Introduction to Investing

INVESTING 101

How To Make Your Money Work For You

Subject Layout

• What is investing?

• How does it work? (Compounding)

• Risk Tolerance: Know Yourself

• Types of Investments

• Portfolios and Diversification

What is Investing?

• Definition: The act of committing money or capital to an endeavor with the
expectation of obtaining an additional income or profit.

• Why is this important?

• Letting your money work for you

• Investing is NOT gambling

• Why might it be important for you to invest?

Multiple Choice

A key difference between saving and investing is

• Saving is for everyone, investing is for the wealthy

• Your money is insured when investing, it is not in savings

• Investing has a guaranteed return, savings does not

• Saving is for emergencies & goals, investing is for long-term wealth

How would you define
investing?

Why Invest?

•Retirement – would you like to retire
early? At all? At your current lifestyle?

• Pension programs - employer puts
money into a pool of funds that is
invested on the employee’s behalf

•Becoming a thing of the past

• Social security – government program
paid for by income tax and given to
retirees /disabled

•funds under pressure due to aging
population in the US

What money can you depend on for
retirement?

Multiple Choice

What is the purpose of Social Security?

• to protect the safety of our nation's harbors

• to provide a trained military

• to help Americans pay the bills when they can no longer work

• to provide low cost healthcare

What money can
you depend on
when retirement is
necessary?

Why Invest?

• Investing money now allows financial flexibility for your future

• The earlier you start investing, the easier it will be to establish a large amount
of money

How does investing work? Compounding 101

•

What do you
wonder about
today’s topic?

How does investing work? Compounding 101

Time and Compounding

•

Multiple Choice

To earn as much interest as possible, you should open a savings account that earns ______ interest and has the _____ interest rate.

• compound; lowest

• simple ; lowest

• compound ; highest

• simple ; highest

Multiple Choice

What is the formula for simple interest?

• A=P(1+r)^t

• I=Prt

• I=P(1+r)t

• A=Prt

Multiple Choice

What does P stand for in I = Prt ?

• percent

• partner

• percent change

• principal

Time and Compounding

• Compounding accelerates your
earning power

• Compounding maximizes your
earning potential of your
investments

• You must leave the initial
investment and interest earned
alone for this to happen

Knowing Yourself: Risk Tolerance

• A measure of how much risk you can handle
as an investor

• Factors which determine your risk
tolerance?

• Amount of money you have to lose

• Your time frame

• Emotional ability to handle risk

• Determines what kinds of investments you
should pursue

• There is no right or wrong way to invest

Are you a risky person? Green-yes, Red-no

Types of Investments

• Bonds

• Stocks

• Mutual Funds

• Alternative Investments

Multiple Choice

What is a stock?

• A loan an investor makes to a company or government that pays interest over time.

• A share of ownership in a company

• A collection of investments sold as a package.

• An option to purchase something in the future at todays price.

Multiple Choice

Ownership in a publicly traded corporation

• CD-certificate of deposit

• Money Market

• Treasury bill

• Stock

Multiple Choice

Provides fixed interest payments for a set period of time

• money

• stock

• bond

• mutual fund

Multiple Choice

Saving and investing provide opportunities to increase your wealth, leading to financial security

• True

• False

Multiple Choice

Bonds are a safer investment than stocks

• True

• False

Types of Investments - Bonds

• Definition: an interest-bearing security that
obligates the issuer to pay the bondholder a
specified sum of money, usually at specific
intervals (known as a coupon), and to repay
the principal amount of the loan at maturity

• Wait, what? A bond is basically a loan given by you

to another entity which is paid back with interest over
the life of the bond.

• Interest is paid throughout the bond life

• Principal is paid back at the end of the life of the

bond

How would you define
bonds?

Types of Investments - Bonds

•For Example:

• Your hometown decides to
issue municipal bonds with
a $100 face value to be
paid back in ten years.
This bond will pay 2.5% per
year.

• $100 * .025 = $2.50

• $2.50 * 10 = $25.00

• Total paid back to you:
$100 + $25 = $125

Types of Investments - Bonds

•There are many different types of bonds:

• U.S. Treasury Bonds – issued by the U.S.
government, considered a safe investment

• Agency Bonds – issued by agencies of the
U.S. government or government
sponsored enterprises

• Municipal Bonds – issued by states, cities,
counties, etc. to fund public projects

• Corporate Bonds – issued by corporations

• High Yield Bonds – issued by entities that
have a low investment grade (they have a
weaker ability to pay back the bond);
generally results in a higher interest rate
and higher yields

Multiple Choice

Which of the following is the LEAST risky investment?

