Coral Gables Senior High
AOF Principles of FinanceLesson 9Financial MarketsStudent ResourcesResourceDescription Student Resource 9.1Reading: Investment Risk Factors Student Resource 9.2Chart: Investment Risk FactorsStudent Resource 9.3K-W-L Chart: Investment InstrumentsStudent Resource 9.4Reading: Investment InstrumentsStudent Resource 9.5Assignment: The Young Investor’s BlogStudent Resource 9.6Reading: Writing for the WebStudent Resource 9.1Reading: Investment Risk FactorsThere are certain risks associated with every choice you make in life. From the friends you choose to the sports you play to even the foods you eat, there is an element of risk involved with each decision. The same holds true with money. Whether you spend, save, donate, or invest your money, there is always an element of risk attached. For example, if you choose to spend $150 on a pair of concert tickets you are accepting a level of risk. What if you get sick on the day of the show, what if the tickets get posted on eBay for half the price, or what if your car breaks down unexpectedly and you need that money for repairs? Even if you keep your money stashed at home hidden in your dresser drawer, you risk that you could lose it or that it could be stolen. Investing is a way for you to increase the amount of money you have—it’s a way to put your hard-earned money to work for you. But investing is also gambling. There is always a chance you will lose your money. You can make a lot, but you can lose a lot if your investment fails. Throughout history, stock markets grow over the long term. That’s why so many people invest in them. Every investment carries with it some level of risk. What’s more, the market sometimes rewards risk takers—the greater an investment’s risk, the greater the possible reward as well as the greater the chance of decline in value. Most investors decide the level of risk they’re comfortable with and invest according to that risk level.So how much risk should you take with your money? That depends on your age, financial goals, existing economic conditions, financial resources, financial responsibilities, and risk tolerance level. Risk tolerance level refers to your ability and willingness to accept risk. Most investors feel that if you are losing sleep over your investments or if your investment portfolio is causing you to feel anxious or worried, then your investments’ risk level probably exceeds your risk tolerance, and you should think about adjusting accordingly. You can evaluate the overall risk of an investment by understanding and being knowledgeable about some of the major risk components described below.Economic Risk and Market Risk Sometimes the value of an investment (stock, bond, mutual fund, real estate) can fluctuate just because of the state of the economy and/or the financial markets. Many factors can influence this type of risk such as war, inflation, political changes, and recessions, to name a few. Economic risks (the investment risk associated with the overall health of the economy) affect the entire market, whereas market risks (the risk that the value of an investment will decrease due to changes in the market) may affect just one sector of the market. Stock prices, interest rates, and exchange rates, as well as other outside forces, can affect market risk. For example, imagine that you bought stock in a tech start-up because your financial advisor told you that its product will fulfill a need in the market and she thinks they’ll be really successful. She says, “Buy stock now at $1.25 a share, and I bet in five years you can sell that stock for $5 a share!” Sounds like good advice, right? But if you bought that stock in 1994, you might have watched in horror as the share price fell to $.25 by 1998!Liquidity RiskLiquidity risk refers to how easily an investment can be bought and sold and/or converted to cash. Some investments are more easily exchanged for cash on short notice than others. These are considered liquid. Financial assets, like stocks and bonds, are generally more liquid than real assets such as collectibles—coin collections, antique cars, jewelry—or real estate. For example, let’s say that you want to buy a car for work purposes. It costs $11,000. You recently inherited your grandmother’s jewelry collection, which is valued at $12,000. You’ve visited the two jewelry shops located in your small town, and the most either one will pay you for the jewelry is $5,000. You could travel to a big city and sell your jewelry there, but you won’t be able to travel there for several months. You can’t redeem your investment (the jewelry) quickly without taking a huge loss in its value. That means your investment has a low liquidity. Inflation (or Price-Level) RiskSome people believe that the safest form of investing is to place their money into a savings account or a certificate of deposit because their money is “guaranteed” to be safe. However, even these forms of investing can be risky. There is a chance that your money may not be able to keep up with inflation and your dollar may actually be worth less in the future. As you have learned, when the price of goods and services goes up, the result is an increase in the cost of living, which is referred to as inflation. When this happens, the value of your money declines and you cannot buy as much as you used to be able to. Twenty years ago, a gallon of gas cost between $1 and $1.50, depending on where you live. Take a look at gas prices now! The cost of a tank of gas back then probably would only get you half a tank today.Interest Rate Risk The amount your investments earn can become uncertain because of changes in value caused by interest rate changes. Changes in interest rates can affect the price of a stock or a bond. If interest rates go up, bond prices usually go down and if interest rates go down, bond prices usually go up. In other words, bond issuers must offer higher rates on new bonds in order to entice investors when interest rates decrease. The result is that the prices of existing bonds drop because investors will choose the newer bonds that are offering the higher rate. Since stocks and bonds react differently to the changes in interest rates, investing in a variety of investment instruments can help minimize this type of risk. Business Risk Business risk refers to another risk associated with investing. This type of risk