Finance - Finance - Savings and InvestingSavings and Investing

FactFact

There are two kinds of money problems.There are two kinds of money problems.

Which one do you want?Which one do you want?

1.1. Not enough money?Not enough money?

2.2. Too much money?Too much money?

SavingSaving

AdvantagesAdvantages Money is protected Money is protected

against lossagainst loss Interest is paid by the Interest is paid by the

financial institutionfinancial institution

DisadvantagesDisadvantages Money loses purchasing Money loses purchasing

power over time due to power over time due to inflation.inflation.

If the current inflation rate If the current inflation rate is 2.5% and the financial is 2.5% and the financial institution is paying you institution is paying you 2%, your money is losing 2%, your money is losing purchasing power.purchasing power.

Saving involves safely putting money aside for future use. For example, depositing money into a savings account which pays interest of 1.5%.

Savings PlansSavings Plans

1.1. Savings AccountsSavings Accounts

2.2. Term DepositsTerm Deposits

3.3. Guaranteed Investment Certificate (GICs)Guaranteed Investment Certificate (GICs)

4.4. Registered Retirement Savings Plan (RRSPs)Registered Retirement Savings Plan (RRSPs)

5.5. Registered Education Savings PlanRegistered Education Savings Plan

(RESPs)(RESPs)

6. Tax Free Savings Account (TFSA)6. Tax Free Savings Account (TFSA)

InvestingInvesting

AdvantagesAdvantages Investments often pay Investments often pay

a higher rate of a higher rate of return. (higher return. (higher interest)interest)

Investments can grow Investments can grow at or exceed the rate at or exceed the rate of inflationof inflation

DisadvantagesDisadvantages The rate of return is The rate of return is

not guaranteednot guaranteed There is some risk of There is some risk of

losing part or all of the losing part or all of the money.money.

Investing is using your savings to earn extra income that will grow over time.

Investing PlansInvesting Plans

1.1. Investment in stocks/sharesInvestment in stocks/shares

2.2. Mutual FundsMutual Funds

3.3. BondsBonds

4.4. Index FundsIndex Funds

5.5. CollectiblesCollectibles

Smart investors have a combination of Smart investors have a combination of savings plans and investmentssavings plans and investments

An individual’s short and long-term goals An individual’s short and long-term goals and plans impact how savings and and plans impact how savings and investments are distributed.investments are distributed.

The Need For a Savings PlanThe Need For a Savings Plan

Savings PlanSavings Plan Systematic or regular habit of putting money aside to Systematic or regular habit of putting money aside to

reach a financial goal.reach a financial goal.

Why?Why?1. Emergency needs1. Emergency needs2. Short and long-term goals 2. Short and long-term goals 3. Security3. Security4. Future needs4. Future needs

Decisions you need to make:Decisions you need to make: How much to saveHow much to save What you saveWhat you save Where you saveWhere you save

Emergency NeedsEmergency Needs

Loss of family income due to death, Loss of family income due to death, injury, or illnessinjury, or illness

Life and health insurance does notLife and health insurance does notalways cover all the costsalways cover all the costs

Unexpected hardships such as gettingUnexpected hardships such as getting fired or laid off from a job fired or laid off from a job

Wanting to quit a job for ethical orWanting to quit a job for ethical or personal reasons personal reasons

How much savings do I need?How much savings do I need?

Ideally, people would be Ideally, people would be wise to have 3 - 6 wise to have 3 - 6 months salary in savings.months salary in savings.

If a job is lost, one’s If a job is lost, one’s savings would provide savings would provide until a new job is likely until a new job is likely found.found.

Short and Long-term GoalsShort and Long-term Goals

Short Term GoalsShort Term Goals Purchase of relatively Purchase of relatively

inexpensive items inexpensive items within a short period within a short period of time of time

Examples include:Examples include: Concert tickets, Concert tickets,

bicycle, televisionbicycle, television

Long-Term GoalsLong-Term Goals Purchase of more Purchase of more

expensive items in expensive items in more than a year’s more than a year’s time.time.

Examples include:Examples include: Car, house, post-Car, house, post-

secondary school, secondary school, retirementretirement

Security and Future NeedsSecurity and Future Needs

Many people who plan financially for their future are happier because they spend less time worrying about their financial future.

David Chilton’s best selling book, The Wealthy Barber, states people should pay themselves first – take 10% of your earnings as soon as you get it and put it aside in savings or an investment plan.

If you get into the habit of doing this, you never get used to having the money to spend in the first place.

Selecting a Savings PlanSelecting a Savings Plan

When trying to select which savings When trying to select which savings plan(s) to use, consider the following:plan(s) to use, consider the following:

1. Rate of return (interest rate) and how1. Rate of return (interest rate) and how interest is calculated interest is calculated

2. Safety2. Safety

3. Liquidity3. Liquidity

Interest / Rate of Return/ YieldInterest / Rate of Return/ Yield

Interest is money received over time for letting Interest is money received over time for letting others borrow moneyothers borrow money

Consumers borrow money from banks and pay Consumers borrow money from banks and pay interest in addition to paying the initial amount interest in addition to paying the initial amount borrowed, which is called the principal.borrowed, which is called the principal.

