Saving and Investing

Saving and Investing EQ: Explain the differences between saving and investing and the benefits and risks of each. E. Napp

There is a difference between saving money and investing money. E. Napp

Saving and Investing • When a person saves money, he is storing money. • When a person invests money, he is trying to significantly increase his money. • Investing money involves greater risk but also potentially greater gain. E. Napp

People invest when they buy stocks and bonds. E. Napp

Stocks and Bonds • When a person buys stock, he is buying partial ownership in a corporation. • When a person buys a bond, he is loaning money to a corporation or government. • It is important to remember the investment poem: Stocks, you own. Bonds, you loan. E. Napp

There are many financial intermediaries to help people invest. E. Napp

Financial Intermediaries • A financial intermediary transfers money from savers to borrowers. • Financial intermediaries can help a person invest. • Banks, finance companies, and mutual funds are examples of financial intermediaries. E. Napp

A mutual fund pools money from many investors. E. Napp

Mutual Fund • A mutual fund pools savings from many people and invests the money in a variety of different ways. • When a person invests in a mutual fund, his money is invested in a variety of stocks and bonds. • The investor ideally profits as does the mutual fund company. E. Napp

By investing in a variety of stocks and bonds, a person reduces his risk. E. Napp

Diversification • The idea of spreading out investments to reduce risk is called diversification. • Think of diversification as not putting all your eggs in one basket! • By investing in a variety of stocks and bonds, the investor is less likely to lose his entire investment. E. Napp

People invest money to ideally make more money. Yes, money can make money! E. Napp

Return • A return is money made above the investment. • If an investor invests $1,000 dollars and makes $1,250, his return is $250. • Investors invest hoping for returns. E. Napp

Questions for Reflection: • What is the primary difference between saving and investing? • Explain the investment poem concerning stocks and bonds. • Why do many investors prefer investing in mutual funds? • Why must an investor diversify his investments? • Why do investors want returns? E. Napp

Bonds and Other Financial Assets In this lesson, students will be able to identify characteristics of bonds and other financial assets. Students will be able to identify and/or define the following terms: Bonds Par Value Coupon Rate Maturity E. Napp

Do you remember the investment poem? Stocks, you own. Bonds, you loan. E. Napp

Bonds • Bonds are loans. • An investor loans money to a corporation or a government. • The corporation or government must repay the loan with interest. E. Napp

This is a U.S. Savings Bond. When an investor buys this bond, he is loaning money to our Government. E. Napp

The Three Components of a Bond: • Par Value: This is principal or original amount of the investment. • Coupon rate: This is the interest rate on the bond. • Maturity: This is the end of the period. This is the moment when the par value and the coupon rate are paid. E. Napp

To receive all of the possible interest accrued on the bond, an investor must wait until the bond matures. E. Napp

Bonds and Risk • While there are many different types of bonds, most bonds are relatively safe investments. • Due to the relative safety of bonds, investors do not make as much money investing in bonds as they do stocks. • However, not all bonds are safe. E. Napp

The more likely the investment is to fail, the more money the investor would make it if succeeds. E. Napp

Types of Bonds • An investor can buy U.S. Savings Bonds and U.S. Treasury Bonds. These are relatively safe investments. • An investor can also buy a bond from a corporation. • A junk bond is a highly risky bond issued from a failing corporation. E. Napp

Investors are more likely to lose their investments when they purchase junk bonds. However, if the company improves, the investor will make a huge profit. E. Napp

Risk and Profit • Investors risk their money hoping to make more money. • High-risk investments are investments that are more likely to fail. • However, higher risk leads to greater profits. Remember, trade-offs! E. Napp

While bonds, excluding junk bonds, are generally safe investments, all investment involves some element of risk. E. Napp

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Questions for Reflection: • What is a bond? • List the three components of every bond. • How does par value differ from the coupon rate? • Why is maturity important for the investor? • How do junk bonds differ from other bonds? • What is the relationship between risk and profit? E. Napp

The Stock Market In this lesson, students will be able to identify characteristics of the stock market. Students will be able to identify and/or define the following terms: Stock Dividend Capital Gain and Capital Loss Dow Jones Industrial Average New York Stock Exchange E. Napp

Do you remember the investment poem? Stocks, you own. Bonds, you loan. E. Napp

Stocks • When a person buys stock, he is buying partial ownership in a corporation. • If the corporation prospers, the investor prospers. • If the corporation fails, the investor can lose his investment. E. Napp

A stock certificate is a piece of paper that shows partial ownership in a corporation. E. Napp

Profiting from Stocks • There are two ways a stock investor can profit from his stocks: Dividends: payments made by corporations to stockholders Capital Gain: selling a stock for more than its original purchase price E. Napp

However, sometimes a capital loss occurs. A capital loss occurs when an investor sells his stock for less than the original purchase price. E. Napp

Stock Markets • Stocks can be purchased in the following stock markets: The New York Stock Exchange (NYSE): handles the most powerful and established companies NASDAQ-AMEX: handles mostly newer technology stocks E. Napp

The New York Stock Exchange (NYSE) handles the most powerful and established companies. E. Napp

The Dow Jones Industrial Average • Stock performance is reported in the Dow Jones Industrial Average. • The Dow Jones Industrial Average is usually referred to as the Dow. • The Dow monitors and reports generally on the trading activities of thirty of the most powerful companies. E. Napp

The Dow is either up or down. If the Dow is up, stocks are selling at higher prices. If the Dow is down, stocks are selling at lower prices. E. Napp

Bull and Bear Markets • A bull market occurs when the stock market rises steadily over a period of time. • A bear market occurs when the stock market falls over a period of time. • Stock indexes, like the Dow, allow investors to track the progress of the stock market. E. Napp

Investors love bull markets. But remember, what goes up, most come down. E. Napp

While investors may not like bear markets because selling prices are low, bear markets are excellent times for buying shares at lower prices. E. Napp

Questions for Reflection: • What is the difference between owning stocks in a corporation and owning bonds in the same corporation? • List two ways investors can make money owning stocks. • List two markets from which investors can purchase stocks. • Why is the Dow Jones Industrial Average important? • What is the difference between a bull market and a bear market? E. Napp

Saving and Investing