revolves around the soundness of the business in which you are investing. BlackBerries were early smartphones with a small screen and a full keyboard. They were extremely popular with businesspeople, and a lot of people invested in the company. But then the iPhone came out, followed by Android phones and iPads and tablet computers…and nobody wanted a BlackBerry any more. Investors who kept their money in BlackBerry took a loss, because BlackBerry’s products have not been as successful in competing with other smartphones. Even if you do careful research on the company, you still face the risk that the company may be less profitable than you expected and may experience declining revenues or increasing costs. There is no way to predict that the company you invested in won’t be affected by the arrival of a competitor or poor management practices. There is also the possibility that the company you invest in could fail and/or go out of business, which would mean that you could lose all of your initial investment! Global Investment RiskGlobal investment risk affects investments made in stocks and bonds offered by companies in other countries. There are many risks involved with investing internationally. Three examples are instability of another country's currency, political stability of another country, or differences in regulatory agencies and standards that other countries must abide by. Imagine you owned a company in the mid-1990s, and you were looking to invest internationally. Ukraine had just become independent from Russia, and Ukrainian businesses were eager for foreign investment. You invest in a Ukrainian business and it is a great investment for many years—until 2014, when political instability wreaked havoc on Ukraine’s economy. The unexpected revolution, tensions with Russia, and general unrest meant a sharp decline in the value of your company’s investment. Minimize Your RiskThere are many different ways to invest, and every option has a different level of risk attached to it. You will learn about the variety of investment options later in this lesson—from low-risk options like US Treasury bills and corporate bonds to more risky instruments like stocks and hedge funds. And as you’ll see, there will always be the potential for loss but also for high returns. The key is to have a balanced investment portfolio so gains in one type of investment in your portfolio can offset any potential losses that may occur in another part of your portfolio. Diversifying your investments (spreading your money among different investments) is a good way to reduce investment risks. Have you ever heard the old saying “Don’t put all your eggs in one basket?” Diversifying your investments is a way to avoid doing that. Imagine you are managing your retirement accounts. You might choose to invest part of your money in high-growth potential companies that are also very risky. But you wouldn’t put all your money there. You might choose to put another part of your money into some very safe, predictable, low-risk investments. You won’t make as much money off the low-risk investments, but you also won’t lose the money. You have diversified your portfolio of investments.One thing to remember: we all have a responsibility when it comes to the decisions we make. We need to educate ourselves and understand the potential risks involved and then make an informed decision about whether or not to accept the risk.Student Resource 9.2Chart: Investment Risk FactorsStudent Name:_______________________________________________________ Date:___________Directions: Use your knowledge of the different forms of risk and the information from Student Resource 9.1, Reading: Investment Risk Factors, to complete the table below. For each type of risk, describe some of the factors that cause it and one thing it most affects.Type of RiskWhat Causes ItOne Thing It Most AffectsEconomic RiskMarket RiskLiquidity RiskInflation RiskInterest Rate RiskBusiness RiskGlobal Investment Risk DOCPROPERTY Category DOCPROPERTY Category DOCPROPERTY Category DOCPROPERTY Category Student Resource 9.3K-W-L Chart: Investment InstrumentsStudent Name:_______________________________________________________ Date:___________Directions: In the Know column, write down anything you already know about these topics. In the Want to Know column, write down any questions you have. As you view the presentation on investment instruments, you will complete the Learned icKnowWant to KnowLearnedStocksBondsMutual FundsOptions, Futures, AnnuitiesAlternative Investments (hedge funds, real estate investment trusts, private equity investments)Stock marketsStudent Resource 9.4Reading: Investment InstrumentsThere are many different investment instruments available that can help investors meet their financial objectives, each with its own unique characteristics. Being knowledgeable about the various instruments available should be the first part of any investment strategy. Owning stock means you own a piece of the company. But that doesn’t mean you can go into their offices and start bossing people around! You own a tiny piece, maybe one-millionth, of the company. The majority owners, people who own lots of stock in the company, are they ones who make decisions about what the company will do. Many times these majority owners are the people who founded the company in the first place.The price of a stock is based on the value of the company. If the company is successful, the stock price will go up. If the company fails, the stock price will drop dramatically. Because of that, stock investing is risky. You can lose all the money you invest, which doesn’t happen with a savings account. Why do people invest in stocks? You can make a lot more money investing than you can just leaving your money in a savings account. You have to decide if it’s worth the risk.The goal is to buy a stock when the price is low and then sell it when the price is high. But not all stocks increase in value, and some stocks are already very expensive because those companies are doing well. It’s not as easy as it sounds.A bond is a loan that pays interest over a specified amount of time. Bonds are more predictable investments. When you purchase a bond, the interest rate and amount of each payment is already established. For that reason, bonds are sometimes called “fixed-income securities.” Companies issue corporate