[MUSIC] Welcome, I'm looking forward today to talking to you about investing, and to really kind of give you the basis and some general understanding of what investing can do and how it can help you grow your own personal wealth. But this is really going to be an introductory session. It won't tell you everything you’re ever going to want to know about investing. But we’re going to cover some main concepts that I do think will be helpful to you. Before we get started, I want to just remind everybody that what we're talking about today is not investment advice for any one particular individual. Data shared, examples shared, these are to help you understand concepts. It's not that I want you to go out and do a particular thing. It's always important when we start talking about investing, that you take concepts and you consider them within the realms of your own personal goals. And what those goals are in terms of the timeframe, how are they short term goals? Or are they long term goals? And then you also need to think about, what's your risk tolerance and what's your risk capacity? So we're going to cover some of these different things as we move forward. In previous modules we've talked about building this sort of foundation of finances and we've been working through this throughout the course. And we talked about in the savings module, if you remember back to then, about the importance of building up emergency savings. Before we jump up to investing, I want to re-emphasize that it's really important that you have emergency savings for unexpected expenses in case you lose your job, medical needs, all of those things before you start thinking about investing. And we'll re-emphasize that but investing is really for the long term and you need to have those savings that are more accessible for short term unexpected needs. So just to keep that in mind as we move forward. The other thing that we kind of touched on before but we're going to, I think it's important to bring back to the front of our minds, is a couple of concepts such as small amounts really do add up. It's true for when you're building up emergency savings, but it's also true for investing. So here we have an example showing what could happen if you saved and invested $20 a week which would be you know about $1,040 a year right? So if we look at this, you can see how the money can accumulate and we're going back to that concept about compounding return that we've talked about in several modules. And here we can really see that that compounding one, it works in our advantage, but also that there is a difference in what you're going to gain depending on your rate of return. And I think we know that if somebody asked us we'd say yes that makes sense but sometimes we forget what a difference that could make. So we have two examples here showing the rate of return if you have it saved and invested at 2% versus 8% annual return rate. And either way money will accumulate but you can see the bottom line here that if you are saving for the long term, let's say for retirement, that over 40 years and if you had money investments that were at 2%, you would accumulate over $63,000. But in contrast, if you were getting an annual return rate on average, not necessarily every year, but on average you'd be up over $280,000. So really a very significant difference and this is really probably one of the big things about why investing can really make a difference in your long term financial network and how your retirement might look. It might seem a long time from now but now's a good time to start thinking about it. So when you start thinking about investing, it's really important to first think about what are your current goals and then we can think about which different investment options or savings options are best for you. So short term goals, things that might be happening within, let's say approximately five years. One of your biggest concerns is access to that money. So let's say you were saving to buy a car or something like that. You want to know that when you need that car that you're going to have access to that money and it's going to be at the amount you expect. So a savings account or something where it's very determined, not a lot of volatility, and also you have access to the money that there's no withdrawal penalties or anything, are going to be important for short term goals like saving for a car. Now if you're saving for the long term, when we're looking at things like retirement planning, then you really, one of your key concerns is staying ahead of inflation. And you don't want inflation to erode the value of the money that you've saved up. And so, that might call for investing in something that's going to give you a return rate that is better than the inflation rate, that's higher than the inflation rate. So real important again, it kind of goes back to those unexpected expenses savings. But even beyond that, when we're saving for short term goals, things under five years, we need to keep that in mind that we need access to that money. A good example of that is, let's say that you were saving to send a child to college. You want to know that, when that child turns 18 or whatever, at that approximate age, that that money is going to be available. You don't want to wait until the stock market goes back up to be able to say now you can go to college. So we gotta have to keep in mind our goals and the time frame when we're making, saving, and investing our choices. So let's make sure we're all pretty clear about inflation and what that means. Essentially what inflation is when in prices increase overall. So not just the cost of maybe gasoline or food, but when our whole sort of shopping basket of goods that we're purchasing are going up, when that happens then our purchasing power goes down. So what we could buy for $1 or $100 over time if inflation is going up, our purchasing power will go down. Again, one of those concepts where I think we hear about it, we know about it, but sometimes we can be surprised what that really means in terms of adding up. And there's a real nice inflation calculator at the US Bureau of Labor Statistics, and I just stuck some numbers in. So let's say you had $100 in 1990 and you went to