• corporate bonds
• stocks
• U.S. Treasury bonds
• mutual funds

Multiple Choice

On the bond market, a bond trading at a HIGHER price than its par value is called a

• Discount bond
• Premium bond
• Low-cost bond
• Mark-up bond

Multiple Choice

This bond would NOT be taxed by the federal government

• U.S. Treasury Bond
• Municipal Bonds
• Corporate Bonds
• Zero-coupon bond

Types of Investments - Bonds

•Bond Ratings

• Definition – a grade given to a particular bond that indicates its credit quality

• Range from AAA (the highest rating) to C or D (called “junk” bonds, the
lowest ratings)

• Private, independent services provide ratings, so indications may vary for
the same rating

• Major rating agencies in the U.S.: Moody’s, Standard & Poor’s, and Fitch

Summarize what
you’ve just learned:

Types of Investments - Bonds

Bond Rating

Grade

Risk

Moody\\u2019s

S&P/Fitch

Aaa

AAA

Investment

Highest Quality

Aa

AA

Investment

Strong Quality

A

A

Investment

Strong

Baa

BBB

Investment

Medium Grade

Ba, B

BB, B

Junk

Speculative

Caa/Ca/C

CCC/CC/C

Junk

Highly Speculative

C

D

Junk

In Default

Types of Investments - Bonds

• Bonds are generally a very safe investment. What is the drawback?

• Payback on bonds is usually lower than other types of investments

• Bonds are a great investment for people who are risk averse

• An investor who prefers an investment with lower risk.

• Pay attention to grades; bonds can be as risky/riskier than stocks

Is this statement true or false? Bonds are a safe
investment.

True

False

Types of Investments - Stocks

• Definition: A term used to describe the
ownership certificates of any company

• Also called: equities, shares

• Stocks are volatile; their value fluctuates
frequently (on a daily basis)

Types of Investments - Stocks

• Why do companies issue stocks?

• To raise money

•Sell part of the company (AKA issuing stocks) – equity financing

•Do not have to pay money back or make interest payments

• Shareholders make money when the stock is worth more than they paid

Types of Investments - Stocks

• Why do stocks make money?

• You (as an owner) are entitled to a portion of
the company’s profits

•Paid out in the form of dividends

•A sum of money paid regularly by a
company to its shareholders out of profits
(or reserves).

• Where is the risk?

• If the company goes bankrupt, there are no
assets to claim

Types of Investments - Stocks

• Risk

• Shareholders are not guaranteed any return if the
company goes bankrupt

• No guarantee that shareholders will receive
dividend payments

• With no dividends, investors make money only
through an increase in stock price

• The bright side?

• Stocks generally outperform other investments due
to their higher risk

• Historically, stocks average 10-12% returns

Summarize what
you’ve just learned:

Types of Investments - Stocks

• Two Main Types of Stock: Common and Preferred

• Common stock – most commonly referred to

•Represent ownership in a company and claim
on profits

•One vote per share

•Higher Yields

Types of Investments - Stocks

• Preferred Stock

•Guaranteed a fixed dividend

•In the event of liquidation, preferred shareholders are paid first

•Do not have the same voting rights as common stockholders

•May be callable (company can purchase shares from shareholders at any
time for any reason)

Types of Investments - Stocks

• Companies can also customize different classes of stock in any way they
would like

• Reasons for this may include wanting voting power to remain with certain
people

• Traditionally noted as Class A, Class B, etc.

Multiple Choice

One way people can earn money from stocks is by...

• selling the stock for the same price as the price they paid for the stock.
• buying stock from an investment banker
• selling the stock for a lower price than the price they paid for the stock.
• selling the stock for a higher price than the price they paid for the stock

Multiple Choice

Diversifying can occur by...

• buying similar stocks and bonds in different industries
• buying different stocks and bonds in the same industries
• buying similar stocks and bonds in the same industries
• buying different stocks and bonds in different industries

Multiple Choice

A stock portfolio is...

• The document that you receive for purchasing stock.
• The online tool used to track stock prices.
• A list of all the stocks you own
• A group of stocks that you can purchase at one time on a stock exchange.

