Essential Standard 4.00 Understand the role of finance in business.
Topics
Saving and investing basicsSaving and investing optionsEvaluation factors for savings and
investing options
Forbes Richest 400
www.forbes.com/wealth/forbes-400/list
Complete Forbes 400 Wealthiest Individuals Activity
Saving and Investing Basics Reasons money is borrowed by the
following: Individuals: to purchase large ticket
items such as homes and cars Businesses: to operate or expand their
business; purchase a building, replace old equipment or offering new products
Government: to improve or expand transportation, schools or other public services
Saving and Investing Basics
What is saving? Putting away money for future use Where?
What is investing? Using savings to earn more money for
future financial security Where?
Saving and Investing Basics
Saving influences on economic activity makes more money available to be used
by individuals, businesses and government
When the borrowed money is spent, the demand for goods and services increases which creates more jobs and spending for workers
Saving and Investing Basics continued
Main goals of savers and investors include making available immediate income and long-term growth
Saving and Investing Basics continued
Growth of savings is interest earned when other borrow your money Simple interest is the amount of $$
paid to saver on the amount deposited for a period of time
Compound interest is the amount of $$ paid to saver on the amount deposited AND interest previously earned for a period of time
Saving and Investing Basics continued
Impact of compound frequency on savings growth rate: the more times the interest is compounded the more growth in savings
How is simple interest calculated?
I = P*R*T
P = Principal (initial amount you borrow or deposit)
R= RateT = TimeI = Interest Rate
How is compound interest calculated?
A=P(1+r/n)nt
A = AmountP = Principal (initial amt. you borrow
or deposit)r = Annual rate of interestn = Number of times interest is
compoundedt = time in years
Savings Growth
Simple interest$1,000 at 10%
Year 1: $1,000 * .10 = $100
$1,000 + $100 = $1,100
Year 2:
$1,000 * .10 = $100$1,100 + $100 =
$1,200What would the
value be at the end of year 3?
Compound interest$1,000 at 10%
Year 1: $1,000 * .10 = $100
$1,000 + $100 = $1,100
Year 2:
$1,100 * .10 = $110$1,100 + $110 =
$1,210What would the value
be at the end of year 3?
Savings Growth
Simple Interest
$1,000 * .10 = $100$1,200 + $100 =
$1,300
Compound Interest
$1,210 * .10 = $121$1,210 + $121 =
$1,331
Savings Growth End of 3 Years Simple Interest I = P*R*T
1,000*.10*3 = 3001,000 + 300 =
$1,300
Compound InterestA=P(1+r/n)nt
1,000(1+.1/1)1*3
1,000(1.1)3 = $1,331
Savings Growth
Calculate simple interest on $5,000 after 5 years at 10% interest
Calculate compound interest on $5,000 after 5 years compounded monthly at 10% interest
SERIOUSLY, DO THE MATH BEFORE CONTINUING…..
REMEMBER: THE PERSON DOING THE WORK IS DOING THE LEARNING AND I EXPECT YOU TO LEARN
Savings Growth
Simple interest $5,000*.10*5 = $2,500
$5,000 + $2,500 = $7,500
Compound interest $5,000(1+.1/12)5*12
=
$8,226.55
Saving Options – Savings Plans
Savings account: usually allows a low or zero balance, deposit or withdrawals (without penalties) anytime and pays low interest rate.
Certificates of deposit (CDs): a minimum deposit remains for a set period of time; penalty is withdrawn early
Money market account: a minimum deposit, interest earned based on gov’t and corp securities; pays slightly higher interest than savings account
Main Categories of Investing Options
StocksBondsMutual Funds and Exchange-traded
FundsReal EstateCommoditiesCollectibles
Stock Investments
Two main categories of stock: Preferred stock pays dividends at a set
rate Common stock represents general
ownership in the company and sharing of profits
What are the major similarities and differences between preferred and common stocks?
