CHAPTER 16
Saving
The
nonuse of income for a period of time so that it can be used later in life
Reasons to save money
Emergencies,
retirement, special purchases, car, college, house
Interest
Each institution offers various programs
that will earn interest. Some are not interested in small accounts so you may
need to bank at a different location than your parents.
· Banks make money
by charging interest on loans (they charge more than they would pay a
depositors)
Þ Trade Offs: Liquidity vs. Risk vs. Yield
Liquidity (low interest)
how quickly can your investment be turned into cash
RISK: is it safe or
risky?
Yield: Profit (what are
you making from your profit)
Types of Savings Accounts
1.
Passbook (AKA) regular
savings accounts
· Depositor keeps a
book hat records deposits and withdrawals.
· Some banks require
a minimum balance
Þ Trade offs: easy access/ low interest
2.
Money Market
Deposit Account-
· Requires a high
minimum balance ($1000 to $5000)
· Pays more interest
out
Þ Trade offs:
Easy access and High interest, but still liquid
3.
Time Deposits
aka CD’s-
· Invest your money
and not get your money back until the account reaches its MATURITY (length of
investment) and you can cash it in. 7 days to 10 or 15 years. Has a higher interest rate with very little
access, the cd must reach maturity.
· Minimum deposit
required $25 to $100,000
Þ Trade offs: Pays higher interest but low Liquidity
· TYPES OF TIME DEPOSITS
1.
CD’s: Certificate of
Deposit
· Trade offs: Pays higher interest but the tradeoff is
LOW LIQUIDITY.
2.
IRA- Individual Retirement
Account
· Tax deferred and
ROTH
· You cannot get
that money out until you are 59 years old.
· You can put up to
5000 a year in it.
· 5,000 x 40 years =
200,000 + Interest
Disposable income: money after taxes are paid.
STOCKS AND BONDS
STOCKS:
You
are part owner of the company
1.
Common Stock
a.
Lets you vote
b.
You only get a dividend check if they make a profit
2.
Preferred Stock
a.
You will get a check whether they win or lose.
BONDS:
· You are not owner,
but a creditor of that company. You are loaning them money that will be
returned, with interest, when the stock reaches maturity.
STOCKHOLDERS MAKE MONEY IN TWO WAYS:
1 Dividends-
the money stock holders receive on the original amount invested. A company can declare dividends once a year
or quarterly and the investor will get a check if the stock goes up or the
company makes a profit. (preferred stock is guaranteed/ common stock is not
guaranteed).
DRIP- Dividend
Reinvestment Program- instead of a check, the investor will get the equivalent
in more stock. This is good for a long
term investment.
2 Speculations:
When you buy stocks and you are planning to sell it as soon as it goes
up to turn a profit. (This is not a long
term investment)
Stock Market Crash- happened after the roaring
20’s
October 29th (Black Tuesday) The crash
actually took place over a period of a week. Tuesday was the final and worst
day.
·
During the late 1920’s investors
were allowed to buy stock “on margin”. It only took $1,000to buy $10,000 of
stock. The other $9000 was covered by
the stock itself, which was used as collateral.
·
Margin call: If the seller needed his money a
margin call meant you had to pay the balance owed or give up the collateral (
the stock would be liquidated)
·
When the stock market crashed there
were many suicides and bankruptcies.
·
Herbert Hoover was president during
the time of the stock market crash.
·
Franklyn D Roosevelt was the
President who really brought us out of the depression. He was elected to be president 4 times. He died in 1945.
·
The 22nd amendment was
brought about to limit the presidential term to 2 terms.
·
Harry S. Truman was the President
who decided to drop the bombs on Hiroshima and Nagasaki.
Congress created the FDIC - Federal Deposit Insurance Corporation.
When the FDIC was established it would insure accounts up to $5,000. Today the
FDIC insures accounts up to $100,000. Not all banks are members of the FDIC. If
a bank has branches in multiple states they must be a member of the FDIC. Approximately 5050 of state banks are members.