Banks pay interest to consumers who deposit Banks pay interest to consumers who deposit money into banks, who then use it to lend to money into banks, who then use it to lend to others at a higher interest rate.others at a higher interest rate.

InterestInterest

Interest is expressed as a percentage of the Interest is expressed as a percentage of the original investment (i.e. 2% of $)original investment (i.e. 2% of $)

This is called a rate of return or yield.This is called a rate of return or yield. Interest rates are based on a one-year time Interest rates are based on a one-year time

period. (1 year = 12 months = 52 weeks = 365 period. (1 year = 12 months = 52 weeks = 365 days)days)

Example:Example: A savings account yields an annual return of 3%. A savings account yields an annual return of 3%. The rate of return on the savings account is 3%.The rate of return on the savings account is 3%.

Savings Accounts and InterestSavings Accounts and Interest

Actual earnings on savings accounts depends on when Actual earnings on savings accounts depends on when the bank calculates and pays the interest:the bank calculates and pays the interest:1. daily1. daily

2. weekly2. weekly3. monthly3. monthly4. annually4. annually

And how the bank calculates interest and may vary from And how the bank calculates interest and may vary from bank to bank from type of savings accounts. Interest bank to bank from type of savings accounts. Interest may be calculated in one of two ways:may be calculated in one of two ways:1. Simple Interest1. Simple Interest2. Compound Interest2. Compound Interest

Calculating Simple InterestCalculating Simple Interest

Simple Interest is calculated on the amount deposited by the consumer – also called the principal amount)

Simple Interest Calculation Interest = Principal x Rate x Time

I = P x R x T

a. Simple Interest calculated annually at 2% = 2/100 = 0.02 Balance of $2000 in my bank account I = 2000 x .02 x 12/12 = $40

b. Simple interest calculated monthly at 2% = 2/100 = 0.02 Balance of $1400 at the end of the month

I = 1400 x .02 x 1/12 = $2.33

c. Simple interest calculated weekly at 2% = 2/100 = 0.02 Balance of $1400 at the end of the week I = 1400 x .02 x 1/52 = 0.53 cents

Calculating Compound InterestCalculating Compound Interest

Interest is calculated on the principal amount plus any Interest is calculated on the principal amount plus any interest already earned.interest already earned.

You earn more interest in each payment period because You earn more interest in each payment period because you are earning interest on interest as well as your you are earning interest on interest as well as your principal.principal.

The more often the interest payment is made (i.e. The more often the interest payment is made (i.e. monthly vs. annually, or weekly vs. monthly, or daily vs. monthly vs. annually, or weekly vs. monthly, or daily vs. weekly), the more your money will grow because interest weekly), the more your money will grow because interest is being paid on top of interest more oftenis being paid on top of interest more often

Calculating Compound Interest Calculating Compound Interest If you deposit $1000 in a savings plan and leave it there for 5 years at 5% interest compounded annually, interest is compounded as follows:

Balance at the beginning

of the Year

During the Year Balance at the end of the year

Year 1 $1000.00 + 5% of $1000 = ?

+ .05 x $1000 = $50.00

= $1050.00

Year 2 $1050 + 5% of $1050 = ?

+ .05 x $1050 = $52.50

= $1102.50

Year 3 $1102.50 + 5% of $1102.50 = ?

+ .05 x $1102.50 = $55.13

= $1157.63

Year 4 $1157.63 + 5% of $1157.63 = ?

+ .05 x $1157.63 = $57.88

= $1215.51

Year 5 $1215.51 + 5% of $1215.51 = ?

+ .05 x $1215.51 = $60.78

= $1276.29

Calculating Compound Interest Calculating Compound Interest

If you deposit $1000 in a savings plan and leave it there for 5 years at 5% interest compounded monthly, interest is compounded as follows:

Balance at the beginning of the Month

During the Month Balance at the end of the month

Month 1 $1000.00 + 5% of $1000 = ?

+ .05 x $1000 x 1/12 = $4.166

= $1004.1666

Month 2 $1004.1666 + 5% of $1004.1666 = ?

+ .05 x $1050 x 1/12 = $4.1802

= $1008.3468

Month 3 $1008.3468 + 5% of $1008.3468 = ?

+ .05 x $1008.3468 x 1/12 = $4.2014

= $1012.5482

Month 4 $1012.5482 + 5% of $1012.5482 = ?

+ .05 x $1012.5482 x 1/12 = $4.2189

= $1016.7671

Month 5 $1016.7671 + 5% of $1016.7671 = ?

+ .05 x $1016.7671 x 1/12 = $4.2365

= $1021.0036

Compound Interest FormulaCompound Interest Formula

If the interest is compounded once a year: A = P(1 + r)n Where: P is the principal (the money you start with, your first deposit); r is the annual rate of interest as a decimal (5% means r = 0.05); n is the number of years you leave it on deposit – exponent n; A is how much money you've accumulated after n years, including

interest.