Open Ended

1. In your own words, explain what a bond is and how you would make money from it.

2. Why is it a good idea to invest in both bonds and stocks?

​How To Make Money With Bonds: Example

If you purchase $1,000 coupon bond in ABC Company for a 20 year period and the coupon rate is 5%. The issuer provides the investor with a 5% interest every year. This means the investor gets $50, the face value of the bond multiplied by the coupon rate $1,000 x 0.05, every year allows us to see the coupon payment per year.

Face Value= $1,000

Coupon= 5% 

Coupon per year= $1,000 x .05 = $50

 

$50 in coupon payments would be made each year.

Risks with Bonds

Default Risk

• ​Risk the borrower will be unable to pay you back your money at maturity

​Interest Rate Risk

• ​The risk of potential loss that are caused by interest rates rising

  • ​When interest rates rise, the value of your bond falls!

​Remember, bonds are a lower risk investment but there are still risks! There are additional risk that relate to bonds that vary based on the situation

Open Ended

 What is the risk you are taking when investing in bonds? How can you minimize this risk? 

Types of Investments - Stocks

• Most stocks are traded on exchanges

• Physical – trades are carried out on a
trading floor

• Virtual – composed of a network of
computers

• Purpose of the stock market – facilitate
the exchange of securities between
buyers and sellers

• Reduces risk of investing because it
brings buyers and sellers together

Interpret
What is one major difference between preferred and common stock?

Paste image or passage here

Types of Investments - Stocks

• Different markets: Primary and Secondary

• Primary market –securities are created and stocks are initially issued
through IPO

• Secondary Market – investors trade previously-issued stocks

•What people refer to when talking about the stock market

•Trading of a company’s stock does not directly involve that company

•Examples: NYSE, Nasdaq, AMEX

Multiple Choice

This is where your orders to buy or sell stock are sent and carried out

• Stock Exchange

• Brokerage Firm

• Stock Meeting Place

• Money Exchange

Multiple Choice

Dow-Jones Industrial Average is made up of how many stocks

• 25

• 30

• 50

• 100

Multiple Choice

Employer sponsored retirement savings plan.

• 401K

• IRA

• Individual Retirement Account

• Roth IRA

Multiple Choice

Interest calculated on both the principal and the accrued interest

• Simple interest

• Compound interest

Types of Investments - Stocks

• Why do stock prices change?

• Stocks are volatile and can change in price rapidly

• Fundamentally, supply and demand determine the price of stocks

• Earnings predominately affect investor evaluation of stocks, but there are other

factors

• There is no one theory that can explain stock prices

Interpret
Why do stocks change?

Paste image or passage here

Types of Investments - Stocks

• There are two ways to buy stocks:

• Through a brokerage

•Most common

•Full-service brokers - expensive but manage
your account

•Discount brokerages - less expensive and
provide less assistance

• DRIPs & DIPs

•Dividend reinvestment plans (DRIPs) and
direct investment plans (DIPs) allow
shareholders to purchase stock directly from
the company

Types of Investments - Stocks

• Buying stocks through a brokerage:

• Step 1: Obtain a stock quote. This shows the bid (buy) price and the offer or
ask (sell) price.

• Step 2: If you are interested in buying a stock, you make a bid. If you are
interesting in selling a stock, you would submit an offer or an ask.

• Step 3: When a bid and offer match, a trade occurs.

Types of Investments - Stocks

• How to read a stock table or stock quote

Week high and low price:
highest and lowest prices
stock has traded at in 52
weeks

Company name and type of stock:
with no symbols following company
name, stock is common stock.

Ticker: Alphabetic name unique to the stock
that identifies it on exchanges

Types of Investments - Stocks

• How to read a stock table or stock quote

Dividend per share:
Annual dividend
payment per share

Dividend Yield: Annual
dividends per share
divided by price per
share

Price to Earning Ratio:
Current stock price divided by earnings
per share from the last four quarters

Types of Investments - Stocks

• How to read a stock table or stock quote

Total number of
shares traded for
the day (in
hundreds)

Daily High and Low:
range of prices that
stock has traded at
throughout the day

Close – last price
traded at upon
market closing
for the day

Net change – change
in stock price in dollars
from previous day’s
close

Types of Investments - Stocks

• How to value a stock: very complicated and differs
from person to person. Four principles impact value:

• Supply and demand determine the price of stocks
from moment to moment

• Do not compare the value of individual stocks;
rather, compare values of companies

• Multiply the value of a stock by the shares

outstanding to

• Earnings are a major factor, but they are not the
only factor

• There is no one theory that can explain how stocks
are valued.

What do you think
about investments?

Types of Investments – Mutual Funds

• What is a mutual fund?

