Monday, February 10th

• Warm Up: Please answer these questions on your warm up:– How would you explain the power of

“compounding” to someone?– How does opportunity cost relate to a class

on building wealth?– Define “RISK”

Today’s Goals …

• Explain the relationship between risk and return

• Categorize investments as lending or owning investments

Investors take a risk for the potential return.Investors take a risk for the potential return.

Why Risk It?Why Risk It?

Risk = possibility of lossRisk = possibility of loss

Return = potential reward or Return = potential reward or benefitbenefit

• High potential return High potential return →→ high risk high risk

• Moderate potential return → moderate risk Moderate potential return → moderate risk

• Low potential return → low risk Low potential return → low risk

Risk and ReturnRisk and Return

What determines how much What determines how much risk you can handle?risk you can handle?

What you want to What you want to accomplishaccomplish

How much time you have How much time you have

Your personalityYour personality

Handling RiskHandling Risk

Protect Your Initial InvestmentProtect Your Initial Investment

• High risk High risk →→ Initial investment may be lost. Initial investment may be lost.

• No risk → Initial investment is secure. No risk → Initial investment is secure.

• Use the risk pyramid to compare investments.Use the risk pyramid to compare investments.

• Categories:Categories:

See Your Risk in PerspectiveSee Your Risk in Perspective

HighHigh ModerateModerate

LowLow

Peak Peak → most risky→ most risky

Base → most reliableBase → most reliable

Categorize investments as lending or owning investments

Securities = legal lending Securities = legal lending or owning agreementsor owning agreements

SecuritiesSecurities

OWNING INVESTM

ENTS LENDIN

G IN

VESTMENTS

SECURITIES

• LendingLending

• OwningOwning

Categories:Categories:

• Lending investment = lending Lending investment = lending money for a pricemoney for a price

Lending InvestmentsLending Investments

Savings accountSavings account

Lending Investments—TypesLending Investments—Types

Certificate of depositCertificate of deposit

Money market accountMoney market account

• Lend money to a bankLend money to a bank• Lend money to a Lend money to a government or corporationgovernment or corporation

BondsBonds

Lending Investments

• Are lending investments right for you?

• Here’s why I like them …– More secure/ less risk– Easy Access– Several options

Ownership investment = ownersOwnership investment = owners’’ rights rights

High or moderate riskHigh or moderate risk

Ownership InvestmentsOwnership Investments

• Stock mutual fund = owning Stock mutual fund = owning pieces of several corporationspieces of several corporations

Ownership Investments—TypesOwnership Investments—Types

• Stock = owning a piece of a Stock = owning a piece of a corporationcorporation

• Real estate = owning propertyReal estate = owning property

• Collectible = owning an item Collectible = owning an item valuable to you or someone elsevaluable to you or someone else

Owning Investments

• Are owning investments right for you?

• Here’s why I like them …– More reward (which does mean more risk)– Easy access for stocks, stock mutual funds– Several options, with a variety of risk levels– TONS of information available to learn

about them

• Use the risk pyramid to compare investments.Use the risk pyramid to compare investments.

• Categories:Categories:

See Your Risk in PerspectiveSee Your Risk in Perspective

HighHigh ModerateModerate

LowLow

Stocks, MF, Stocks, MF, CollectiblesCollectibles

Real Estate,Real Estate,Stocks, Mutual FundsStocks, Mutual Funds

Savings Accounts,Savings Accounts,MMAs, CDs, and BondsMMAs, CDs, and Bonds

Peak Peak → most risky→ most risky

Base → most reliableBase → most reliable

In Summary …

• Two categories of securities (or investments)– Lending– Owning

• Lots options• Higher the risk, higher the reward• Opportunity cost and risk – the

relationship (add note to your risk tab)

Practice Quiz

Stock Research

• Take a look at the stocks you’ve selected.

• Lending or ownership investment?

• How could you evaluate their level of risk?– Volatility

In Summary

• REMEMBER: Need to finalize your list of TEN stocks for tomorrow’s class … prepare to create your stock portfolio!

• You’ll become Company Owners (in THEORY!)

Copyright:

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