If the interest is compounded q times a year: A = P(1 + r/q)nq

Electronic Compound Interest/Future Value Calculator: http://www.moneychimp.com/calculator/compound_interest_calculator.htm

Note: Compound Interest is also referred to as Future Value.

Selecting the Savings PlanSelecting the Savings Plan

Note:Note: Compare different financial institutions savings plans in Compare different financial institutions savings plans in

order to find the one with the best rates for you.order to find the one with the best rates for you.

Some savings accounts require you to have a minimum Some savings accounts require you to have a minimum balance in order to receive a higher rate of interest on balance in order to receive a higher rate of interest on your account. (i.e. $4000 vs. $1000)your account. (i.e. $4000 vs. $1000)

Some savings plans require you to leave your money Some savings plans require you to leave your money with the financial institution for a minimum number of with the financial institution for a minimum number of years. The greater the principal and the longer you leave years. The greater the principal and the longer you leave it with the institution, the higher interest they will pay you.it with the institution, the higher interest they will pay you.

SafetySafety

Most savings plan deposits in banks, trust Most savings plan deposits in banks, trust companies, and loan companies are companies, and loan companies are protected by the Canada Deposit protected by the Canada Deposit Insurance Corporation (CDIC) – an Insurance Corporation (CDIC) – an agency of the federal government.agency of the federal government.

The financial institution pays for the The financial institution pays for the insurance - not you.insurance - not you.

SafetySafety

Depending on the province, the CDIC will insure your Depending on the province, the CDIC will insure your deposits at individual institutions up to a maximum deposits at individual institutions up to a maximum amount.amount.

Examples:Examples: The Nova Scotia Credit Union Deposit Insurance The Nova Scotia Credit Union Deposit Insurance

Corporation insures deposits up to $250,000.Corporation insures deposits up to $250,000. The Deposit Insurance Corporation of Ontario insures The Deposit Insurance Corporation of Ontario insures

deposits to $100 000 and an additional $100 000 for deposits to $100 000 and an additional $100 000 for each registered savings plan.each registered savings plan.

Depending on how much you have in savings, you may Depending on how much you have in savings, you may want to make deposits in several institutions.want to make deposits in several institutions.

LiquidityLiquidity

Liquidity refers to how easily you can Liquidity refers to how easily you can convert an item into cold hard cash quickly convert an item into cold hard cash quickly and without noticeand without notice

A house for example is not very liquid as it A house for example is not very liquid as it would take time to sell, whereas a would take time to sell, whereas a chequing account is liquid because you chequing account is liquid because you can withdraw the money immediately.can withdraw the money immediately.

LiquidityLiquidity

Should there be an emergency, it is Should there be an emergency, it is important for investors to try to keep some important for investors to try to keep some of their savings as liquid as possible.of their savings as liquid as possible.

Some savings plans are locked in for a Some savings plans are locked in for a certain amount of years and/or charge a certain amount of years and/or charge a penalty fee for early withdrawal of money.penalty fee for early withdrawal of money.

Savings PlansSavings Plans

1.1. Savings AccountsSavings Accounts

2.2. Term DepositsTerm Deposits

3.3. Guaranteed Investment Certificate Guaranteed Investment Certificate (GICs)(GICs)

4.4. Registered Retirement Savings Plan Registered Retirement Savings Plan (RRSPs)(RRSPs)

5.5. Registered Education Savings PlanRegistered Education Savings Plan

(RESPs)(RESPs)

Common Savings PlansCommon Savings Plans

Savings AccountSavings Account Interest may be calculated daily and paid at the end of Interest may be calculated daily and paid at the end of

each month, oreach month, or Paid on the average account balance during a specific Paid on the average account balance during a specific

time period; ortime period; or Paid on the minimum balance, and deposited in your Paid on the minimum balance, and deposited in your

account semi-annually on April 30account semi-annually on April 30thth and October 31 and October 31stst.. Interest rates vary from institution to institutionInterest rates vary from institution to institution Accounts may require a minimum balance in your Accounts may require a minimum balance in your

account at the end of each month (i.e. $5000)account at the end of each month (i.e. $5000) Online banks often have better interest ratesOnline banks often have better interest rates

Term Deposits and Guaranteed Investment Certificates Term Deposits and Guaranteed Investment Certificates (GICs)(GICs)

Both are savings plans where you deposit a fixed sum of money for a specific length of time (term), at a fixed rate of interest.

Terms may range from 30 days to 5years.

Usually, the shorter the term, the greater the deposit required and the lower the interest rate.

The greater the deposit and the longer the term, the higher the interest rate may be.

Some GICs are locked which means you can not access the money early.

GICs that are not locked will pay a lower interest rate and may have conditions upon when you may cash in your deposit.

$4 000 for 5 years at 5% interest

GIC

$3 000 for 3 years at 3% interest

GIC

Registered Retirement Savings Plan Registered Retirement Savings Plan (RRSPs)(RRSPs)

Introduced by the federal government in 1957 to encourage people to save for their retirement

Think of an RRSP as a money box. You can chose to invest your money in a number of things that will fit into your RRSP box.

Your RRSP may be made up of mutual funds, GICs, stocks, bonds, and index funds.

