Unit 6.2a-b

4 factors used to compare savings and/or investment options include:

1. Convenience - This is a sense of the relative ease with which a financial instrument or institution can be accessed in terms of time and location. 2. Liquidity - This is a measure of how quickly a financial instrument can be converted to cash. 3. Reward - The benefit or return gained from an investment. 4. Risk - The chance of losing money.

Mutual funds

A pool of money used by a company to purchase a variety of stocks, bonds or money market instruments. Provides diversification and professional management for investors.

Savings and Checking Accounts

A savings account is the most basic type of account a bank offers; your money is insured and typically earns interest over time. Depending on the amount of money in the account, a savings account may earn only 0.09% interest, depending on the type of institution providing the account (as of January 2020). There is usually a low minimum amount ($25) required to open the account. Generally, online banks offer higher interest rates since they have fewer costs compared to brick-and-mortar institutions. A checking account is very similar to a savings account except that it is easier to withdraw money in the form of a check or an ATM transaction. The money in a checking account usually earns no interest at all or a lower interest rate than the money in a savings account or because the balance tends to be less steady. The higher interest in savings accounts acts as an incentive for people to save. The more money people have in their savings accounts, the more money banks have to fund loans, which can help keep the economy growing in a healthy way

Money Market Accounts

A type of savings account that banks and credit unions offer. The interest earned is based on the interest banks make on short-term investments. These accounts differ from regular savings accounts because they typically earn higher interest but also have higher minimum balance requirements (sometimes $1,000 to $10,000). Money market accounts also typically earn more interest than CDs do, depending on the performance of the account. They offer more liquidity than money tied up in a CD. However, money market accounts frequently limit the number of transactions allowed on the account—often just three per month. They are set up in units of shares; one dollar of your money buys one share. Money Market= Savings account on Steroids.

Mutual funds

During times of economic change, different types of investments produce different results. Some investments might do well, and others might do poorly. This is why many people invest in mutual funds—a collection of several different stocks and bonds. A mutual fund company selects various stocks and bonds it believes will perform well overall. An investor can then buy shares in the mutual fund rather than the individual stocks that make up the fund. Mutual funds are attractive because they offer a less risky way of investing in the stock market. If one stock does poorly, chances are another one in the same mutual fund will perform well, so the overall outcome for the investor could still be positive. A well-balanced portfolio balances the risks and rewards for its investors.

Costs of Investing

Finance Charges/Fees - The total cost of credit, including interest and transaction fees. Interest Rate Risk - The chance that interest rates may change (upward) while the saver is "locked in" to a (lower) rate for a time deposit (a CD, for example) or a bond. Also the chance that interest rates may change (downward) while a borrower is "locked in" to a (higher rate) on a loan. Load - A fee charged for purchasing (front-end) or selling (back-end) shares of a mutual fund. Loads are usually calculated as a percentage of the amount of the transaction. Some mutual funds are no-load funds. Market Gains/Losses - The loss of value of an investment due to market conditions.

real estate

Property such as land, houses and office buildings.

Cost to consider when investing include: finance charges and fees, opportunity costs

Risks to consider when investing include: market losses and interest rate risk

What is the difference between saving and investing

Saving= Zero Risk Investing= Risk remember the higher the interest rate the higher the risk.

Saving options

Savings Accounts Certificates of Deposit Money Market funds

Cash vs Bank

The most basic option for saving money is simply to keep it as cash. However, you should look at the costs and benefits of depositing your money at a bank in a checking or savings account. Apart from providing interest, banks insure your money and usually provide a free debit, ATM, or credit card, which you can use with the account. With an account, a bank also will cash your checks for free—a service that would cost extra at another bank. Banking does involve fees. Some banks charge monthly fees for basic savings or checking accounts; so, be smart, and ask what fees are involved for any type of account you open

money market mutual fund

These mutual funds are invested in high quality short-term, fixed-income securities. They are for people who want a relatively low-risk investment that offers stability and liquidity. They are based on securities including cash or cash equivalents. When you invest in a money market mutual fund, an investment company puts money together from investors to buy short-term investments, such as Treasury bills, CDs, and short-term bonds offered by large corporations. Money Market Mutual Funds are issued by investment companies and are not insured by the FDIC. They generate income but usually don't offer capital appreciation. Returns on these investments vary, and they can be easily bought and sold. Money Market Mutual Funds are excellent short term investments but lack the higher rate of return of other investment options.

What is investing?

When people invest, they spend something now (it can include time and effort as well as money) in an effort to gain something in the future. Involves risk!

Financial Planning Pyramid

from high risk highest earnings to lower risk lower earnings top- Commodities, Collectibles 2nd- real estate, speculative/stock/bonds/mutual funds 3rd- Growth stocks 4th- Value stocks 5th- Mutual funds and high-grade corporate bonds bottom- insured savings/ checking accounts, U.S savings bonds, certificates of deposit, Treasury issues

Investment options

stocks bonds government savings bonds mutual funds Real estate retirement plans

opportunity cost

the cost of giving up something to have something else

Scarcity Exists

when there are not enough resources to satisfy all of the wants. ________ requires certain trade-offs and good decision making. For example, during your lifetime you will only earn so much money.