bonds to raise money for expansion, modernization, or other business activities. A company has to “back” the bonds with something of value, similar to how you need collateral for some loans. A company can offer debenture bonds (backed by faith in the company), mortgage bonds (backed by the company’s assets), or convertible bonds, which can be traded for stock.The US government offers many types of bonds; the three most common types are Treasury bills (T-bills), Treasury notes (T-notes), and US savings bonds. Treasury bills are short-term investments (under a year in length) and are used by the government to provide immediate funding. T-notes are midterm investments (payable in 2?10 years) and help to pay interest on national debt. Series EE savings bonds are offered by the federal government and can earn interest for up to 30 years.Municipal bonds allow states and cities to finance new projects and improvements. General obligation (GO) bonds are backed by the government and the interest is paid from tax revenues. Revenue bonds are paid by specific fees that are collected, such as bridge tolls.Money markets provide short-term debt financing for borrowers who are seeking funds with maturity dates of one year or less. In other words, you will get your money back―with interest―in less than a year. Money markets do not include stocks because stocks do not have a specific maturity date, or date when you will get your money back. You could own a stock for a few hours or for several decades. T-bills and CDs don’t work that way. You know when your money will be available and how much you will get back. Bond investing is therefore less risky than stock investing.Money markets provide individuals, businesses, and even the government with short-term funds that have varying maturity dates to match particular financial needs. By investing in mutual funds, investors with limited capital can create a diversified portfolio. There are many different types of mutual funds; the three main groups are stock funds, bond funds, and money market funds. Within each group, many different categories exist to meet the needs and objectives of different types of investors. Most of these funds serve to diversify an investor’s holdings by purchasing a variety of investments within their particular category. At the end of 2012 there were more than 7,000 mutual funds in the United States with nearly $12 trillion in them.Stock funds invest in stocks and can be classified by the types of stock they buy. Categories can range from (but are not limited to) global stock funds (international companies) to utility funds (companies that offer utility services) to value funds (companies that may be undervalued and pay high dividends) to growth funds (companies in a rapid expansion phase).Bond funds invest in bonds and can be classified by the types of bonds they buy. Bond funds provide income. Categories include junk bonds (high-risk companies), corporate bonds, and municipal bonds, to name a few.Money market funds usually maintain a $1-per-share value, so they can be thought of as equal to cash. The interest the investments earn is low when interest rates are low. Money market funds invest in short-term interest-paying securities. Picture this: a store at the mall is selling autographed t-shirts signed by your favorite athlete. Your friend is right at the front of the line. You are way at the back. Wouldn’t it be great to ask your friend to save a shirt for you? Would you pay your friend to save your spot? These investments work in a similar way. You pay now to make sure you have investment opportunities later.If you buy an option, you have purchased the opportunity to buy something at a specific price over a period of time. Your option guarantees that next year you can buy stock in XYZ Industries for the same price the stock is now, even if by next year XYZ’s stock has doubled in price. And next year, if you choose not to buy, you have lost the cost of your option, but nothing else.If you buy a futures contract, you are saying that you will purchase 100 shares of XYZ’s stock for $50/share next August. You are committed to that price at that time. There is a lot of risk in a futures contract. What if next August XYZ’s stock is only worth $10/share? You’re locked in to pay $50! Investing in futures can be dangerous for corporations as well as for individuals.Annuities are sold by life insurance companies and provide a regular series of payments that continue for a set period of time. Investors can purchase annuities with a single payment or a series of payments. Annuities are often used to fund a person’s retirement. There are fixed annuities that pay a set amount (usually monthly) and variable annuities in which the payments change based on how well the investments are doing. A hedge fund is an investment fund that is lightly regulated. With hedge funds, investors can participate in a range of investment and trading activities. Hedge funds invest in stocks, bonds, and more and use a variety of investment strategies to enhance returns. Currently hedge funds do not have to register with the SEC.Real estate investment trusts (REITs) are established to make money in real estate. REITs are also similar to mutual funds in that they use funds pooled from a group of investors to buy buildings or mortgages on buildings. Most REITs will specialize in a specific type of building such as hotels, hospitals, apartments, and/or shopping centers. REITs are similar to stock in that they trade on the major exchanges. REITs are considered a highly liquid method of investing in real estate. There are many different forms of REITs; for example, there are equity REITs, mortgage REITs, and hybrid REITs. Private equity consists of securities of companies that are not openly traded on stock exchanges. Very wealthy investors are often interested in private equity investments. Their money goes into pools and is used as a source of funding for high-risk ventures, including new start-ups that are predicted to have significant growth possibilities or firms in need of restructuring. Many well-known companies have had their beginnings with private equity funding. Federal Express and Intel are two well-known examples. Capital markets include stock markets, which provide financing by issuing shares of stock, and bond markets, which provide financing by issuing