GICsStocks Bonds

RRSP

Other

RRSP’sRRSP’s

Helps you save money by allowing you to invest a Helps you save money by allowing you to invest a portion of your annual income without having to pay portion of your annual income without having to pay income tax on it.income tax on it.

Example:Example: Let’s say you pay 35% income tax on your incomeLet’s say you pay 35% income tax on your income

If you decide to contribute $5000 to an RRSP over the If you decide to contribute $5000 to an RRSP over the course of a year, you will receive from the government course of a year, you will receive from the government 35% of that $5000 on your income tax return for that 35% of that $5000 on your income tax return for that year. (5000 x 0.35 = year. (5000 x 0.35 = $1750)$1750)

The government has refunded you for the tax you paid The government has refunded you for the tax you paid on the $5000.00on the $5000.00

RRSPRRSP The sooner you begin investing money into an RRSP, the The sooner you begin investing money into an RRSP, the

longer time it has to grow until your retirement.longer time it has to grow until your retirement.

Interest or rate of return is earned on your deposits over Interest or rate of return is earned on your deposits over time.time.

Actual earnings depend on what type of investments make Actual earnings depend on what type of investments make up your RRSP.up your RRSP.

The government limits how much money you can contribute The government limits how much money you can contribute to your RRSP each year.to your RRSP each year.

If you already contribute to a company pension plan, you will If you already contribute to a company pension plan, you will not be able to put away as much into your RRSP.not be able to put away as much into your RRSP.

Currently, you can invest 18% of your income up to a Currently, you can invest 18% of your income up to a maximum of $22 000 a year.maximum of $22 000 a year.

Withdrawing Money from Your Withdrawing Money from Your RRSPRRSP

When you withdraw money on your RRSP, you must pay When you withdraw money on your RRSP, you must pay tax on it.tax on it.

You may withdraw money before retirement, but if you You may withdraw money before retirement, but if you are working, your annual income will likely be large are working, your annual income will likely be large enough that you may have to pay taxes in a higher enough that you may have to pay taxes in a higher income tax bracket resulting in paying more taxes.income tax bracket resulting in paying more taxes.

Since your income after retirement is usually lower than Since your income after retirement is usually lower than your income before your retirement, you may fall into a your income before your retirement, you may fall into a lower income tax bracket.lower income tax bracket.

2009 Federal Income Tax Brackets2009 Federal Income Tax Brackets

$10,320$10,320

$0$0

$40 726$40 726

$81 452$81 452

$126 264$126 264

NilNil

15%15%

22%22%

26%26%

29%29%

2009 Federal Income Tax Brackets2009 Federal Income Tax Brackets

Taxable IncomeTaxable Income Tax on this incomeTax on this income

$0 - $10,320$0 - $10,320 NilNil

$10 321 - $40 726$10 321 - $40 726 15%15%

$40 727 - $81 452$40 727 - $81 452 22%22%

$81 453 - $126 264$81 453 - $126 264 26%26%

Over $126 264Over $126 264 29%29%

Canadian Revenue Agency. “What Are Income Tax Rates For Canada 2009.” 24 August 2009. 16 February 2010 <http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html#provincial>

Registered Education Savings PlanRegistered Education Savings PlanRESPRESP

Anyone who wants to contribute to a child’s RESP can.

The contributor does not get a tax benefit like with an RRSP.

Child is the beneficiary because s/he will benefit from using the money for his/her future education costs.

The beneficiary must be a resident of Canada.

GICsStocksBonds

Family Plan RESP

Group Plan RESP

Individual Plan RESP

Other

GICsStocks Bonds

Other

GICsStocks Bonds

Other

RESP

Income earned from these investments is tax-free until the beneficiary begins to use it to pay for his/her future education.

Students do pay taxes on the income withdrawn from the RESP, but because students usually make minimal income while in school, the tax actually paid is minimal to none.

RESPRESPMain steps in opening an RESP:

1. Get a Social Insurance Number (SIN) for yourself and for anyone you name in your RESP.

2. Apply to the Canada Revenue Agency for the Canada Child Tax Benefit if your family net income is $74,357 or less. This form is generally provided at the hospital where your child was born.

3. Choose the RESP provider that best meets your needs. RESP providers include most financial institutions, such as banks or credit unions, as well as group plan dealers or financial services providers.

4. Decide on the type of RESP you want to open. (Individual, Group, or Family Plan)

5. Decide on the type of investment that will make your money grow.

6. Put some money into your RESP.

Sources: http://www.tax-services.ca/resp-canada.html http://www.canlearn.ca/eng/saving/cesg/faq.shtml

RESP RulesRESP RulesCurrent Rules on Contributions to RESP1. There is no annual limit on what one may contribute

except that:

2. The lifetime contribution limit is $50 000.

3. The government will also contribute up to $500 a year to a lifetime maximum of $7 200. The annual limit may go up to $1000 if there is unused grant from previous years.

