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Consumer Economics
Investment notes
Home | overview | final exam review | Unit 1 Economic Thinking | Unit 2 Investments | Unit 3 personal finance | Unit 4 Demand/Supply

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Investment Notes -page 1


I.                                  Savings:          Income withheld from current spending for future use.



                                    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 years old

                                                        3. Withdrawals are taxed

                                                        4. Withdrawals after you reach 70   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 ,  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









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