Personal Financial Literacy Module 4 DBA

Bonds

-Purchasing a bond means giving a loan to a company
-Requires a minimum amount of money to purchase and a minimum length of time to hold on to the bond
-"T-Bonds" are bonds issued by the U.S. Treasury and are safer than corporate bonds
-A moderate investment

Mutual Fund

-Share of ownership in a mixture of companies
-Requires a minimum amount of money to invest
-Can earn significantly more money but also potentially lose more
-But your money is not based on only one company
-A moderate investment

Real Estate

-Ownership of property, which may include land and homes or other buildings
-Requires maintenance costs, including upkeep of the land and any building maintenance or repairs, as well as local taxes on the property and services for it such as water and electricity
-Best for a long-term investment—values generally rise over time but are heavily dependent on market, regional, and local conditions
-A moderate investment

Stocks

-Share of ownership in a single company
-Makes the most money over a long period of time
-If company fails, you lose all your money
-An aggressive investment

Futures

-Betting on the future price of a common product, like wheat
-You make a legal commitment to buy a certain amount, at a certain date for a certain price
-Riskiest of the investments, can earn or lose large amounts of money
-An aggressive investment

Real Return

The amount you earn from an investment after taxes, administrative costs, and inflation

Dividends

Payout to stockholders of a portion of company profits, based on number of shares owned

Common Stock

Allows investors to vote on various company issues, such as choosing its leaders, and it often offers dividends, which can rise and fall with company profits

Preferred Stock

Does not usually come with voting rights, but it does offer fixed dividends, meaning the dividend payout will not change with the company's increased or decreased profits

Exchange Rates

Rate at which one currency may be traded for another

Supply and Demand

The main factor affecting stock prices is supply and demand. Higher interest rates mean it costs more to borrow money. Because access to funds to expand is more expensive, businesses may slow or halt their growth, showing a potential profit decrease. Investors may then demand fewer shares of stock, causing the value of stocks to drop. People's expectations affect their behavior.

Trends and Shares

When considering whether to purchase stocks, investors also look at trends. Long-term trends are important and reflect overall economic conditions, including inflation and unemployment rates. In addition, with stocks, the number of shares owned is significant to returns. When prices are low, an investor can buy more shares to multiply future returns, assuming they've chosen wisely, and the companies bounce back and grow again.

Company Age

The age and the value of a company will affect stock prices. A start-up tech company will have the potential for a higher rate of return since the stock will be cheaper per share than a "blue chip" company like Disney; however, that higher return potential also comes with high risk since a start-up is more likely to fail.

Blue Chip

Stock from a financially secure and well-established company

Economic Conditiosn

Many factors affect the stock market, including domestic as well as international economic conditions. Changes within the industries can also affect stock prices, regardless of the rest of the economy. For example, a technology can become obsolete . . . imagine how people who invested in typewriter stock felt when the computer took off! Yet national economic policies, like the interest rate banks pay to the Federal Reserve, do have a ripple effect.

Avoid Media Hype

News about companies and industries can lead people to rash, uninformed decisions. How can you avoid this? Do some research. Learn all you can about the company before investing in it. Who knows, the claim could check out. Or maybe Company Z had a great year, but perhaps that's only because it was the first year it didn't lose money. Seek accurate data before investing. Chasing big returns over the short term does not lead to long-term gains. The hype, and the good times for the company, probably won't last forever.

Take Some Risks

In addition, many investors tend to choose companies they are familiar with or feel strongly about. Just because a company attracts investors, though, doesn't mean it will be profitable. It's important to have a diverse portfolio. Remember, the higher the risk, the higher the reward. Sometimes it pays to invest in the unknown, like international stocks, rather than employer or domestic stocks.

Think Long-term

Let's say you decide to buy stock in Company Z, but the stock prices drop. Should you sell the stock, or should you wait to sell until you see a gain? Keeping assets instead of selling at a loss is another common investment mistake. Investors tend to do this because they weigh losses more than they weigh gains. True, sometimes a stock can experience a comeback. But if it doesn't, investors could lose even more money if they hold onto it too long. Most financial advisors recommend that investors think long-term and not react immediately to changes.

Speculate

Predicting the price of an investment based on market factors

Diversify

Spread money among multiple accounts, in investing

Low Risk Investment

-Individual Retirement Account (IRA)
-Certificate of Deposit (CD)
-Traditional Savings Account
-Money Market Account

Moderate Risk Investnment

-Real estate
-Mutual fund
-Bonds

High Risk Investment

-Stocks
-Futures

Market Price

The purchase price of an asset

To diversify, you should:

-Utilize different types of investments
-Invest in different companies
-Invest across multiple risk levels

Risk Tolerance

Some investors can tolerate more risk or uncertainty than others can, and it depends on factors like personality, income, and family situation. For example, some people would prefer to keep an "emergency fund" in a shoebox under the bed. While any kind of savings is a step in the right direction, you should consider your options. Stashing currency is a risk for theft, and it will not beat inflation. Some people are concerned about handing money over to a bank. However, the FDIC insures bank deposits in the United States up to a certain amount—though this does not apply to non-bank investments.
Generally, younger investors can tolerate more risk. They are likely to have time to recover from losses before they must rely on investment income. People nearing or in retirement tend to be less risk tolerant. They are more likely to rely on investment income and less likely to be able to recover losses. Therefore, older investors are likely to have more low- and moderate-risk investments, while young people often have more moderate- and high-risk investments. Many people shift their investment portfolio from moderate and high risk to low and moderate risk as they age.