Note: The government’s contribution to an RESP is called the Canada Education Savings Grant, (CESG).The actual grant will depend on a number of factors. See the following site for more detail:

http://www.canlearn.ca/eng/saving/cesg/faq.shtml

RESP RulesRESP RulesCurrent Rules on Accessing RESP funds:

1. The students can access up to $2,500 of their income and grants for each 13-week semester of study. Payments are referred to as Educational Assistance Payments (EAPs).

2. Usually, a qualifying educational program is a course of study that lasts at least three weeks in a row, with at least 10 hours of instruction or work each week. A program at a foreign educational institution must last at least 13 weeks.

3. Qualifying educational programs include apprenticeships, and programs offered by a trade school, CEGEP, college or university.

4. RESP funds can be used for full or part-time study in a qualifying program.

5. To find out more about qualifying educational programs contact the Canada Revenue Agency toll-free at 1-800-959-8281.

RESP RulesRESP Rules What if the child beneficiary chooses not to attend post-

secondary education?

1. 1. Since an RESP can stay open for up to 36 years, the money can be used if your child decides to attend school later.

2. 2. Use the money for a brother or sister who does continue education after high school

3. Transfer the money into a Registered Retirement Savings Plan (RRSP) to help you save for your retirement.

4. Withdraw your personal savings, tax-free. The unused government portion returns to the government.

Costs of Post-Secondary EducationCosts of Post-Secondary Education

Student Living at HomeYears until Child Attends a Post-secondary Four-

year College or Institution

Estimated Cost of University Program

Monthly Savings Needed

2 $36 000 $1350

4 $40 000 $681

6 $44 000 $449

8 $49 000 $337

10 $54 000 $266

12 $60 000 $221

14 $66 000 $186

16 $73 000 $161

18 $80 000 $144

Calculations assume a 5% annual increase in education costs including inflation and four years of education. It also assumes an 8% rate of return on investment savings, and the maximum amount invested to receive the total government grant under the CESG program

Student Living AWAY from HomeYears until Child Attends a Post-secondary Four-

year College or Institution

Estimated Cost of University Program

Monthly Savings Needed

2 $66 000 $2519

4 $73 000 $1270

6 $80000 $844

8 $88 000 $632

10 $97 000 $505

12 $107 000 $420

14 $118 000 $359

16 $130 000 $311

18 $143 000 $274

Calculations assume a 5% annual increase in education costs including inflation Calculations assume a 5% annual increase in education costs including inflation and four years of education. It also assumes an 8% rate of return on investment and four years of education. It also assumes an 8% rate of return on investment savings, and the maximum amount invested to receive the total government grant savings, and the maximum amount invested to receive the total government grant under the CESG program. Estimate includes tuition and books.under the CESG program. Estimate includes tuition and books.

Tax Free Savings AccountTax Free Savings Account(TFSA)(TFSA)

Introduced by the federal Introduced by the federal government in 2008government in 2008

Allows individuals to Allows individuals to invest and save money invest and save money and not have to pay tax and not have to pay tax on any returns (i.e. on any returns (i.e. interest) made.interest) made.

Money can be withdrawn Money can be withdrawn at any timeat any time

Deposit limit of $5000 Deposit limit of $5000 each year.each year.

TFSA may include a TFSA may include a savings account, GICs, savings account, GICs, stocks, bonds, and stocks, bonds, and mutual funds.mutual funds.

TFSA

GICsStocks Bonds

Savings Account

Mutual funds

http://cibc.com/ca/investing/tfsa/video/index.html?chapterID=0&WT.mc_id=tfsavideo-005

Common Forms of InvestmentsCommon Forms of Investments

1. Canada Savings Bonds and Canada Premium Bonds2. Corporate Bonds3. Mutual funds4. Real estate5. Collectibles6. Stocks

Note: Each type of investment has a different level of risk and expected

rate of return. Level of risk varies from guaranteed to get it all your money back

plus interest to losing everything The safer the investment, the lower the return The more riskier the investment, the possibility for a larger rate of

return exists.

InvestingInvesting

Good investors Good investors diversifydiversify their investments their investments Investing in many different types of Investing in many different types of

investments to spread out the risk. investments to spread out the risk. If one investment is performing poorly, it may If one investment is performing poorly, it may

be balanced out by one that is doing wellbe balanced out by one that is doing well

Don’t put all your eggs in one basket !Don’t put all your eggs in one basket !

Canada Savings Bonds (CSB)Canada Savings Bonds (CSB)

CSBCSB A loan you give to the A loan you give to the

governmentgovernment

The government will repay The government will repay you the value of the bond you the value of the bond plus interest.plus interest.

The The maturity datematurity date printed printed on the bond is the date on the bond is the date when the bond becomes when the bond becomes due and is paid back to due and is paid back to you.you.

Canada Savings Bond (CSB)Canada Savings Bond (CSB)

Provincial and Provincial and municipal bonds are municipal bonds are also available, but also available, but less popularless popular

CSB’s can be CSB’s can be purchased at all purchased at all major financial major financial institutions, including institutions, including banks and credit banks and credit unions.unions.

