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Building Bucks

Building Bucks

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Building Bucks

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Presentation Transcript

  1. Building Bucks Savings and Investment Basics

  2. Basics • Saving • provides funds for emergencies and for making specific purchases in the near future • Investing • Focuses on increasing net worth and achieving long-term financial goals

  3. Investing • Buying an investment • Putting money into an asset that generates a return • Speculation • Not the same as an investment • Purchasing assets, equity or debt because of an assumed value • Ex: Gold coins, baseball cards, gems

  4. Saving or Investment Choices • “Lending Investments” • Savings accounts • Bonds • “Ownership Investments” • Real-estate • Income-producing properties • Stocks • Interest rates affect your rate of return

  5. Risk—What’s Your Tolerance? • Interest Rate Risk • The higher the interest rate, the less the bond is worth • Inflation Risk • Rising prices will erode purchasing power • Business Risk • Effects of good and bad management decisions • Financial Risk • Associated with the use of debt by the firm • Liquidity Risk • Inability to liquidate a security quickly and at a fair market price • Market Rate Risk • Associated with market movements

  6. Reducing Risk • Diversification • “Don’t put all your eggs in one basket” • Reduces risk without affecting expected return • Asset Allocation • Investment return is associated with types of assets you select • Investment portfolio

  7. Securities • Primary Markets • New securities traded • Initial Public Offerings (IPOs) and Seasoned New Issues • Secondary Markets • Previously issued securities traded • Stocks and bonds • Trading done through either bond dealers or brokers

  8. Types of Brokers • Full-Service Brokers • Commission based, give advice and execute trades • Discount Brokers • Execute trades, but provide no advice, approx. ½ the commission rate • Deep Discount Brokers • Execute trades for up to 90% less than full-service brokers • Online Brokers • Discount or deep discount brokers trading electronically for a flat fee

  9. Savings Account Basics • Allow you to… • Put money away for future use • Protect your principal and earn interest • Types • Regular Savings Account • Certificates of Deposit (CDs) • Highest return on savings, least amount of risk • Money Market Account

  10. Bonds • Investing • Produce steady income • If held until maturity, bonds are a safe investment with low risk • Par Value • Face value or return at maturity • Coupon interest rate • Percentage of par value paid out annually

  11. Types of Bonds • Corporate Bonds • Allow firms to borrow money • Treasury and Agency Bonds • Agency bonds are virtually risk-free with higher interest rates than Treasuries • Municipal Bonds • Tax-exempt • Serial maturities • Not entirely risk free • Junk Bonds • Low-rated or high-yield • Greater risk of default • Callable (issuer can call them back and reissue at an altered interest rate)

  12. Investing in Stocks • Common Stock • Purchasing a part of the company • Possible dividendsand capital appreciation • Many are limited liability • Companies may repurchase their own stock • Types of Common Stock • Blue-Chip Stocks • Growth Stocks • Income Stocks • Speculative Stocks • Cyclical Stocks • Defensive Stocks

  13. Risk • Common Stock • Stocks fluctuate in value over time • Diversification reduces risk • Investing over time can be wise • Leverage, borrowing money to invest, increases risk • Preferred Stock • No fixed maturity date • If interest rate rises, value drops • If interest rate drops, value rises and it is called away • No safety of bond interest payments

  14. Mutual Funds • A diversified portfolio of stocks, bonds or other securities. • Services • Automatic investment and withdrawal plans • Automatic reinvestment of interest, dividends, and capital gains • Wiring and funds express options • Phone switching • Easy establishment of retirement plans • Check writing • Bookkeeping and help with taxes

  15. Investment Companies • Open-end Investment Companies • Most popular • Can issue an unlimited number of shares • Closed-end Investment Companies • Fixed number of shares, cannot issue new shares • Unit Investment Trusts • Real Estate Investment Trusts

  16. Mutual Funds vs. Individual Stock and Bond Trading • Mutual Funds • Professional management of investing • Minimal transaction costs • May offer higher returns • Many to choose from • Individual Stock and Bond Trading • Requires time and expertise • Higher transaction costs • Less likely to have proper diversification