Saving and Investing
Stocks
The stock market is a private or public market for the trading of company stocks at an agreed price. Stocks are listed and traded on stock exchanges where buyers and sellers of stock and bonds are brought together.
U.S. Savings Bond
a formal agreement where the federal government (borrower) pays interest to investors (lenders) for loaning money a) the government will use your money for a set period of time. b) savings bonds are designed to be held for up to 30 years so if you cash it in within 5 years of purchase, you will pau a penalty--usually 3 months of lost interest c) typically pay higher rates of return than savings account d) you can buy government issued U.S savings bonds from almost any financial institution or directly from the government
Inflation
a rise in the cost of goods and services -inflation decreases the spending power of each dollar you have
Stock
an investment that represents part ownership in a corporation and entitles the stock owner to a part of that corporations earnings and assets
Basic Rule
basic rule of a risk to return relationship is that the higher the risk, the higher the return rate (the more $ you will make)
compound interest
earning interest on interest (earning interest on the principal plus the interest you have already earned) -earning interest on interest
Common Stock
gives shareholders voting rights but no guarantee of dividend payments
Stock
having stock in a company means that you own a part of that company a) stock is purchased in denominiations called shares b) individuals who own stock are referred to as shareholders or investors c) stock is generally riskier than income investments because you can potentially make more money -over long periods of time, stock tends to make more money than income investments d) stock is generally liquid where you can sell back a stock at any time
simple interest
interest that does not compound (you dont earn $ on the interest)
Investing
is putting money to a use that you hope will increase its value over time (long-term goals) -no guarantee $ will go -investment will rise/increase and fall/decrease in value over time -risky-growth, or increase in value of investments over a period of years is not guaranteed -- you may lose a lot of money, however, you may gain a lot of money
Savings Account
normally the first banking product that people use or open a) earns a small amount of interest b) considered to be very low risk c) tend to pay low rates of interest d) you can take your money out of the account without any penalties, so a savings account is very liquid. (liquid: it can easily be converted to cash)
Preferred stock
provides no voting rights but usually guarantees a dividend payment.
Examples of Growth Investments
real estate, stock, classic cars, coins, baseball cards, stamps etc real estate: investors buy property such as land or buildings exampels of real estate: a) malls b) apartment complexes c) undeveloped land (land that has nothing built on it) d) commericial buildings e) farmland f) houses
Blue Chip Stock
stock in a corporation with a national reputation for quality, reliability and the ability to operate profitably in good times and bad.
principal
the amount $ invested or the $ borrowed for a loan
Earned interest
the payment you recieve for allowing a financial institution or corporation to use your money
Saving (Cont)
- when you save or invest your money, you will earn a certain amount of interest of interest depending on the rate of interest -apr/apy
Time Value of Money
time value of money refers to the relationship among time, money, and rate of interest -money: the more you have to save or invest, the more you are likely to earn rate of interest: the higher the rate, the more money you are likely to earn -time: he sooner you invest, the more time your money (investment) has to make new money, so it will be more lkely that your investment will earn more money as a result
Saving
what people do to reach short term and intermediate-terms goals. -money is very safe -earns small amounts of interest -easy for you to get to and withdraw the money when you need it. (your account is very liquid--the money can easily be converted into cash) -when interest rates are low, money has very low growth, but it is very safe
Investment Facts
1. All investments involve some degree of risk which uncertainty that the anticipated return will be achieved. 2. Risk/reward trade off-- the principle that an investment must offer higher potential returns to make up for the increased potential unpredictability. 3. The GREATER the risk you take with your money, the GREATER the potential returns on your investments. The LOWER the risk you take, the LOWER the potential returns will likely be. 4. Investors range from CONSERVATIVE to AGGRESSIVE. It depends on how much risk you are willing to take on your investments.
Certificates of Depsoit
when you purchase a CD from a bank, you are loaning money for a set period of time such as 3 months, 6 months, 1 year, 2 years etc. and getting interest in return. a) the longer the term the higher the rate of interest paid b) normally pay a slightly higher rate of interest than savings bonds c) like savings bonds, you will lose a few months of interest if you cash them in early (there will be a penalty)
Dow Jones Industrial Average
A price-weighted average of 30 U.S blue-chip stocks.The most popular index which follows US Blue Chip Stocks
Money Market Account
Cons: a) may limit how many withdrawls (take money out of account) you can make a month b) requires initial deposit c) may require a higher minimum balance to avoid fees.
FDIC
Federal Deposit Insurance Corporation -each depositor is insured for up to $250,000 -FDIC is an independent agency of the United States government -each month banks pay a percentage of their deposits to the FDIC for FDIC protection
2 Major Categories of Investments
Income: Growth: Savings acount Stock U.S savings bond Real estate Certificate of deposit Collectibles Money market