CSBCSBAdvantagesAdvantages Guaranteed payment by the governmentGuaranteed payment by the government

Can be cashed at any time (very liquid)Can be cashed at any time (very liquid)

No interest will be paid if it is cashed out within the No interest will be paid if it is cashed out within the first three months of purchasefirst three months of purchase

Face value of the bond is the initial amount you Face value of the bond is the initial amount you loaned to the government.loaned to the government.

Can be purchased through automatic payroll Can be purchased through automatic payroll deductions arranged with your employerdeductions arranged with your employer

Can be purchased for as little as $100Can be purchased for as little as $100

Canadian Premium BondCanadian Premium Bond

AdvantagesAdvantages Offers the same security Offers the same security

as a CSBas a CSB

Offers a higher interest Offers a higher interest rate but can only be rate but can only be cashed on the cashed on the anniversary of the issue anniversary of the issue date (when it was date (when it was purchased) or during the purchased) or during the 30 days after that date)30 days after that date)

Corporate BondsCorporate BondsSecuritiesSecurities Corporate bonds and shares of stock sold by Corporate bonds and shares of stock sold by

business to help raise money to expand the business to help raise money to expand the business or introduce new products.business or introduce new products.

Corporate BondsCorporate Bonds Promise to repay borrowed money from Promise to repay borrowed money from

investors on a certain future date, along with investors on a certain future date, along with interest.interest.

Assets of the company are used as collateral to Assets of the company are used as collateral to guarantee payment to the investor.guarantee payment to the investor.

Corporate BondsCorporate Bonds

Investor can sell his/her bond Investor can sell his/her bond through an investment dealer through an investment dealer (like a real estate agent), to (like a real estate agent), to another interested investor at another interested investor at the current market value.the current market value.

Market value is what other Market value is what other investors would be willing to investors would be willing to pay and may be impacted by pay and may be impacted by current company current company performance and the performance and the economy.economy.

A fee would have to be paid A fee would have to be paid to the investment dealer to the investment dealer assisting in making the sale assisting in making the sale possible.possible.

What if the bondholder /investor wants their money What if the bondholder /investor wants their money back before the bond’s maturity date?back before the bond’s maturity date?

Real EstateReal Estate

Real EstateReal Estate Includes land and Includes land and

anything attached to it anything attached to it like homes, cottages or like homes, cottages or apartment buildings, etc.apartment buildings, etc.

Generally, the value of Generally, the value of real estate increases over real estate increases over time. time.

Supply and demand, in Supply and demand, in addition to the general addition to the general state of an economy can state of an economy can impact the market values impact the market values of real estateof real estate..

Real Estate InvestmentsReal Estate InvestmentsInvestment IncomeInvestment Income Investors will rent out property.Investors will rent out property. The rent should cover the The rent should cover the

mortgage costs.mortgage costs. One day it can be sold for a higher One day it can be sold for a higher

price than it was purchased for.price than it was purchased for. Investors may continue to rent it Investors may continue to rent it

out after it has been fully paid for out after it has been fully paid for through rent.through rent.

Investors may purchase a piece of Investors may purchase a piece of property for minimal funds, fix it up property for minimal funds, fix it up and resell it at a profit.and resell it at a profit.

CollectiblesCollectibles Items of interest people collect Items of interest people collect

that may increase in value over that may increase in value over time if it is popular, rare, difficult time if it is popular, rare, difficult to find and the demand of it to find and the demand of it exceeds the supply.exceeds the supply.

Examples may be hockey or Examples may be hockey or baseball cards, comic books, baseball cards, comic books, art, antiques, stamps, coins, art, antiques, stamps, coins, etc.etc.

Collectors form clubs where Collectors form clubs where people can meet to buy, trade, people can meet to buy, trade, sell, and display their prized sell, and display their prized possessionspossessions..

Investing in StocksInvesting in StocksInitial Public Offering The first time a corporations sells stocks (shares) of its

company to the public to raise money for the company.

Shareholders Investors who have purchased shares of a company

and have become part owners of the company. Shareholders can sell their share(s) to anyone else who

is interested in purchasing them.

How Investors make money on the stock market1. Shareholders share in the profits of the company when

the company pays out dividends – an amount of money per share you own in the company.

2. Shareholders sell their shares to someone else at a higher price than what they purchased it for.

Parties Involved in the Stock MarketParties Involved in the Stock Market

Public Corporations Sell shares of the company to the public to raise money for the business

Shareholders Investors who have purchased shares/stocks of a public corporation.

Stock Exchanges Business where corporations sell their shares to the public and where the public goes to buy and sell their

shares to each other. Corporations pay fees to have their company shares available to be sold at any the stock exchanges of their

choice Examples include the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSX)

Stock Brokerages Like the Real Estate companies for selling and buying shares Businesses that are hired by corporations and individual investors to facilitate the buying and selling of

shares between two parties. Revenue is earned by charging fees to the corporations, shareholders for facilitating the trades and providing

trading advice One expense is the fees paid to the stock exchanges allowing their stock brokers to work at the exchange to

facilitate the trading.

Stock Broker Like the real estate agent for those buying and selling shares Work for the Stock Brokerage to facilitate the buying and selling of shares between individuals and providing

trading advice.

