Econ U6 TEst Financial Planning

Investing and Stock Market

Investing

• Process of putting your money to work over the long term, by buying and holding assets that will grow from compound interest 

Investing

assets like stocks and bonds index funds

harness compound interest and higher average returns to grow your wealth faster

your account balance will be impacted by the market

6-10% return

Saving

• Process of putting cash aside so it can be used in the short term and on minimal notice. can cause loss of purchasing power due to inflation. investment beats inflation.

Saving

meant for short-term goals

involves little risk

saving up for purchase or making emergency funds

0-2% return

Investing Strategy

buy low, sell high

Index fund

tracks the performance of a specific market index, such as the S&P 500

compound interest (investing)

“interest on interest”: you earn money on your original amount plus all the money your money has already earned. The “growth” (exponential) portion of your account eventually becomes much larger than the actual cash you put in".

Stocks

each share represents the fractional ownership of a company

ex: Apple inc

Bond

A loan made to a large organization. It pays interest to the holder, and can be bought and sold.

ex: A 20 year Treasury note is a loan to the US govt that matures in 10 years

Mutual Funds

A fund that may own multiple assets, and it is managed by a professional investment

ex: the fidelity overseas fund invests most in non-U.S. companies

Stock Market

people buying and selling little prices of companies based on how much they think the prices will be worth in the future. If you allow public to buy shares the company grows faster.

When a company lists its stock on an exchange, it means investors can buy its stock. How does this benefit the company? 

When a company “goes public” and lists its stock on exchange the primary benefit is access to more money and expansion. Instead of taking out a loan with high interest the company sells small pieces of itself (shares) to the public.

2 main ways investors can make money from stocks

Capital Gains (Buy low, sell high): If you buy a share for $50 and the company grows and becomes more successful, the price might rise to $100. When you sell it, the $50 profit is your capital gain. Dividends: Companies doing well can choose to share a portion of their profits directly with their shareholders. They might send you a small payment (e.g., $0.50 per share) every few months just for owning the stock. It’s like getting a "thank you" check for investing

Trends in stock market

the upward and downward patterns of the stock market over a recent period of time

Bull and Bear market

A BULL(optimistic) market is when the stock market is rising and the economy is booming, while a BEAR (negative) market describes a declining market and a receding economy

Why is it challenging to match your investing decisions with how the stock market is performing? 

It is hard to predict trends, and trends can only be identified once they’ve already happened 

Why would your savings account "lose value" if the rate of return you receive is lower than the rate of inflation?

the money put aside in your savings account will have less purchasing power in the future

how would investing your money for a higher rate of return work to reduce the impact of inflation on your savings?

because your money will grow faster than the rate of inflation