MUNICIPAL BOND
Buying
a bond from the local government
US SAVINGS BOND
A U.S. savings bond can be purchased for a
little as $25 or as much as $100,000 and can have a maturity date of as little
as a year or as long as 20 to 25 years.
Stock Markets
LARGEST STOCK MARKET
1st
NYSE/ New York Stock Exchange.
2nd AMEX/ American
Exchange
3rd Chicago Exchange.
There are also exchanges in other cities like Boston, Philadelphia,
Cincinnati, Kansas City and Los Angeles.
S & P
· Standards and
Poors, has 500 Stocks
DJIA: Dow Jones Industrial Average
o
Has 30 stocks
There
are other exchanges thru-out
the nation and the world
o
70% of all US stocks are listed on 2 exchanges NYSE, AMEX
o
There is another exchange in New York called the NASDAQ/ National Association of Securities
Dealers Automated Quotations. This is an exchange for smaller companies
that don’t qualify for the larger NYSE and AMEX.
BROKER
Person licensed to buy and sell stock. To
buy stocks or bonds most people go to a broker. That is a go-between person
that is licensed to sell stocks and bonds.
These individuals get a small fee for each transaction.
BUYING ONLINE
You can now buy and sell yourself through
online connections like ameritrade. Here you can sit in front of your computer
and move stocks around all day for a small fee on each transaction. ($8.00)
CAPITAL GAIN
When you buy and sell stocks the profit
and losses are part of your yearly income and you must pay taxes on that
income. If you make a profit it is
called a Capital Gain and you have
to pay taxes on that profit
CAPITAL LOSS
If you
lose money on the sell of stock it is called a Capital Loss and you can deduct that loss from your taxes.
_____________________________________________________________________________________________________________
Mutual Funds
|
Advantages of Mutual Funds
|
|
· You now own a
larger % of stocks and bonds
|
|
· Investment
decisions are made by an expert or professional
|
|
· Money is spread
out so if one stock drops, losses are offset by gains
|
· They take your
money and spread it out into a variety of stock.
· DIVERSIFICATION: You have a variety of investments.
· When a group of
people combine or pool their money together to purchase a larger amount of
stock.
· This gives them a
larger purchasing power and also allows them to diversify their funds.
OTHER TYPES OF MUTUAL FUNDS
1.
Private financing:
· You invest your
money in a brand new business. You could lend your friend money.
· Riskiest types of
mutual funds.
· This is when you
help a company with start-up costs. You are on the “ground floor.” If the
company does well, then you can make a lot of money…if it fails, you loose
everything.
Because of the
potential of crooked deals and as a result of the crash of ’29 the government
created the
SEC-Securities and Exchange Commission to monitor
insider trading and illegal activities between corporations
Insider Trading
When
you have information that no one else has
Insider information is illegal. Here are examples of companies and
people who got in trouble for insider trading…
· Martha Stewart
sold early. All companies must also give out important information
Gains, lossess, new business acquisitions and how investors money will be used.
PENSION PLAN
Is a
retirement plan through your job. Usually the company matches your monthly
deposit.
TYPES
OF PENSION PLANS
· 401 K: Every time you get a check, they take $50
out of your paycheck and put it in your 401k and the business will match it.
· IRA- Individual Retirement Account (up to $4,000)
per year, you can put $5000 if you are over 50 to catch up. Must be 59 and ½ to
get that money
REAL ESTATE INVESTING
Buying
and selling houses/ fixing them up and reselling them for a quick profit. The
problem now is a drop in housing sales.
ONE OF THE MOST
IMPORTANT ASPECTS OF INVESTING IS
Diversification: spreading out investments to reduce the
risk of loss
· When picking a
company to invest in think about your morals. Does the company or a subsidiary
promote or make items that you do not agree with?
· Animal
testing/Abortion/ stem cell research/ overseas sweatshops/ meat
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