The Initial Public Offering (IPO)The Initial Public Offering (IPO)

A Stock brokerage is usually hired to handle the sale of shares to the public through the Stock Exchange(s) the corporation is registered with.

An initial price offering is made the day the market opens

For example, when Google went public in 2004, its shares were initially offered at $85.

Supply and demand for the shares will determine by how much the initial price of the share increases or decreases.

The money collected from the initial shares being offered goes back to the corporation to be used by the business.

Once a share is purchased, it is now out in the stock market where the shareholder can hold or sell his/her shares to another interested buyer for an agreed price. A stock broker may be paid a fee to make the sale and purchase between two people happen.

The Stock ExchangeThe Stock Exchange

The Stock ExchangeThe Stock Exchange The business that provides The business that provides

corporations a place where their corporations a place where their shares can be bought and sold shares can be bought and sold (traded).(traded).

There are thousands of stock There are thousands of stock exchanges around the world.exchanges around the world.

Corporations may sell their shares Corporations may sell their shares on more than one stock exchange.on more than one stock exchange.

Canada’s main stock exchanges Canada’s main stock exchanges include the Toronto Stock include the Toronto Stock Exchange (TSX) and NASDAQ Exchange (TSX) and NASDAQ Canada.Canada.

http://www.world-stock-http://www.world-stock-exchanges.net/canada.htmlexchanges.net/canada.html

Toronto Stock Exchange

Stock ExchangeStock Exchange

Stock exchanges make money three waysStock exchanges make money three ways::

It collect fees from stock brokers for the use of It collect fees from stock brokers for the use of its its facilities (brokerage fees)facilities (brokerage fees)

Collects listing fees from the corporations who Collects listing fees from the corporations who choose to sell their shares using the particular stock choose to sell their shares using the particular stock exchange. ($15 000 - $150 000)exchange. ($15 000 - $150 000)

Sells stock information to individuals.Sells stock information to individuals.

Other Stock ExchangesOther Stock Exchanges

NASDAQNASDAQ National Association of National Association of

Securities Dealers Automated Securities Dealers Automated Quotations Quotations

Stock exchange for high-tech Stock exchange for high-tech stocks and emerging stocks and emerging technologiestechnologies

Largest electronic stock Largest electronic stock market in North Americamarket in North America

Europe has its equivalent Europe has its equivalent called the EASDAQcalled the EASDAQ

Japan created its equivalent Japan created its equivalent in 2000. in 2000.

How The Stock Exchange WorksHow The Stock Exchange Works

Many stocks and bonds are sold through Many stocks and bonds are sold through stockbrokers and investment dealers.stockbrokers and investment dealers.

These are licensed financial expertise who These are licensed financial expertise who advise buyers on which stocks to buy and advise buyers on which stocks to buy and sell, and when.sell, and when.

They charge a fee, or commission, which They charge a fee, or commission, which pays for the broker’s salary and for the pays for the broker’s salary and for the services their brokerage firm provides.services their brokerage firm provides.

How The Stock Exchange WorksHow The Stock Exchange Works

Person A wants to sell his/her shares of Google.Person A wants to sell his/her shares of Google. Person B wants to purchase shares of Google.Person B wants to purchase shares of Google. The stockbrokers hook Person A and B together The stockbrokers hook Person A and B together

to make the deal.to make the deal. The price of the shares will depend on supply The price of the shares will depend on supply

and demand. If more people want to buy then and demand. If more people want to buy then sell, the price may higher than it was the sell, the price may higher than it was the previous day.previous day.

The stockbroker receives a fee or/and The stockbroker receives a fee or/and commission from the individuals wanting to do commission from the individuals wanting to do the trade.the trade.

Online InvestingOnline Investing

It is possible for individual investors to buy and It is possible for individual investors to buy and sell their shares directly online using online sell their shares directly online using online investing websites.investing websites.

Fees are less expensive than a brokers fees.Fees are less expensive than a brokers fees.

If an investment dealer or stockbroker is not If an investment dealer or stockbroker is not used, it is important to conduct some used, it is important to conduct some

research research before engaging in online trades to before engaging in online trades to educateeducate

yourself yourself about what you are doing.about what you are doing.

Stock Price Information Stock Price Information Newspapers and Stock Exchange websites publish the following stock price Newspapers and Stock Exchange websites publish the following stock price

information:information:

1. 1. 52 week high and 52 week low52 week high and 52 week low The highest and lowest price paid for the stock during the current year. The highest and lowest price paid for the stock during the current year.

2. 2. (High, Low)(High, Low) The highest and lowest price paid for the stock the previous day.The highest and lowest price paid for the stock the previous day.

3. 3. Last or CloseLast or Close The last, or closing price of the stock that day The last, or closing price of the stock that day

4. 4. Chg.Chg. The change in price from the previous day’s closing price The change in price from the previous day’s closing price

5. 5. VolumeVolume The number of shares traded during the most recent trading session (i.e. The number of shares traded during the most recent trading session (i.e.

business day)business day)

The Stock MarketThe Stock Market

How do people make money in the stock market?

