2.04: What is Stock Anyway?

Debit Card
An electronic card issued by a bank that allows bank clients to access to their account to withdraw cash or pay for goods and services
Traditional Savings or Checking Account

– Funds deposited in bank that the account holder can withdraw at will

– Easily can withdraw cash
– Easy to use w/ debit cards/checks
– Potential identity theft
– Bank may charge fees
– Doesn’t make much money

Certificate of Deposit (CD)

Savings note issued by a bank to a despositor who places funds in savings for a set period

– Makes better money than traditional
– Banks charge fee if money is withdrawn prematurely
– Requires minimum amount of money to invest
– Safe ways to save money, but hard to withdraw from

Money Market Account

Savings account that offers higher rate in return in exchange for deposits that are larger than normla

– Won’t make much, but more than traditional
– Bank charges fee if withdrawn early
– Miminum amount in account required

Compound Interest
Calculating interest earned based on original deposited amount plus interest already earned
Inflation
General rise of prices
Nominal Interest Rate
The rate quoted in loan and deposit agreements
Real Interest Rate
The rate of interest an investor expects to receive after allowing for inflation
Individual Retirement Account (IRA)
Allows depositor to set aside a portion of income each year. Can be withdrawn at a certain age, usually 59 1/2, or when retired.
Traditional IRA
Depoists made of pre-tax, which means no tax is paid on the money until it’s withdrawn from the account
ROTH IRA
Deposits are post-tax and make in the account tax-free. The tax-free growth makes this type of account more appealing than a traditional IRA. There’s certain income limits to qualify
Costs & Benefits of IRAs

Limits to how much money a person may deposit each year.

Penalty fees with be charged if money is taken out before 59 1/2

Includes multiple types of investments including stocks nd bonds. Risk varies depending on the specific plan

Some investors have great control over how their savings are invested. Others have a set plan that guarantees a certain income after retirement

Bonds

A debt investment, meaning the purchaser of the bond is loaning money to the company or government for a set period. They have a fixed interest rate, meaning the investor knows how much interest will be earned on the loan since the rate will not change.

Purchasing a bond means giving a loan to a company.
Bonds require 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. (Loaning money to the government is safer than loaning money to a private business.)

Mutual Fund

A pool of funds collected from many investors in order to purchase stocks, bonds, and other investments in greater amounts.

Mutual funds are shares of ownership in a group of companies.
Mutual funds require a minimum amount of money to invest.
Mutual funds can earn significantly more money but can also potentially lose more.

Stocks

A share of ownership in a corporation that represents a claim on a portion of that company’s earnings.

Stocks are shares of ownership in a single company.
Stocks make the most money over a long period of time.
If the stock company fails, all money invested is lost.

Futures

A contract, or legal agreement, where an investor agrees to purchase a certain amount of a physical good or financial asset on a specific date for a set price.

Futures involve betting on the future price of a common product, like wheat.
With Futures a legal commitment is made to buy a certain amount on a certain date for a particular price.
Futures are the riskiest of the investments, because large amounts of money can be earned or lost.

Defined Contribution Plan

A defined contribution plan is a retirement plan where an employer, employee, or both contribute deposits.

The amount is fixed and contributed at specific intervals such as each pay period or monthly.
Most common types are a 401(k) and 403(b). The major difference between these two types is the type of companies that can offer them and some of the rules they must follow.
These are similar to mutual funds and IRAs in that multiple types of investments (bonds, stocks, etc.) are purchased.

Step 1: Determine value of IRA including contributions & growth

Because these are annual cash flows, you can use the future cash value formula for an annuity. Assume contributions are at the end of each year (ordinary annuity) and the rate of return is compounded annually.

FVOA = C*{(1+i)^(nt) −1}/i
C = cash flow; i = periodic interest rate; n = number of compounding periods per year; t = time in years

FVOA, =, 3000({(1+0.07)^(1*45) −1}/0.07); FVOA, =, 3000(285.75); FVOA, =, 857250;

After 45 years, Max’s IRA account will have grown to about 857,250.

Step 2: Calculate the taxes paid on contributions over the years

Calculate the tax as 28% of each contribution over 45 years.

Tax = 28% of $3,000 * 45 years

Tax, =, 0.28(3000)(45); Tax, =, 840(45); Tax, =, 37800;

Step 3: Find the value of IRA, considering taxes paid

Final Value = IRA − Tax

Final Value = 857,250−37,800

Final Value = $819,450

The final value of Max’s ROTH IRA is about $819,450.

Exchange Rates
Rate @ which one currency may be traded for another
Blue Chip
Stock from a financially secure and well-established company
Stock Market Index
Calculation of a mixture of stock ownership value

Well, notice that, with the exception of the fifth day, the value of the stock increased by a little bit each day.

Not only that, but each day’s highest value stayed close to the closing price and increased every day as well. This tells you that over one week, the stock increased in price regularly without too much fluctuation. If you were thinking of buying this stock, you would then have to decide if you think this is the beginning of a trend or a random jump that will come back down. If it is the beginning of a trend, you might want to buy it right away and hope it goes even higher!

Risk Tolerance
Personal: Low
Interest Rate
The rate of return on investments such as savings accounts, certificates of deposit, and money markets are tied to the interest rate earned. When the Federal Reserve lowers the federal funds rate, banks can more easily borrow money from one another (and from the Fed), and do not rely on member deposits, therefore, the interest rates they offer on accounts stays low. In reverse, if the federal funds rate is raised, banks will rely more heavily on deposits to cover loans and the interest rates on accounts will increase to entice deposits. So, when the Fed raises or lowers the interest rate, bank account rates follow suit.
Domestic & 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.

Exchange rates also affect the rate of return. If an investor chooses to purchase international stocks, they must pay for and sell those stocks in the currency of the country of origin. The value of the exchange will affect potential earnings.

Rule of 72
Determines how log it’ll take for the money to double by dividing 72 by the rate of return or interest rate
Egg Baskets
Liquid
Easily converted to cash
FDIC
Protects bank deposits
Stockbroker
Person who trades stocks for clients
IRA
Special retirement savings account
`Stock
Share of ownership in company
Exchanges
Place where securities are exchanged
Checking
Best account to pay bills
CD
Saving account for sepcified time period
Interest
Fee of borrowed money
Dividends
Profits pay out of sock
Mutual Fund
Share of ownership in many companies
Public
Type of company that offers stock shares for sale
Liquid
Young people are encouraged to invest more

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