Savings and Investing Consumers can use any money left over from purchasing goods and services toward savings or investing. Saving means putting money aside for future use. Investing is using savings to earn extra income. For most consumers, it is a good idea to combine both savings and investing in their financial plan. The Need for a Savings Plan A savings plan ensures that a certain amount of money is put aside on a regular basis to reach a financial goal. Why People Save People save for many reasons including emergency needs, short- and long-term goals, and security and future needs. 1
Selecting a Savings Plan Benefits of Savings Plans Plans offered by financial institutions can offer interest, safety, and insure against loss. Earnings and Yield When money is deposited into an account at a financial institution, it is being lent to the institution so that it can also be lent to other borrowers. Interest is paid to the account holder for the use of the money. Interest is also paid by the person borrowing the money. Rate of return is interest expressed as a percent of the original investment. It is also called yield. ($1000 x.05 = $50) Now worth $1050 2
Selecting a Savings Plan Safety Established in 1967, the Canadian Deposit Insurance Corporation (CDIC), an agency of the federal government, protects depositor s funds to a maximum of $100 000. Liquidity Liquidity is the ability to convert an asset or investment into cash quickly and easily. 3
Common Savings Plans There is a wide range of savings plans available to individuals from different institutions. Savings Accounts Savings accounts are the safest way to save and earn some interest or return on your money. Interest rates and calculation methods vary from one institution to the next, and fluctuate with economic conditions. Term Deposits and Guaranteed Investment Certificates Term deposits and guaranteed investment certificates (GICs) are savings plans in which a fixed sum of money is deposited over a specific length to time. 4
Common Savings Plans Registered Retirement Savings Plans In 1957, the federal government introduced registered retirement savings plans (RRSPs) to encourage people to save for retirement. Registered Education Savings Plans Registered education savings plan (RESP) is a long term savings plan to help finance a child s education. See some restrictions below. Income earned is tax-free until the child attends an approved post- secondary school full time. The amount is limited to $42 000 (new legislation $50 000). The Canadian Education Savings Grant (CESG) is up to $400 per child per year. Costs of Post-secondary Education Tables 14.2, Student Living at Home, and Table 14.3, Student Living Away from Home, on p. 446 in the text, show the estimated costs of post-secondary education and student living costs. 5
Common Forms of Investments Investments, such as government or corporate bonds, stocks or mutual funds, real estate, and collectibles, have different levels of risk. Lower yields are associated with safer investments. Higher yields are associated with riskier investments. When someone diversifies their investment, they spread their investments across several types. Canada Savings Bonds A Canada Savings Bond (CSB) is a loan made by an individual to the government of Canada. On the maturity date, the government will repay the principal plus interest. 6
Common Forms of Investments Corporate Bonds Businesses sometimes need money to increase production, expand operations, or introduce new products. Businesses sell securities corporate bonds and shares of stock to raise the necessary funds. A bond is a promise to repay borrowed money on a certain future date along with interest. Investing in Stocks When an individual buys stocks, they become part owner or a shareholder in the company. Shareholders share the risks and rewards of the company. A bull market occurs when the demand and price for most stocks is high. When demand and price for most stocks is low, it is a bear market. 7
Common Forms of Investments Common Stock Common stock represents general ownership in a corporation, carries voting privileges, and includes a right to share in its profits. However, there are no fixed dividend rates. Common stock is always liquid it can be bought or sold at any time on the open market. Preferred Stock Preferred stock has advantages over common stock due to the payment of fixed rate dividends. Shareholders have no voting privileges, and stock prices tend to be more stable. This type of stock is also liquid. Blue chip companies such as Weston and Imperial Oil are characterized by a long record of regular dividend payments, stable growth, and active trading. 8
Common Forms of Investments The Stock Exchange Investors buy and sell stocks often with the help of stockbrokers or by using online services through the stock exchange. The Toronto Stock Exchange (TSX) handles about $5 billion worth of shares a day the largest trading volume of any stock market in Canada. The TSX and TSX Venture Exchange have over 110 members made up of mostly investment bankers and brokerage firms. Other well-known stock exchanges include NYSE New York Stock Exchange (New York City, USA) NASDAQ National Association of Securities Dealers Automated Quotations (New York City, USA) London Stock Exchange (London, England) Hong Kong Stock Exchange (Hong Kong, China) 9
Common Forms of Investments Buying and Selling Stocks Stockbrokers and investment dealers are licensed financial experts who advise buyers on which stocks to buy and sell and when to complete these transactions. Online investing, the buying and selling of stocks on the Internet, is growing in popularity due to convenience and low associated costs. Stock Quotations The bid price is the highest price anyone is currently willing to pay for a stock. The ask price is the lowest selling price that another investor is willing to accept for the stock. Both make up a stock quotation. 10
Chapter 14: Savings and Investing Savings and Investing Mutual Funds Mutual funds are pools of money from many investors that are set up and managed by an investment company to buy and sell securities from other corporations. Real Estate Real estate is land and anything attached to it. Besides buying a home as a form of investment in real estate, some people buy income property. Collectibles Collectibles are items of personal interest to a collector. A collectible may increase in value over time due to the scarcity of the item or the demand in the market. 11
Business Investments Three Main Reasons Why Businesses Invest 1. Businesses can invest excess cash (usually at a low risk but highly liquid) until it is needed. 2. Excess cash can be invested to generate income. 3. Business can invest strategically by purchasing another business. 12