investing

investing

using long terms savings to grow money over time

why should you invest?

• it is an essential part of supporting future needs (living expenses for when you retire)

• provides a source of income, allowing you to make money on money

inflation

a rise in the general level of prices

• reduces ur purchasing power over time

rule of 72

a technique for estimating the years required to double your money at a given rate of return

• if your investing is earning a rate of return of 6%: 72/6 =12 years to double your money

emergency fund - stage one

start putting a portion of your pay into a savings account

• this money is to pay short term expenses

initial investing - stage two

begins after you have established and built up your emergency (savings) fund

• money set aside for investing - investment should be low

systematic investing - stage three

happens once ur initial investment are solid

• setting aside money regularly

strategic investing - stage four

the carful management in investment alternatives to maximize the growth of your portfolio over the next 5-10 years

• requires diversifying and moving money from poor preforming to high preforming

portfolio

collection of investments

speculative investing - stage five

happens when you make bold and high-risk investment choices

• when you are investing regularly and still have money available to take bigger risks

investment risk

is the chance that an investment’s value will decrease

risk capacity

how much risk you’re willing to take on, depending on your financial stage and goals

• greater risk = greater potential return

risk tolerance

is the amount of uncertainty that is acceptable

risk-adverse

investing with caution

diversification

spreads risk among different types of investments

• not putting all your eggs into one basket

securities

terms for stocks, bonds, and other investments

brokerage firm

connects buyers and sellers to securities( investments) - they make money through commissions and fees

discount brokers

buy and sell at a reduced price - no advice given

full-service brokers

also provide analysis and opinions to their clients

robo-advisor

a digital platform using automation - no human interaction

bonds

debt (loan) obligation of corporation or government that must be repaid at maturity

US savings bond

when you buy a savings bond - you lend the government money

low risk/ low return investments

• playing it safe - bonds

medium risk/medium return investments

• stocks and mutual funds

stocks

a unit of ownership in a corporation

• the owner of a stock is called a stockholder

mutual funds

pools money from many investors to buy a large selection of securities

• professionally managed and highly diversified

load

sales fee

high risk investments

• collectibles

• value is unpredictable

collectibles

any physical asset that appreciates over time because it is rare of desired by many (stamps, art coins, cards, records)

owning stock

when you buy a share of stock, you are purchasing an ownership interest in a company

public corporation

is a company whose stock is traded openly on stock markets

stockholders/shareholders

people who own shares of stock

dividends

money pained to stockholders from the corporation’s earning or profits

• if you owned 100 shares and a company declared a $1 dividend per share, you would receive $100

capital gains

an increase in the value of a stock over time

capital loss

you sell the stock less than you bought it for - resulting to money loss

• this happens when the company begins to preform poorly and/or investors start selling off their stock shares - lowering the price per share

why sell stocks

to make a profit

capital loss =

you lose your entire investment and end up with $0

return on investment (ROI)

is used to evaluate the efficiency of an investment

• how good is it doing - how much money are we making

common stock

a type of stock that pays a variable dividend and gives the holder voting rights

preferred stock

stock that pays a fixed dividend, but holders have no voting rights

security exchange

is a marketplace where brokers meet to buy and sell securities (stocks, bonds, etc.)

where they are traded

• largest physical exchange - NY Stock Exchange

• NASDAQ is here people sell and trade online

P/E ratio - price to earnings ratio

• to determine if the current stock price is low compared to the company’s earning

• to help determine if a stock is under or overvalued

earning per share (EPS)

are corporations profits divided by the number of shares owned by investors (profits/total number of shares owned)

• indicates a company’s profitability and it is a good measure for determining a stocks value

stock symbol

unique series of letters that identify the company

IRA ( individual retirement account)

retirement savings plan that offers tax advantages and allows individuals to set aside a specified amount each year

traditional IRA

you can deduct your contribution each year from your taxable income

• lowers how much money you pay taxes on

Roth IRA

an IRA where contributions are taxed but earnings are not

• you contribute money that has already been taxed

401(k) plan

a tax-deferred retirement plan that some employers offer their employees

• you can designate a portion of your check to automatically go into your 401 account before taxes are taken out