Introduction to Investing What is Investing Remember The

Introduction to Investing

What is Investing? Remember: The purpose of savings is to develop financial security Once you’ve saved an appropriate amount of liquid assets (can be easily converted to cash), your new focus should be on acquiring overall wealth—the accumulation of resources, measured as net worth. Most people do this through investing. Investing is the purchase of assets with the goal of increasing future income Characteristics: Focuses on wealth accumulation Appropriate for long-term goals

Two types of investments PERSONAL INVESTING Practiced by individuals Depositing or spending money to make a financial gain in the future Ex: buying stocks or bonds Most often used in news reports to discuss investments ECONOMIC INVESTING Practiced by companies Spending money to buy capital goods (machinery, technology, buildings) to make consumer goods/services Most often used by economists

Complete Activity 1 What similarities can you find in these examples of investment? Each involves risk and payment in money or effort now in order for the investor to receive a future benefit.

Criteria for Investing Liquidity: ease with which savings or investments can be turned into cash Risk: chance of losing some or all of the money invested Return: earnings from an investment

Liquidity Financial investments are more liquid than other investments Personal savings accounts/short-term interest-accruing (gaining) accounts NOT certificates of deposit (cannot touch the money until time period of savings is complete) Liquidity helps to explain why people value financial investments—it is relatively easy to convert stocks and bonds into cash (unlike equity in capital)

Risk Chance of loss of some or all of the money invested Some investments involve more risk than others: Investing money in a bank savings account has little risk; investing in ”high risk” stocks or bonds have a lot more risk The greater the risk, the greater the potential return

Financial Risk Pyramid Increasing potential for higher returns BUT has The risk level for specific investment tools may vary Futures Commercial Paper Options Collectibles Increasing Stocks risk Mutual Funds Checking Savings Account Real Estate Bonds Money Market Deposit Account Index Funds Certificate of Deposit Speculative Investment Tools Savings Bonds Savings Tools

Return For investors, a return is the earnings from an investment Some investments can earn higher returns than others However, some of these include higher risk investments (“don’t put all of your eggs in one basket” is one adage) or require more initial investment

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 Investments usually earn higher rates of return than savings tools

Ro. R Practice Problems 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? $110 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? 1, 050900=$150 $2, 200 $150 Remember to multiple the answer decimal answer by 100 to get % $900

Complete Activity 2 Most personal investments for young people include education and family investments in bulk purchases The goal for successful financial investment is to gain a greater return in the future by forgoing short-term benefits (those in the present)