bonds. Capital markets include investment instruments that typically have maturity dates of more than a year. The capital market is regulated by the US Securities and Exchange Commission (SEC), which regulates and enforces the conduct of every organization participating in the US securities market.One of the most common forms of capital markets is the stock market. The New York Stock Exchange (NYSE) is one of the largest securities exchanges in the world. In order for a company to be listed on the NYSE, a company must have issued at least 1.1 million publicly traded shares of stock worth at least $100 million and must have earned more than $10 million over the last three years. NASDAQ refers to the National Association of Securities Dealers Automated Quotations system. It is a screen-based, floorless system that uses a telecommunications network to connect brokers and dealers. To be listed on the NASDAQ, a company must have issued at least 1.25 million publicly traded shares of stock with a bid price of at least $4 at the time of listing worth at least $70 million and must have earned more than $11 million over the last three years.The NYSE MKT Amex Equities is another well-known stock exchange located in New York. Its core business has recently changed from stocks to options and ETFs (exchange-traded funds). You’ve now been introduced to some of the most common investment instruments—from stocks and bonds to mutual funds—as well as the three most common stock markets. Becoming knowledgeable about the various investment instruments and related concepts is your first step toward becoming a successful investor. You are now one step closer toward meeting your financial objectives. Student Resource 9.5Assignment: The Young Investor’s BlogStudent Name: Date:Directions: You are going to serve as a contributing author to a blog that encourages young people to try investing. The blog wants a series of short articles that introduce basic investment concepts and explain them in a way that teenagers and young adults will understand and appreciate. Use this assignment sheet to help you research and plan out your blog posts. Before you begin, read through all of the instructions on this resource, and read the assessment criteria at the end to make sure you understand how your work will be assessed.What is a blog?A blog is a website that is regularly updated and written in a casual or informal style. Many blogs are personal, written by one individual or a small group of individuals, talking about their lives. Other blogs are sponsored by businesses or organizations to discuss a specific topic.For this assignment, you are serving as a contributing writer to The Young Investor’s Blog, a site that aims to encourage teenagers and young adults to try investing.What do I need to do?You will be assigned one or more terms that you learned about in this lesson.You will research these terms online and also look in your notes to find out more about them.For each term, you will write a brief blog post. Your post needs to define the term and give examples of it. Your posts should be written in a way that will be understandable and appealing to teenagers and young adults, but you also need to make sure that your facts and examples are accurate.My TopicsOnce you have been assigned your topic(s), write them down in the space provided.Recommended SourcesThere are many good resources on the Internet to help you learn more about investment terms and concepts. Here are a few reliable sites you can use for research. Your teacher may have other research suggestions for you as well. Use the organizer on the next page to help you keep track of the information you find. An example is provided icNotesSourceStock marketsThere are 3 main ones: NYSE, NASDAQ, NYSE MKT Amex Equities. Make sure your assignment meets or exceeds the following assessment criteria:Each blog post correctly defines or explains the topic.Each blog post includes one or more helpful examples.The blog posts’ style and use of language are appropriate for the audience (teenagers and young adults) and for the format (reading on the web).The blog posts are neat and easy to read.Student Resource 9.6Reading: Writing for the WebKeep it easy to read. People read differently on the web. They don’t “dig in” to the content. They tend to scan or skim over things. Therefore, your content needs to be easy to read. Use headers, bullet points, and short paragraphs. If you have a lot of information, you need to put a summary at the top so people know if it’s worth their time to read the whole thing. What counts as a lot of information? If a reader would need to scroll down on their computer screen more than once, it’s probably a lot of information (by web standards).Put the important stuff first.As you just learned, people tend to read fast or skim information presented online. So put your key points first. If you don’t want to jump right into them, use a summary statement or bullet-pointed list to say, “Here are the things I will be discussing in this article.” That way a potential reader knows you will have important stuff to say, even if you don’t say it in the first paragraph.Make sure it’s accurate.Anyone can put up a website claiming they know about any topic. That doesn’t mean we’re all experts on everything. If you want your online writing to be taken seriously, you need to prove that you know what you’re talking about. How do you do that? Be accurate in what you post. Make sure there are no typos or mistakes in your work―double and triple check. Provide links to your sources so people know that you did research and didn’t just make things up.Provide links, images, and videos.One of the great things about publishing your work online is that you have the entire Internet to use to support and enhance your writing. It’s great to link your online work to other online postings that support your writing. That doesn’t mean link to somebody’s Facebook posting―it means linking to online articles and materials from people who are viewed as experts in their field.You can also enhance your work by adding images and videos, as long as you are careful about copyright infringement. That means you can’t post images or videos that don’t belong to you. Examples of well written blogs can be found at the following links: ................
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