Stock Investments
PREFERRED STOCK
Investment risk and pays dividends
No voting power Pays dividend before
common stock Less risky than
common
COMMON STOCK
Investment risk and pays dividends
Invited to annual corporate meetings and one vote per share owned
Stock Investments
What are stockbrokers? People who buy and sell stocks and
bonds at a set price for a commission Stock exchange
Where the trading of securities takes place
What is market value of stock? The price for which a share of stock can
be purchased
NYSE – New York Stock Exchange
Located in New York City on Wall Street in lower Manhattan
www.nyse.comBuyers and sellers of securities meet
and compete for the best price for their customers. A trade takes place when the best bid meets the lowest offer to sell. Stock prices are determined by supply and demand.
Stock market terms
Initial public offering – the first time a company sells shares of itself to the public to raise capital
Bull market – when the prices of stocks are generally rising
Bear market – when the prices of stocks are generally declining
Stock market terms
Stockbroker – a professional who is licensed to buy and sell stock
Stock – A unit of ownership in a company
Dividend – profits paid to a stockholder as a return on investment
Capital – money needed to expand a company
Stock market terms
Supply – the quantity or amount of a product that is available
Bond – A loan or IOU that investors make to corporations and governments which pays interest over a fixed period of time
Demand – the quantity or amount of a product that buyers want to purchase
DJIA – Dow Jones Industrial Average
One of the best know and most widely cited indicators, the DJIA tracks the stock prices of 30 major “blue chip” companies
Invented by Charles Dow in 1896 as a way to gauge the performance of the stock market
DJIA
ALCOA Inc. American Express AT&T Boeing Co Bank of America Caterpillar Cisco Systems Coca-cola E.I. du Pont Exxon Mobile
General ElectricHewlett-PackardHome Depot Intel IBM Johnson & Johnson JPMorgan ChaseKraft Foods3M Company
DJIA
McDonald’sMerck & Co.MicrosoftPfizerProctor &
GambleTravelers Co.United
Technologies
VerizonWal-Mart StoresWalt Disney Co.
Stock Table
A B C D E F G H I
52 Week Sales
High Low Stock Div Yld PE Vol100s
High Low Last Chg
12 1/8 8 AAR .44 6.2 15 6 6 3/4 6 5/8 6 1/2 -1/8
49 1/2 31 1/4 ACF 1.76 7.4 7 477 36 1/4 37 5/8 37 +3/4
26 1/2 16 AMF 1.36 6.7 7 133 17 1/2 17 1/2 17 1/2 -3/8
6 1/8 3 1/8 ARA 2 7 8 10 33 7/8 33 7/8 33 -1
Stock table
A – highest and lowest price of stock during the past 52 weeks
B – Symbol used to represent the company and current dividend as dollars per share of stock
C – Dividend yield based on current selling price
D – Price-earning ratio
Stock table
E – Number of shares exchanged on trading day. The amount is listed in 100’s
F – Highest price of a share on trading day
G – Lowest price of a share on trading day
H – Closing price I – Change from previous trading
day’s closing price
Selecting Stock
Factors that could influence investors in selecting stock: Economic▪ Inflation▪ Interest rates▪ Consumer spending▪ Employment
Company▪ Dividend yield: dividend per share/mkt price
per sh▪ Price-earnings ratio: stock price/earnings per
share
Yield Calculations
Yield is usually calculated in the following way:current value – original value = yield
original value Current value=closing price for the day Original price=price paid for stock Yield=Interest earned For example: a stock is bought at $40 and
valued at $43:$43 – $40
$40 yield = 7.5%
Yield Calculations
Dividends also may be added to the calculation.
For example: a stock is bought at $40 and sold at $43, but also earned a $2 dividend during that time:
$43 + $2 – $40 $40
yield = 12.5%
Price/Earnings Ratio
Stock price/Earnings per share = P/E ratio A measure of market valuation
(capitalization) Affected by: growth rate of the company,
expectations of future growth rate, earnings, and other risk factors
Should use to compare companies within the same industry
Comparing Stocks Activity
Complete “Comparing Stocks Activity” using: www.freestockcharts.com
Bond Investments
What is a bond? A promissory note to pay back a specified
amount of money at a stated rate on a specific date; issued to lend funds to the organization selling the bond.
Main Categories of Bonds Government bonds▪ Municipal bonds: issued by local and state gov’ts for
public service projects▪ U.S. savings bonds: Series EE, HH and I bonds▪ Treasury bills (91 days to 1 year) and notes (1 to 10
years) Corporate bonds: loaning money to a company
Bond investments
Lenders versus owners as it relates to investing in a company’s stocks and bonds Bonds = lender Stocks=owner
How does stated interest rate impact the value of a bond? Stated interest rate determines the price
investors want to pay for a bond
Bond investments
Bond sold at par value Ex. A bond’s stated interest rate is 5%
and the current market rate is 5%. Bond would be sold at par (100) A $10,000 bond would sell for $10,000
Bond investments
Bond sold at a premium Ex. A 10 year bond sells in 2005 for
$10,000 with a stated interest rate of 5% In 2007, the market interest rate is 3% Because your bond is paying a higher
interest rate than the market rate, you could sell you bond for more than the $10,000 face value (102) in order to realize a yield of 3%
A $10,000 bond would sell for $10,200
Bond investments
Bond sold at a discount Ex. A 10 year bond sells in 2005 for
$10,000 with a stated interest rate of 5% In 2007, the market interest rate is 7% Because your bond is paying a lower
interest rate than the market rate, a buyer would be willing to pay less than face value (98) in order to realize a yield of 7%
A $10,000 bond would sell for $9,800
Comparing bond investments
Current yield of a bond = Dollar amount of annual interest
income/current market valueEx. Annual interest income = $80
Current Market Value = $998$80/$998 = 8%• This bond is being sold at a discount
because the current market value is less than par (1000).
Bond Investments Activity
Use the following website to research the values of current bond offerings.
www.investingbonds.com/marketataglance.asp?catid-32
Mutual Funds
A portfolio of stocks, bonds or both grouped according to an investment strategy
Net asset value (NAV) is a per share value determined at the end of each trading day. A mutual fund is bought or sold at the NAV no matter if the trade takes place at 10 AM or 3 PM or any time in between opening and closing bell
Mutual Funds
Mutual Fund Companies’ major tasks in assisting investors of mutual funds
The mutual fund company studies companies stocks and bonds and then buys a variety of stocks and bonds to sell to investors based on their level of risk and investment strategies
Mutual Funds
Some examples of mutual fund categories Aggressive-growth stock funds: look for quick
growth but has a higher level of risk Income funds: look for stocks that pay
regular dividends International funds: stocks from around the
world Sector funds: companies in the same
industry Bond funds: corporate bonds Balanced funds: both stocks and bonds
Exchange-traded Fund (ETF)
An exchange-traded fund (ETF) is a portfolio of stocks, bonds or other investments that trade on a stock exchange like regular stock. Similar to a mutual fund except the
value changes during the day like a stock so an investor may pay a different price at 10 AM vs. 3 PM or any time between opening bell and closing bell
Other Investments
Real Estate: land and anything attached to it Advantages: tax benefits, increased
equity, pride of ownership Disadvantages: property taxes, interest
payments, property insurance, maintenance
Examples: house, condominium, mobile home park, farmland, commercial property, industrial property
Other investments
Commodities and futures: grain, livestock and precious metals; investors agree to buy and sell for an amount at a specified price in the future Examples: rice, cattle, gold, pork bellies
Collectibles: items collected over time that may increase in value Examples: art work, antique furniture,
autographed items, beanie babies
Evaluation Factors
Safety and risk Safety is assurance that the money you
invested will be returned to you Risk is the chance that the money you
invested will not be returned to youPotential yield
The possible percentage of money earned on a savings or investment over a year
Higher yield = higher risk
Evaluation Factors
Liquidity The ease with which an investment can
be changed into cash without losing value
Taxes Amount the federal and state
governments require as payment based on type of investment, return of interest and gain or loss of principal amount