family economics financial education june 2010 investing unit introduction to investing slide 1...

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 1Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.12.1.G1Risk vs. Reward

ActivityWinnings Chart

Number of Guesses 6 5 4 3 2 1

Number of Candies Won 0 1 2 5 10 15

Activity

Number on Die 1 2 3 4 5 6 Number

Rolled

Number of

Guesses

Candies Won

Round 1

Round 2

Round 3

Round 4

Round 5

Total


1.12.1.G1

Group Questions1. How did the number of candies won relate

to the number of guesses made?2. Who had the largest return? Did you have

a strategy for play?3. Did anyone have a strategy for activity

play? If so, did the strategy work?4. Did anyone choose only one number every

time? If so, how many candies did you win?

5. Did anyone choose five numbers every time? If so, how many candies did you win?

6. If you had to give up candies every time you chose a number would you have played differently?

Discuss and then answer on

the back of activity sheet.

Please use complete

sentences.

Introduction to Investing

Take Charge of Your FinancesFamily Economics and Financial

Education


1.12.1.G1Saving and

InvestingOnce an appropriate amount

of liquid assets are reached

Refocus goals from savings to investing

Remember: The purpose

of savings is

to develop financial security.


1.12.1.G1

What is Investing?• The purchase of assets with

the goal of increasing future income

Characteristic: • Focuses on wealth

accumulation

Investing is appropriate for long-term goals.

What are examples of long-term goals that

can be accomplish

ed by investing?


1.12.1.G1

Rate of ReturnInvestments usually earn

higher rates of return than savings tools

• Rate of Return–The total return on an

investment expressed as a percentage of the amount of money invested

Total

Return

Amount of

Money

Invested

Rate of Return

Remember: Return is the profit or income generated by savings

and investing.


1.12.1.G1What is Mandy’s

Rate of Return?Mandy saved $2,200 in a

money market deposit account. After one year, she

has a return of $110. What is Mandy’s rate of return?

$ $

Mandy’s rate of return on investment is %


1.12.1.G1What is Derek’s

Rate of Return?Derek invested $900. When he withdrew his money from the investment, he had a total of

$1,050. What is Derek’s rate of return?

$ $

Derek’s rate of return on investment is %


1.12.1.G1

RiskPOTENTIA

L RETURN

RISK

Risk• The uncertainty regarding the outcome

of a situation or eventInvestment Risk• The possibility that an investment will

fail to pay the expected return or fail to pay a return at all


1.12.1.G1

Investment Risk• Risk is a trade-off for the

potential to receive high returns• All investments carry some

level of risk

Financial Risk PyramidIllustrates the trade-offs between risk

and return for a number of saving and investing tools

What is the risk level of

savings tools?


1.12.1.G1Financial Risk

Pyramid

Wealth Accumulation- Investments

Financial Security- Savings Tools

SpeculationIncreasing

potential for higher returnsIncreasing risk


1.12.1.G1

InflationInflation

The rise in the general level of prices

Inflation RiskThe danger that money won’t be worth

as much in the future as it is today

Inflation risk should not be a concern with savings since the

goal of savings is to provide current financial security

The rate of return on an investment should be

higher than the rate of inflation.


1.12.1.G1Investment

PhilosophyEach individual has a tolerance level for the

amount of risk they are willing to take on

Investment PhilosophyAn individual’s general

approach to investment risk

The greater the risk a person is willing to

make on an investment, the greater

the potential return will

be.

Generally divided into three categories: conservative, moderate, and aggressive


1.12.1.G1Discussion

Questions1. When playing Risk vs.

Reward, what do you believe your investment philosophy was?

2. Did your investment philosophy change throughout the activity?

3. Do you think your investment philosophy during the activity is or will be the same in real life?


1.12.1.G1Portfolio

DiversificationPortfolio Diversification-

reduces risk by spreading investment money among a

wide array of investment toolsCreates a collection of

investments that will provide an acceptable

return with an acceptable exposure to risk

Assists with investment risk reduction

Referred to as “Building a Portfolio.”


1.12.1.G1Types of

Investment ToolsStocks Bonds

Mutual Funds

Index Funds

Real Estate

Speculative

Investments


1.12.1.G1

Stocks• Stock–A share of ownership in a

company• Stockholder or shareholder–Owner of the stock

Usually a stockholder owns a very small part

of a company.


1.12.1.G1

Return on Stocks• The share of profits distributed in

cash to stockholders• Stockholder may or may not

receive dividends- depends on company profit

Dividends

• The current price that a buyer is willing to pay for stock

• If stock is sold for a market price higher than what was paid, stockholder will receive a return

• If stock is sold for a market price lower than what was paid, stockholder will lose money

Market Price


1.12.1.G1

Bonds• A form of lending to a company or

the government (city, state, or federal)

• The company or government pays annual interest to the investor until the maturity date is reached– The specified time in the future when

the principal (or initial investment) amount of the bond is repaid to the bondholder

Bonds are less risky

than stocks but do not have the

potential to earn as

much as a stock.


1.12.1.G1

Mutual Funds• Mutual fund- Created when a

company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds

Always research the fees

charged by a mutual

fund.

Reduces investment risk

by helping people diversify their portfolio

Fees can be high

Saves investors time


1.12.1.G1

Index Fund• Index fund– A mutual fund that was designed to

reduce fees by investing in the stocks and bonds that make up an index

• Index- a group of similar stocks and bonds– Examples- Standard and Poor 500,

Wilshire 5000• Offer high diversification with low fees

What is the difference between a

mutual fund and an

index fund?


1.12.1.G1

Real Estate• Includes any residential or

commercial property or land as well as the rights accompanying that land

• A family home is not considered an investment asset

• Can be risky and more time consuming but has potential for large returns

Examples of real estate

investments include

rental units and

commercial property.


1.12.1.G1Speculative

Investments• Have the potential for

significant fluctuations in return over a short period of time–Examples- future, options,

commercial paper, collectibles

• Recommended for people with an aggressive investment philosophy and a high level of financial security


1.12.1.G1

DISCOUNT BROKER

Buying and Selling Investments

Investors must utilize a brokerage firm that acts as a buying and selling agent

for the investor (except for when buying real estate and certain speculative

investments).FULL SERVICE GENERAL BROKERAGE FIRM

Complete investment

transactions

Offer investment advice and one-on-one attention

from a broker

Only complete

investment transactions

Offer no advice to investors

but charge 40-60% less

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