Chapter 6 Notes

1
Chapter 6 Notes

• Saving and Investing

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Why do people save?

• Interest - The payment people earn when they
  deposit their money in a savings account
• This is one area in which banks compete
• Safety - Deposits are insured up to 100,000
• FDIC

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Types of Savings Accounts

• Regular Savings Accounts
• Money can be withdrawn at any time
• Little or no minimum balance requirements
• Passbook savings account - Depositor records
  transactions in a booklet
• Statement savings account - Transactions are
  recorded on a statement - sent to depositor once
  a month

4
Types of Savings Accounts

• Money market account - Higher interest than
  regular savings accounts
• Usually require a minimum balance of at least
  1,000

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Types of Savings Accounts

• Time Deposits
• Certificates of Deposit (CD) -
• Earn interest only for a period of time, until
  the CD matures
• 90 days to 20 years
• Money cant be withdrawn before maturity date
• Interest is higher on a CD than a savings account

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Types of Savings Accounts

• Online Savings Accounts
• No branch offices
• All transactions done online
• Some people dont trust online banks
• FDIC insured
• Forced to offer higher interest rates to compete
• Example ING Direct

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Interest Rates

• Bank of America - 0.25
• Regions Bank - 0.25
• Source - Bankrate.com

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Investing in Securities

• Stocks
• Bonds
• Mutual Funds

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Investing in Stocks

• Stocks represent ownership of a corporation
• What investors get
• Possibility for extremely high growth

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Stock Market Vocabulary

• New York Stock Exchange (NYSE)
• Where many stocks are traded
• Consists mainly of big, old companies

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Stock Market Vocabulary

• NASDAQ
• Another place where stocks are traded
• Done by computer, not actually a place
• Consists mainly of newer or smaller companies

12
Stock Market Vocabulary

• Dow Jones Industrial Average
• The most common tool used to measure the stock
  market
• Consists of 30 very large companies
• S P 500
• Another common tool used to measure the stock
  market
• Consists of 500 companies

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Stock Market Vocabulary

• Bulls
• People that are optimistic about the near-term
  future of the stock market
• Bears
• People that are pessimistic about the near-term
  future of the stock market

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Investing in Bonds

• Governments issue bonds to raise money for
  projects
• i.e., Build schools, make roads.
• Corporations issue bonds to raise money for
  projects
• i.e., Build a new production plant.
• Investors buy bonds as an investment

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Investing in Bonds

• What investors get
• Fixed interest rate
• Guaranteed to get initial investment back

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Investing in Mutual Funds

• Mutual Funds are a group of securities bundled
  together as one investment
• What investors get
• Diversification, professional management
• Possibility of high growth

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Investing with a Purpose

• Investing should be done with a purpose.
• Saving for a purchase
• Saving for college
• Saving for retirement

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Saving for a purchase

• If the purchase is to be made within the next 5
  years
• Use savings accounts or CDs (if you can)
• Avoid stocks and mutual funds

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Saving for College

• There are tax benefits to saving for college if
  the appropriate account is used
• Earnings are tax free if used for college
• Savings bonds
• Coverdell Savings Account
• 529 plans

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Savings for Retirement

• Pensions
• Participate through your employer
• Participation is mandatory if your employer has a
  pension plan
• Money received (benefit) is based on salary when
  you retire and years of service

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Saving for Retirement

• 401k
• Participate through your employer
• Participation is optional
• Employer often matches employees contribution
• FREE MONEY
• but only if you participate

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Saving for Retirement

• Individual Retirement Account (IRA)
• Earnings are tax free
• Roth IRA is a type of IRA with different tax
  benefits than a traditional IRA

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Reading a Stock Quote
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