• An investment vehicle that consists of a ‘pool’ of funds contributed by many
investors in order to invest in stocks, bonds, and other assets.

• These funds are managed by money managers

Types of Investments – Mutual Funds

• Advantage of mutual funds:

• Give small investors access to professional
investment help by allowing them to invest in
diversified portfolios

• Disadvantage of mutual funds

• Fees, which can limit profit

Types of Investments – Mutual Funds

• Pooled Funds:

• Aggregated investment from many individuals

• Examples: mutual funds, pension funds

• Advantages: Economies of scale - lower trading costs and professional
management

• Disadvantages: management fees/capital gains are spread evenly among
investors, what is best for the group may not be what is best for an
individual

What do you think
about mutua?

What do you think
about mutual funds?

Types of Investments - ETFs

• Definition: exchange-traded funds (ETFs) are an alternative to mutual funds
that allow for more flexibility.

• Trade on exchanges

• Priced and available for trading throughout the business day

• Generally have a slightly lower expense ratio than their mutual fund equal

Types of Investments - Alternative

• Several other types of investment vehicles available

• Options, futures, FOREX, commodities, etc.

• Usually very high risk and require specialized knowledge to be successful

• First, create a good financial platform in lower-risk investments

Portfolios and Diversification

• Important for long-term goals such as retirement

• Portfolio: a conglomerate of different financial assets which balances risk and
return

• Diversification: a risk management tool that mixes a large amount of
investment mediums within a portfolio

• Portfolios and diversification go hand-in-hand

Portfolios

• What do portfolios include?

• Any asset you own: tangible assets, equities, bonds, etc.

• Think of like a pie chart

• The asset mix should meet your risk tolerance and time horizon

What did you learn
about portfolios?

Portfolios

• Aggressive investment strategies: aim to make the highest returns

• Investor should have high risk tolerance

• Investor should have a longer time horizon

• Generally have many equities

Portfolios

• Conservative investment strategies: puts safety over returns

• Investors should be risk averse

• Investors should have a shorter time horizon

• Consists mainly of cash and cash equivalents

• Goal is to combat inflation to protect the value of the portfolio

Portfolios

• Moderately Aggressive Portfolio: Balances risk and return

• Investor should have an average risk tolerance

• Investor should have a longer time horizon

• Moderate amounts of equities, bonds, and cash and cash equivalents

Diversification

• Two categories of risk affect investments:

• Systematic Risk: inherent to a market that
is unpredictable; impossible to avoid

•The Great Recession

•Measured by a security’s beta:

•>1 - more risk than the market
•<1 - less risk than the market

• Unsystematic Risk: company- or
industry-specific risk inherent in all
investments

•Reduced by DIVERSIFICATION

Diversification

• Using diversification to combat unsystematic risk

• Portfolios include investments in unrelated industries

• EXAMPLE: as an employee of United Airlines, you receive

company stock every year. You realize that your portfolio is
susceptible to risk if the airline company fails. What
investments might you use to balance this risk?

•Avoid investing in the airline industry or companies
that do business with airline industries. Instead,
invest in healthcare, clothing companies, or other,
non-related industries.

Diversification

• There are a lot of complicated ratios and opinions that allow for portfolios to be
diversified

• Understanding the basics of diversification is enough to invest safely

In one minute,
write the most
important thing from
today’s
lesson.

Conclusion

• Compounding allows your money to make money

• There is no wrong way to invest

• Risk tolerance is a measure of how much risk you can withstand as an
investor, and should be considered when choosing an investment

Conclusion

• Bonds: a loan paid by you to a company that will be paid back with interest

• Stocks: ownership in a company and rise in value with the company

• Mutual funds: shared access of diversified investment mediums, may include
fees

• Portfolios should be diversified to combat risk

References

• Investopedia Staff. "Investing 101: A Tutorial For Beginner Investors." Investopedia.

Investopedia, 30 Mar. 2017. Web. 17 Apr. 2017.

• Hayes, Adam. "Bonds." Investopedia. Investopedia, 11 Apr. 2017. Web. 17 Apr. 2017.

• Investopedia Staff. "Stock." Investopedia. Investopedia, 30 Dec. 2015. Web. 17 Apr. 2017.

• Investopedia Staff. "Mutual Fund." Investopedia. Investopedia, 28 Mar. 2017. Web. 17 Apr.

2017.

• Investopedia Staff. "Diversification." Investopedia. Investopedia, 08 Jan. 2015. Web. 17 Apr.

2017.