Money Center - Investing Basics

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Investing

BIG Ideas

	1	What is Investing?
	2	Your Options as an Investor
	3	How Investing makes your money grow
	4	How to decide what to Invest in: Creating an Investment Plan
	5	Taking on the Stock Market

I. What is Investing

	You must have heard about Investing, but what is it? What do you think of when you hear the word investing?

Click on the faces below to see their answers.

	You're all right! In general, investing means doing certain things now that will "buy" you the things you want in the future. The things you want in the future may be good grades, good health, good habits, good relationships, etc.

	In terms of money, investing means to put money into a business, real estate, stocks, bonds or CDs (certificates of deposit) with the purpose of obtaining income or profit some time in the future.

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II. Your Options as an Investor

Think of yourself as preparing for an adventurous journey-your life! You will need to take some money with you, but you won't use all of it now and you can add to it as you go along. Some of the money will be for purchases along the way (in a week, a few months, a year). Some money is for later in life when you've returned back home.

Here are some of your options for investing.

Click on each item to see what it means. Then, decide if you think you want to take it along with you on your trip through life.

Savings
Bonds

Savings Bonds
Savings bonds can be bought for half their face value and then cashed in (at a later date) for full value. This means you can pay $50 for a bond and then cash it in for $100.

Savings bonds are usually issued by federal, state or city governments, so they are pretty safe investments.

The time you wait to cash-in is called "maturity time." The government pays out an additional $50 for using your money during this time.

For more information, visit http://www.publicdebt.treas.gov/sav/sav.htm

Certificates of Deposit
When you buy a CD from a bank, they will pay you interest for your money. CDs pay from 2% to 5% for your money.

CDs are issued for a certain period of time-3 months, 6 months, 1 year, 2 years… Remember if you buy a 6-month CD, you have to keep your money there for the whole six months. If you take it out sooner, the bank will charge you. This charge is called a penalty.

Stocks
A stock is a share of ownership in a corporation. This means you own a piece of the corporation.

When you own shares in a company, you make money if the company is doing well. You may lose money if they are not doing well.

Example: Stock in Coca-Cola

Mutual Funds
A collection of stocks and bonds from different corporations.

Buying a mutual fund may be safer than buying individual stocks because your money is spread out with a lot of different companies. This means you have shares in more than one corporation.

Example: A "Health Sciences" mutual fund might include stocks from Pfizer, Medtronic, Genentech.

Certificates
of Deposit

Stocks

Mutual Funds

A Word to the Wise...

People invest in the stock market (stocks and mutual funds) because their return on investment is generally higher than the amount of interest they earn on a savings account or CD. The return is higher because the risk is greater. Savings accounts are insured by the federal government for up to $100,000. Investments in the stock market are not; stocks can lose value.

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III. How Investing Makes
your Money Grow

You earn money on your investments in two ways:

1	Compound interest : When you invest in CDs, the bank pays you interest for keeping your money. When you invest in savings bonds, the government pays you interest for keeping your money.
2	Dividends: When you invest in stocks and mutual funds, you are becoming a part-owner of companies. If your companies do well, you will get a small share of their profits. These are called dividends.

	When you are saving, your bank or financial company adds interest to your savings at regular intervals (for example, every week or every month). If you don't use any of the money in your account, the bank will pay you interest on your interest as well as on the original amount you put in your savings account. This is called compound interest.

	Compound interest is the real power of a savings account! Click to see a step-by-step example of how compound interest works...

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IV. How to decide what to Invest in:
Creating an Investment Plan

	To decide what options to invest in, you need to consider four things: 1. Your goals for investing 2. Your timeframe: Are you investing for the long-term or short-term 3. Your comfort with risk (safety) 4. Your rate of return or yield Start by asking yourself some important questions…

Copy the check list below into your Money Notebook and fill in your answers to determine your own investing priorities.

Questions to ask yourself

Amount (1): $

Amount (2): $

Amount (3): $

Goals - What are my goals for investing this money?

Timeframe - For how long do I want to invest this money?

	Less than 1 year
	1 to 5 years
	6 to 15 years
	16 to 30 years

	Less than 1 year
	1 to 5 years
	6 to 15 years
	16 to 30 years

	Less than 1 year
	1 to 5 years
	6 to 15 years
	16 to 30 years

Risk - How comfortable am I with the prospect that I might lose some/all of the money in this investment?

Roll-Over

	See Grandma's example...

	Now that you have clarified your goals, timeframe, and comfort with risk, you can review your options. Here are some general rules for investing.

5 Rules for Investing

Goals: Your goals for the money will help determine your timeframe and comfort with risk. For example, if you need think you'll need money within a year for necessary medical expenses, you won't want to take chances. So, for this money, you'll have a short time-frame and very low comfort with risk.
*Note: You can have different goals for different pools of money.

Relationship between Yield

Time: In most cases, the longer you are able to invest your money for, the more money you will make on your investments. <More time à More money>

Relationship between Yield

Risk: In general, you will make more money on investments that involve greater risk. Depending on your goals, though, it is often better to play it safe and grow your money more slowly.

Investment Options based on Risk:

Low Risk options include savings accounts, certificates of deposit (CDs), and money market funds.
Medium Risk options include bonds and bond mutual funds.
High Risk options include stocks and stock mutual funds. These investments enable greater money growth but with less safety (more risk)

Diversification: You must have heard the saying "Don't put all your eggs in one basket," well that's what it means to diversify. Spread your money out across different kinds of investments. In this way, you will even out your risk and make the most money in the long run.

Egg1 Egg2 Egg3

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V. Taking on the Stock Market

	The key to making money on the stock market is to . If you sell a stock for more than you paid to buy it, you will make money. You need to do a little research in to find out: