Investment Notes -page 1
I. Savings:
Income withheld from current spending for future use.
II.
A. Investing: Money spent to increase current or future income.
Risky:
Not insured (volatility in price movement)
Benefit:
Higher return
Trade
off: Risky and less liquid
B. Compound Interest:Interest
earned on interest after it is added to principle Example: $1,000
in savings at 5% interest
Year 1
1,050 interest
$50
Year
2 1,102.50 $52.50
Year
3 1,157.63 $55.13
Year
4 1,215.51 $57.88
C. Simple Interest: Interest earned off of initial principle
Example: $1,000 in savings
at 5% interest
Year 1
1,050
$50
Year 2
1,100
$50
Year
3 1,150
$50
Year
4 1,200
$50
Year
5 1,250
$50
D. Three factors to effect growth of savings
and investing
1. Time:
The longer it has to grow the more it can accumulate
2.
Money: If the amount of money invested
increases so does rate of return
3. Rate of Return: As growth rate
increases the investment grows faster
E. Rule of
72: Money doubles at a point in time determined by dividing 72 by the interest
rate you earn
72 / 2% = 36 years
72/
4% = 18 years
72/6% = 12 years
72/8% = 9 years
72/12% = 6 years
Investment Notes -Page 2
At age 18 Sally puts $500 away per year. How long until she is a millionaire?
Savings
@ 4%/Yr.
= 130years old
Index
Fund @ 10.5% / Yr. = 71 years old
Mutual
Fund@ 15%/Yr. = 56 years
old
Major Life Goal
Total $ Needed
Savings/Month Time
20% Down/House $60,000
$300
9 years
?
?
?
?
III. Using money to make money
A. Golden
Rule: The greater
the risk the greater the potential profit or loss Risk/ Reward
B.
Yield:
Equals % return on your investment and is dependent on how
Often interest is compounded
C.
Snowball Theory: To beat inflation let it roll picking up size.
BE PATIENT
$1,000 at 14.5% - 8 year bond
Year
8-
$3,650.00
16- $ 13,322.50
24- $ 48,627.13
32- $177,489.00
40- $647,834.85
48- $2,364,595.20
D. Financial Institutions
Entities like banks, credit unions, brokerage houses, savings and loans. Their
goal is to direct money from savers to investors or borrowers. Savers money is
insured by two national insurance groups.
1. FDIC
Federal Deposit Insurance Corporation
2. NCUA
National Credit Union Association
Investment Notes - Page 3
IV.
Types of Investments and Savings
Consumers make decisions
according to rewards and penalties (incentives)
Scenario: Susan fears
losing her job in corporate downsizing. She sets money aside to cover her monthly
expenses in case she loses her job.
Incentive: financial stability
A. Savings
Savings Account: High liquidity
low interest and safe
Cash Deposit (DC): Less liquidity leave $ for
weeks to years
Money Market: Limited
checks, you have some liquidity, but less interest than CD
B. Stocks
Common Stock: Fractional
ownership in the total stock of a company.
Sold in the stock market, holder can vote in corporation business
At annual stock holders meeting.
Large gains are possible
Participate 2 ways in Corporation growth,
dividends and share prices
Preferred Stock: They
carry a set dividend rate, if company is liquidated you get dividend payment or asset distribution before common shareholders. No voting rights. Safest type of stock
to own.
Why Prices Change: After IPO, the market price reflects
investors views of a company’s prospects. (Public Confidence). They change
for political and emotional reasons as well as interest rates.
Analyzing Co.’s Outlook:
Uniqueness of product
Competitive position and potential
Market share of products sold
Sales and industry trends
Management practices
How inventive they are
Public image
Is future growth threatened
Investment Notes- Page 4
C. Bonds
Corporate Bond: I.O.U’s
for debt. Less risky, higher return than CD, MM, Savings
You are paid first if company goes Bankrupt ie. United Airlines
U.S. Savings
Bonds: U.S.
Borrows money by selling Bonds below face value and
placing an % value on it. $100
T- Bills:
3-6 months $500
T-Notes: 1-7 years
$1,000
T-Bonds:
10-20 years
Mutual Funds:
Pool savings to diversify in several companies, a safe investment.
Professionally managed with dozens of analysts and researchers.
High Liquidity. You pay a managers fee around 5% and
Fund expenses 2% annually.
Load Fund:
Mutual funds where you pay commission that changes based on performance
No Load Fund: Mutual funds where you don’t pay commission
Retirement/Pension Plans
IRA:
Individual Retirement Accounts. $2000/ year or $4000/year
If married. This is before tax contributions, tax deferred payments
Drawbacks: 1. early withdrawal penalties
2. Contributions stop after you are
70 ½ years old
3. Withdrawals are taxed
4. Withdrawals after you reach 70
½ years old
Roth IRA Similar to IRA, but
not tax deferred.
Positives: 1. Fewer penalties for early withdrawals
2. No penalty for withdrawing
if you are 59 ½, first time home buyer, Paying for college, disabled.
3. May contribute forever
401 (k) Tax deferred retirement fund, sometimes matched by employers.
Allows you to borrow against your fund paying yourself back at the going
interest rate.
403 (b) Same as 401 (k) offered to government employees.
Investment Notes Page- 5
History of Stock Exchanges
NYSE (1792) Who is accepted?
Companies worth $40 million with minimum earnings of $2 million. They are accepted on a case by case basis.
24 brokers met under a buttonwood tree on Wall Street in 1792 to make the first trades
in the stock market. (The Bank of New York was the first stock traded on the NYSE)
AMEX (1950) Who
is accepted?
Small cap and mid cap companies too small for the NYSE.
They
Began meeting on the curb outside the NYSE. It
was known as the curb exchange
NASDAQ (1971)Who is accepted?
Same as the NYSE but is primarily technology companies.
Regional Exchanges:Philadelphia, Chicago, Cincinnati,
Boston,
Pacific (L.A. & San Francisco)
OTC
Over the Counter. Risky stocks under $1 in value per share