Domestic and International Economic Conditions

A growing economy means low unemployment and more money for spending. Businesses earn higher profits and stocks do well, increasing the rate of return. In a recessive economy where unemployment is high, business profits shrink as people have less money to spend. The reputation of a business also affects its stock value. If the public has reason to suspect that the business has major issues, perhaps their products are facing recall, the stock is sold by investors in large numbers, so it decreases in value. Therefore, it is important for individuals to have accurate information about a company's sales and profits when investing in that company. Exchange rates also affect the rate of return. An investor who chooses to purchase international stocks must pay for and sell those stocks in the currency of the country of origin. The value of the exchange will affect potential earnings.

Insurance Policies

A contract with a company for certain benefits in the event of a loss, in exchange for regular payments called premiums

Premium

An amount of money paid by a person (the insured) over a period of time to a company (the insurer) in order to cover a risk

Life Insurance

Pays beneficiaries a sum of money in the event of the policyholder's death

Beneficiaries

A person named by the policyholder in an insurance policy that may receive services or money when the policy is used

Property Insurance

Covers your home, land, and other structures in case of damage

Health Insurance

Covers preventive care and medical treatment

Social Security

Social Security Disability Benefits is a federal program aimed at assisting those who are retired or disabled. Taxpayers support this program through a tax on their income.

-Payment if you are unable to work for a year or more due to disability
-Must have worked in jobs covered by Social Security
-Benefits continue until you return to work or reach retirement age

Medicare and Medicaid

Medicare is a government-sponsored healthcare program for seniors.

-Covers some medical expenses for those 65 and older
-May cover those under 65 if they are disabled and eligible for Social Security

Medicaid is government-sponsored healthcare to assist those with no or low incomes.

- Pays medical bills for those who meet the income criteria

Some Americans will qualify for both Medicare and Medicaid.

Unemployment Insurance

Unemployment Insurance is a government relief program for those who have lost income due to losing a job.

-Provides temporary assistance to workers unemployed through no fault of their own
-State laws determine eligibility and benefits

Workers' Compensation

Workers' Compensation is a government relief program for people who have lost income due to being hurt on the job.

-Covers medical care for on-the-job accidents
-Pays benefits to families of those killed at work
-Benefits for temporary and permanent disabilities

Liability

The part of an automobile insurance policy that protects the insured by covering damage done to other people or their property in the event of an accident where the insured is at fault

Collision

The part of an automobile insurance policy that protects the insured by covering losses when the covered vehicle is in a collision with another vehicle or object

Comprehensive

The part of an automobile insurance policy that protects the insured by covering losses in a non-collision situation, such as damaged caused by theft, wind, or hail

Certain factors determine insurance rates and premiums:

-Make of a car
-Age and gender
-Driving record
-Location

Exclusion

A service, item, or event not covered by an insurance policy

Deductible

A set amount of money that the insured must pay out of pocket, meaning pay themselves, before the insurance coverage will apply

Co-payment

An out-of-pocket fee paid for individual services each time that service is rendered

Coinsurance

A feature found in some health insurance policies in which the policyholder is responsible for a certain portion of claims, usually in a certain category like hospital stays

Way:

Cost-sharing is a way for insurance companies to prevent risky behavior.

A few of the methods identity thieves can use to obtain your personal information:

-Bribery
-Hacking
-Shoulder surfing
-Phishing
-Catfishing
-Dumpster Diving

Bribery

If you are providing personal information to buy a product or receive a service, it's possible for identity thieves to obtain this information through bribery. Bribery includes giving someone money or something else in exchange for the information. It could be at the post office, doctor's office, electronics store, or any other business.

Hacking

If a company or business keeps personal records on customers or individuals, identity thieves may be able to break in and steal information. This can also occur if you keep personal information on a computer or cell phone, use the same password for multiple accounts, or use easy-to-guess passwords. Identity thieves can hack into devices over public Wi-Fi or home Wi-Fi that isn't well protected.

Shoulder Surfing

If you're withdrawing money at the ATM or making a purchase with your debit card, identity thieves can look over your shoulder and see your personal identification number (PIN). If they've placed a device on the machine that reads your card number, they're one click away from an online shopping spree.

Phishing

Phishing is a term that refers to email attempts to steal personal information. Through this method, identity thieves often use the threat of identity theft to perpetrate the crime. For example, let's say you receive an email from your bank saying your account is going to be debited for a purchase, but you realize you didn't make the purchase. You follow the links and put in the necessary personal information to stop the purchase. Yet the email didn't really come from your bank; it came from an identity thief, and you've just given him or her all your information.

Catfishing

The term catfishing often refers to a person posing as another person on social or dating websites. Through this method, identity thieves can earn your trust and willingness to give them your personal information.

Dumpster Diving

While it sounds gross, you'd be surprised how many cases of identity theft are traced back to personal records found in the trash, in which vital personal information was not blacked out or shredded. All the identity thief needs to do is dig a little, and your accounts and credit are in his or her hands.

Effects of Identity Theft

-Affect your current assets
-Affect your purchasing power
-Affect your future
-Consequences on your time and mental health

Identity Theft and Assumption Deference Act of 1998

established identity theft as a federal crime separate from the theft of financial assets with penalties up to 15 years in prison and a maximum fine of $250,000. This means that if someone uses your identity to obtain a credit card, they are committing both identity theft and credit card fraud. It also:
established that a person whose identity was stolen is a true victim
allowed federal agencies to work against identity theft
established the FTC as the agency to gather identity theft complaints
allowed victims to seek restitution if there is a conviction

State Regulations

Most states have legislation that classifies identity theft as a misdemeanor or felony, based on the level of the offense. Some states have statues that define how the victims will recover their stolen property, including lost wages and attorney fees that result from repairing identity theft.

Historical Volatility

The measure of how far an investment's price deviates from its average price

Disability Insurance

A policy that covers you in the event you are unable to work for a long period of time, usually from illness or injury