How do I start building wealth? 5 stages of investing

1. Put-and-take account:3-6 months in liquid account 2. Beginning investing: low risk investments (CD,MM) 3. Systematic investing: Retirement savings 4. Strategic investing: Values and Growth Stocks(10 year goals) 5. Speculative investing: Commodities (Gold/Soybeans ect.), Collectibles (Baseball cards/beanie babies)

Where do you get funds for investing

1. gifts- a voluntary present of money or some other valuable asset 2. inheritance- money or other assets given to a party upon one's death, also known as a bequest 3. Market Gains-Proceeds from previous investments in the form of interest payments, dividends (regular distribution of profits) or capital gains (realized income from selling an investment at a higher price than was paid for it). 4. Savings - Money set aside for a future use that is held in easily-accessed accounts, such as savings accounts and certificates of deposit (CDs)

Certificates of deposit (CD)

A (interest bearing) certificate issued by a bank to a person depositing money in an account for a specified period of time (often six months, one year or two years). A penalty is charged for early withdrawal from CD accounts.

Bonds

A certificate of indebtedness issued by a government or a publicly held corporation, promising to repay borrowed money to the lender a fixed rate of interest and at a specified time. (Optional: Bonds are rated according to their perceived risk. AAA is the highest rating. B- or B3 is the lowest for a bond of a firm or government that is not in default.)

Stocks

Also called equities, stocks are the cornerstones of many people's investment plans because they can earn high returns. A stock is a share in the ownership of a company. As a stockholder, you are a part-owner of a company and have a claim to a portion of that company's assets and earnings. The more stock you purchase, the greater your portion—or share—in the company's earnings. You can buy stock in any publicly traded company. It could be Apple, Coca-Cola, or a small construction company whose environmental mission you want to support. There are large-cap, mid-cap, and small-cap stocks—these are ways of describing the size of a company (for instance, large-cap stocks refer to larger companies). Most large-cap businesses and corporations are typically valued as being worth $10 billion or more. Some examples of large-cap stocks include Walmart, Microsoft, and General Electric. Stocks typically increase or decrease in value based on a company's performance. Stocks may also pay a dividend—or a portion of the profits—for each share, usually every three months. If a company grows and is successful in the marketplace, a person's investment will increase. Apple is a good example of this. If you had bought Apple shares in 2004 and sold them in February 2020, you would have made a lot of money. Let's say you had purchased one single Apple share in 2004 for $17. In early 2020, that same share would have been worth more than $324—a net increase of more than 1800%! If you would have bought and sold 1,000 shares during that time, you would have more than enough money for a college tuition. The beauty of stocks is that you can potentially earn a great deal of money. But, you also risk the possibility of not making much money or of losing your initial investment entirely. For example, if someone would have bought Apple stock in February 2008 and sold it in February 2009, that person would have lost about half of his or her investment. While stocks can increase your earnings dramatically, they are also among the riskiest types of investment.

Money Market Account

An interest-bearing account similar to a saving account. Deposits may be added at any time; some money market accounts limit the withdrawals depositors may make without paying a penalty. Also known as money market deposit account.

Stocks

An ownership share or shares of ownership in a corporation.

Bonds

Another type of investment is a bond, which is a sort of loan from you to a company or a government. When you purchase a bond, you are lending money to that entity for a defined period of time and at a fixed interest rate. Typically, you will get a dividend—or payout of the interest—on a regular basis, such as every year. At the end of the set term, your investment is returned to you. Companies and municipalities use bonds to finance a variety of projects and activities. They are usually considered a lower risk than stocks, but that is not always the case. For instance, a saver might buy bonds in a promising new biotechnology company; however, five years later, when they try to redeem the bonds, they discover that the company is no longer in operation. Firms such as Standard & Poor's evaluate the credit ratings of businesses and governments to determine how risky it would be to purchase their bonds. "Junk" bonds are the riskiest type. These types of bonds are high-yield bonds carrying high risk, which are generally issued by a company seeking to raise capital in a very short amount of time. There are three main categories of bonds. Businesses can use corporate bonds, city and local governments can issue municipal bonds, and the federal government can issue U.S. bonds and treasuries. Bonds are frequently bought and sold like cash and are considered a fairly liquid form of investment.

Treasury Securities

Bonds issued by the United States Treasury to investors when the federal government borrows money. *Treasury bills have maturity of one year or less. *Treasury notes have maturity of one to ten years. *Treasury bonds have maturity of more than 10 years.

Liquidity

Both of these are Very Liquid! Liquidity is an important characteristic of any asset. Liquidity refers to how easily an asset can be turned into cash. Savings or checking account funds are considered one of the most liquid investments because the money can be removed at short notice and low cost. You can access your money at any time with no penalty or fee. To open a savings or checking account, simply go down to your local bank with proper identification and ask to open an account.

Certificate of deposits (CD's)

Certificates of deposit, or CDs for short, are accounts that earn an interest rate proportional to the length of time your money is held. The longer the bank keeps your money, the higher the interest rate will be. (photo on google slide #12)