Savings and Investment

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Savings and Investment
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Why do we invest?
If we have money we can...

• Spend It
• Save It
• Put It In The Bank
• Invest It

What are the Advantages/Risks of each option?
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Investment - redirecting resources from being
consumed today so that they may create benefits
in the future
If you had 1,000
Spend it now, take advantage of the utility and
value of your money.
Or, invest your money now in order to receive
benefits in the future.
You Could...

• Return - the money an investor receives above and
  beyond the sum of money initially invested.

Ways to Invest - Save money in a bank and
collect interest - Buy Stock - Buy Bonds
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Ways to Invest

• Savings in the Bank
• Bonds - Government, Municipal, Corporate
• Shares of Stock

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Saving in Bank

• Rather than save money hidden in your house, you
  can save your money in a bank, where it is still
  easily accessible if you need it, but safe,
  insured, and collecting interest.
• Interest gained on money saved in the bank is
  based on an Annual Percentage Rate (APR).
• Typically, the interest percentage an individual
  earns on savings accounts is about 2
• The catch is that you have to leave your money in
  the savings account so that the bank can use it.

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How You and Banks make Money

• You open a savings account at the bank.
• The bank pays you interest on the money that you
  deposit and leave in that account.
• The bank then loans that money out to other
  people, only they charge a slightly higher
  interest rate on the loan than what they pay you
  for your account.

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Bonds

• Bond - A formal contract to repay borrowed money
  with interest at a fixed intervals
• Essentially a loan taken out by a government,
  municipality, or company, that is funded by the
  buyers of bonds.

Generally considered a long-term investment, but
bonds can mature in various time periods, from
months to over ten years.
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Types of Bonds

• Government Bond - Issued by a government in order
  to acquire money to pay their bills and finance
  programs. The more stable the issuing government,
  the less risk in the investment.

• Municipal Bond - Issued by a state, city, county,
  or district, in order to raise funds and finance
  projects such as hospitals, power plants,
  streets, schools, or airports.

• Corporate Bond - Issued by businesses to help pay
  expenses or fund growth. Risk is determined by
  the stability and future of the company

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Buying Stocks
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How do you buy stocks?

• Stockbroker - someone who brings together buyers
  and sellers of stock to make a trade.
• Brokerage Firms - Brokerage firms are companies
  that specialize in trading stocks and employ
  stockbrokers.

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Stock Exchange

• Stock Exchange - A market for buying and selling
  stock
• NYSE - New York Stock Exchange. The countrys
  largest and most powerful exchange. NYSE handles
  transactions for only the largest and most
  established companies.

Does the Performance of one companys Stock
Represent the Health of the Economy? How Can We
Determine the Health of the Economy through the
Stock Markets?
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• Dow Jones Industrial Average - Tracks the
  performance of stock from 30 of the countrys
  largest companies in various industries. Used to
  measure the health of the countrys economy as a
  whole.

How might we more accurately analyze stock
performance and the economy?
Is This Analysis Accurate?
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S P 500 - Standard Poors 500 gives a
broader picture of stock performance. Tracks 500
companies and measures overall stock market
performance.
Bull Market - When the stock market rises
steadily over a period of time
Bear Market - When the stock market falls for a
period of time
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Investment - Risk and Advantages
Long Term Less Risk Short Term Greater
Risk Long Term Smaller Returns Short Term
Chance of Greater Returns
As a general rule
However...
Long Term Investments also have less
liquidity Short-Term Investments have greater
liquidity as their resources more easily accessed.
Its all about Trade Offs
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How can we Minimize Risk in Investment?
Diversification
The strategy of spreading out investments to
reduce risk.
If I wanted to invest my money I could...
Buy Stock In British Petroleum Royal Dutch
Shell Chevron
Buy Stock In British Petroleum Microsoft Target
Buy British Petroleum Stock A Government
Bond Money in Savings Account
OR
OR