Investing your money (1)

Investing Your Money -Savings Accounts

-Stock Market(Buy on Margin)

-Mattress

In 1929 -513 Millionaires in Americaby 1932 - 20

Savings Accounts- Guaranteed Profit- Safe

Stock Market- Chance for Larger Profits- Greater Risk

Buying Stocks – On Margin(Loan-on credit)- Very Risky- Chance for Large Profits will only a small

amount of cash

Mattress- No Profit- No Risk

Saving AccountsSay You have $10,000 but you don’t want to invest in the Stock Market because you want a reliable income by investing your

money in the Bank• Simple InterestRate per year – 6%

YEAR 110,000 x .06(6%) = $600

YEAR 210,000 x .06(6%) = $600

YEAR 310,000 x .06(6%) = $600

Total Money Saved after 3 yrs = $1,800 + 10,000

• Compound InterestRate per year – 6%

YEAR 110,000 X .06(6%) = $600

YEAR 210,600 x .06(6%) = $636

YEAR 311,236 x .06(6%) = $674.16

Total Money Saved after 3 years = $1,910.16 + 10,000

• In the 1920’s business used advertising

• This convinced consumers that they would be happier if they bought their product

• Many began to buy on

credit(installment plans)

Advertising played a role

How does the stock market work?You buy 100 shares of stock of

x $5.00 per shareHow much money have you invested? $500.00 (initial investment)

Scenario #1

stock increases to $20 per share

100 shares of stockx $20.00 per share

How much are your 100 shares of stock now worth?

$2,000.00

How much profit have you made?

$2,000.00 stock value

- $500.00 initial investment

$1,500.00 net profit

Millions of Americans invested in the BULL MARKET, becoming rich as stock prices rose.

Stocks Surge

How does the stock market work?You buy 100 shares of stock of

x $5.00 per shareHow much money have you invested? $500.00 (initial investment)

Scenario #2stock decreases to $1 per share

100 shares of stockx $1 per share

How much are your 100 shares of stock now worth?

$100.00

How much money have you lost? $100.00 stock value

- $500.00 initial investment

$400.00 net loss

* Unquestioned faith in the bull market helped lead to the GREAT DEPRESSION!

Some people began to buy stocks on margin, which is similar to installment buying (on Credit)

Credit and the Stock Market

The Federal Reserve • The board of the Federal Reserve, the nation’s central bank, worried about the nation’s interest in stock and decided to make it harder for brokers to offer margin loans to investors.

• Their move was successful, until money came from a new source: American corporations who were willing to give brokers money for margin loans.

• Buying continued to rise.

Investors increasingly used credit to buy stocks as the market rose.

Buying on Margin• Investors were buying on margin,

or buying stocks with loans from stockbrokers, intending to pay brokers back when they sold the stock.

• As the market rose, brokers required less margin, or investors’ money, for stocks and gave bigger loans to investors.

• Buying on margin was risky, because fallen stocks left investors in debt with no money.

• If stocks fell, brokers could ask for their loans back, which was called a margin call.

The stock market:people invest in a co. by

purchasing stocks; in return for this they expect a profit

With booming economy of the 1920's, $ was plentiful, so banks were quick to make loans to investors

also investors had to pay as little as 10% of the stock's actual value at time of purchasethis is called? BUYING ON MARGIN, and

the balance was paid at a later date

Buying Stocks on Margin: Scenario A

investor stock broker

Hello, sir. I would like topurchase 100

shares of stock in Ford. How

much is it going to cost me?

Buying Stocks on Margin: Scenario A

investor stock broker

Well, Ford stock costs

$10 per share. You

want tobuy 100 shares?

Figure it out yourself,

smartguy!

Buying Stocks on Margin: Scenario A

investor stock broker

Ummm…100 shares

x $10 per share

= $1,000.00

Oh, well. I only have $200. I can’t afford 100 shares.

Buying Stocks on Margin: Scenario A

investor stock broker

No, problem! Just give me $200 and you can owe me

the rest!

Buying Stocks on Margin: Scenario A

investor stock broker

Like, how muchwould that be? Let me think…

$1,000 worth of stock - $200 paid

= $800 owed

Alright, it’s a deal!!

Buying Stocks on Margin: Scenario A

investor stock broker

Six months later, Ford stock doubles to $20 per share.

Sell Out Mr. Broker Sir.

My 100 shares are now worth...

100 shares x $20 per share $2,000

Buying Stocks on Margin: Scenario A

investor stock broker

That’s great! Now pay me the $800 you

owe me!

Buying Stocks on Margin: Scenario A

investor stock broker

No problemo! It was a pleasure doing business

with you!

Buying Stocks on Margin: Scenario A

investor

Now let’s figure out how much money I made!

$2,000 net worth - $800 owed to Broker $1,200 -- money on hand

- $200 initial investment

$1,000 net profit

Buying Stocks on Margin: Scenario B-Investor didn’t sell

investor stock broker

Six months later, Ford stock decreases to $1 per share.

My 100 shares are now worth...

100 shares x $1 per share

$100 net worth

Buying Stocks on Margin: Scenario A

investor stock broker

Too bad, hotshot! You still owe me

$800!

Buying Stocks on Margin: Scenario A

investor stock broker

But I’m broke! What am I going

to do!

Buying Stocks on Margin: Scenario A

investor stock broker

I don’t care what you do as long as you pay

me back!

Unquestioned faith in the Bull market helped lead to the GREAT DEPRESSION!

Many Buy stocks on margin, which is similar to installment buying

The Money? “It’s all gone!”

People lost all faith in the American Banking System

Bring Calculator to Class Tomorrow