– Lending– Owning
• Lots options• Higher the risk, higher the reward• Opportunity cost and risk – the
relationship (add note to your risk tab)
Practice Quiz
Stock Research
• Take a look at the stocks you’ve selected.
• Lending or ownership investment?
• How could you evaluate their level of risk?– Volatility
In Summary
• REMEMBER: Need to finalize your list of TEN stocks for tomorrow’s class … prepare to create your stock portfolio!
• You’ll become Company Owners (in THEORY!)
Copyright:
All photographic digital images on this CD are owned by the aforementioned photographic resources or their licensors and are protected by the United States copyright laws, international treaty provisions, and applicable laws. No title to or intellectual property rights to the images on this CD are transferred to you. These sources retain all rights and are not to be used, digitally copied, transferred, or manipulated in any way. To do so is a violation of federal copyright laws.
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