spend it. You went to go buy something that you could've bought for $100 in 1990 today, you would need over $181. So, big change in not that long of a time period when we think about over our life span. So, it's important to keep in mind what inflation is doing. All right, now that we have sort of those background pieces that we needed to cover before we start talking about investing, let's kind of now move into how does investing work and what does that mean? And in many situation, investments mean that we're really sort of investing in companies, and so let's look at an example of a small case example to kind of put this into a picture. And we're going to talk about Sam, Sam wants to start a new business. He's really into tennis and he thinks that tennis shops are going to be just the wave of the future and so he wants to open up his own shop, but he really doesn't have enough money. So how can he get more money? Well, he has a couple of different options. What he can do is he could ask if somebody would like to loan him some money. So he approaches one friend, Ann, and she says that she's willing to loan him $10000 with payments that he would make to pay it back every six months. And he is going to get that loan at 6% so that's one way that we can invest in companies, is we can loan them money. Another way to invest in companies is by having part ownership in that company. So another friend says, no, I don't feel like loaning you money but this sounds like a great idea. I agree with you, I think tennis shops are going to be a big deal in our community. So I would like to go into business with you. And I'll put in $50,000 if you'll make me a 45% partner. And so Sam thinks this sounds like a good idea too. So these are two different ways that he can get some financial support to start his own business. Now when you're in a situation where you're thinking about investing, there's a couple of questions you need to ask yourself. You have to ask yourself, when I'm comparing different investment option which has the potential to make me more money? At the same time, you need to ask yourself, what's my risk of losing money and is it different in these different options? And it's really a balancing act, and this is kind of what we do all our lives when we're looking at investments, is do this balance between how much do I want to try to get in terms of return and balance it with amount of risk I'm comfortable taking with that. So let's take a look again, at our example with Ann and Mike. What are their potential gains? Well, Ann's is pretty fixed, right? She's made a loan with 6% interest. She's going to get her principal back plus that interest on top of it. She can calculate exactly what her potential gain is and that's pretty easy to do. Mike is really, it's a lot more potential growth, right? If that company just did wonderful and there were franchises that opened up everywhere, I mean he could make a lot of money off his investments. So we don't really know what that potential gain is, in the sense that we can't calculate it today. So let's hold on this thought, and we're going to come back to Ann and Mike as we talk a little bit more down the road here. Essentially what we've been talking about here with Ann and Mike, are essentially bonds versus stocks. When you own a piece of a company, that's what stocks are. When you buy a stock, you're buying a share in that company and that's what we saw Mike do. In the example where Ann was loaning money, that's very similar to when you buy a bond. A bond is really a loan to that company, and then they're going to pay you back at maturity for that bond as well as provide interest. So those are the two basic concepts and sometimes we hear those words go round and round, stocks and bonds, stocks and bonds, we don't understand really the difference. One is about ownership and one is about loaning, and those are the main things to see. How do you make money on stocks? Let's say you bought stocks, how does that work? Well, there's a couple of ways that people can make money on stocks. One is, you hope the company does well and the price of that company's shares would go up. And then you could sell your share to somebody else, and that would be a profit from the cost that you bought it. And that's called the capital gains. Another way that people make money on stocks is that sometimes companies pay stockholders a dividend, sort of a piece of that profit. And not all companies do this, but that is another way that you can make money on stocks. How do you lose money on stocks? Well if the company does poorly, then the price is probably going to go down. And if you sell your share when the price is down, then you're going to lose money compared to what you purchased it. And that is one of the things about stocks, the prices do tend to go up and down, and this is where you got that capital loss versus the capital gain. How do you make money on bonds? Well it's really about hoping that you can sell it for a profit beyond the interest payments that you're getting. What we know about the bonds is that it tends to be very much impacted by the overall interest rates in the country or in a marketplace. So if interest rates go down, then your bond, which is giving a higher interest rate, is going to be very appealing to other people. And people are going to want to buy that bond. So you can sell it and have a gain before it would come to maturity. And then of course, the interest payments, as we mentioned, is another way that you're making money on a bond. Can you lose money on a bond? Yes, you can lose money on a bond. Your interest rates that you're receiving most likely get those unless there's really a problem. But again, if you go to sell it, if interest rates have gone up in the market, then yours isn't looking so good and you're going to end up selling at a loss. So, with stocks and with bonds, both situations, you stand the chance of gaining money or losing money. The risk level is a little different and we'll talk about that as we go forward. But that's the sort of basic ideas of how do you invest in a company? How do you loan money to a company, and what's your potential for, and how would you make a profit or build wealth that way? [MUSIC]
