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 lost
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