1. Purchase shares of a company and sell them at a higher price to another interested buyer later on.

Example: In 2004, Google shares issued at $85 a share. In November of 2006, they were selling at $500+ a share

If you purchased 100 shares at $85 per share and sold them for $500 per share, how much money have you made?

Purchase price = $85 x 100 = $8 500Selling price = $500 x 100 = $50 000

Personal Profit (Return on Your Investment ) = $50 000 - $ 8500 = $41 500

ROI = (50 000 – 8 500) / 8 500 X 100 = 488% increase

The Stock MarketThe Stock Market2.2. Shareholders receive dividends on the shares they Shareholders receive dividends on the shares they

own. own.

Board of Directors declare a .50 cent dividend at year end Each shareholder will receive .50 cents for every share s/he owns in the

company.

Dividends are like interest. A bank pays you a certain % of interest (i.e. 2% per year) on the money you have in your savings account.

Dividends, however, are not guaranteed to be paid out every year, as it depends on how profitable the company has been and what its cash flow is, and the type of share you own.

Example: You own 100 shares of Google. At the end of a business year, Google has made a significant profit and the BOD declares a .50 cent dividend.

How much money did you make: $.50 x 100 = $50.00

The Stock MarketThe Stock MarketBear MarketBear Market General decline in the General decline in the

overall prices of all or overall prices of all or most stocks on the stock most stocks on the stock market of around 20%market of around 20%

Investors confidence in Investors confidence in business performance business performance and the economy is and the economy is weak, so demand for weak, so demand for stocks is weak stocks is weak

Bull MarketBull Market Demand for and prices of Demand for and prices of

stocks is highstocks is high Confidence in business Confidence in business

performance and the performance and the economy is high economy is high

There is an anticipation of There is an anticipation of future price increasesfuture price increases

Investor ConfidenceInvestor Confidence An investor’s desire to purchase orAn investor’s desire to purchase or

sell shares on the stock market is sell shares on the stock market is influenced by their overall influenced by their overall confidence level in the future confidence level in the future performance of the companies and performance of the companies and the state of the economy. the state of the economy.

Consumer confidence is impactedConsumer confidence is impacted by a number of any of the following by a number of any of the following factors: factors:

Company earnings and growth prospects News of new products or planned services or

sales News of company incidents, (i.e. lawsuits due to

faulty products that have been recalled.) The general state of the economy

Types of Stock/SharesTypes of Stock/SharesCommon Stock Most common and available Provides the right to attend the

company’s annual meeting and vote on company matters

One common share/stock = 1 vote

Dividends are paid out if the company is profitable, but only after bondholders and preferred shareholders have been paid first. If there is anything left over, common shareholders will share in the rest.

Preferred Stock More expensive than common

stock Paid first, before common

shareholders if dividends are declared

Paid at a fixed rate which is often more than what common shareholders would receive

No voting rights Less risk than with common

shares, but less of a chance for bigger gains in years of high profit when price of shares is less than the market value of common shares.

Blue Chip CompaniesBlue Chip Companies

Companies with long records of Companies with long records of regular regular dividend payments, stable dividend payments, stable growth growth patterns, and active patterns, and active trading on the trading on the stock market.stock market.

Considered to be much less risky Considered to be much less risky than than growth companies, which reinvest growth companies, which reinvest

company profits into their operations company profits into their operations rather than paying shareholder rather than paying shareholder dividends.dividends.

Mutual FundMutual Fund It’s a pool of money from many It’s a pool of money from many

investors that is set up and investors that is set up and managed by an investment managed by an investment company which monitors daily company which monitors daily the stock market and business the stock market and business and economic news to buy and and economic news to buy and sell shares which will yield the sell shares which will yield the greatest possible return for its greatest possible return for its investors.investors.

There are 100s of different There are 100s of different funds each with a different funds each with a different focus focus

For example, there are real For example, there are real estate mutual funds, global estate mutual funds, global funds, growth funds, etc.funds, growth funds, etc.

Some mutual funds are more Some mutual funds are more riskier than othersriskier than others

Mutual funds are regulated by Mutual funds are regulated by law so as to guarantee a law so as to guarantee a certain measure of security to certain measure of security to investors.investors. Real Estate Fund

Global Fund

Money Market Fund

Mutual FundsMutual Funds

Who would be interested in investing in mutual funds? Who would be interested in investing in mutual funds? Individuals who:Individuals who:

don’t want to follow the stock market don’t want to follow the stock market on a daily basis and ongoing making on a daily basis and ongoing making changes to their investments;changes to their investments;

are uncomfortable with large amounts are uncomfortable with large amounts of riskof risk

are comfortable entrusting their investment are comfortable entrusting their investment money with individuals whose job it is to money with individuals whose job it is to make day-to-day trading decisionsmake day-to-day trading decisions

Mutual FundsMutual Funds

Important facts to consider:Important facts to consider: Due to the low risk, low return nature of mutual Due to the low risk, low return nature of mutual

funds, these funds are meant to for long-term funds, these funds are meant to for long-term investors. investors.

For this service and their expertise, investors will For this service and their expertise, investors will pay management fees to the investment pay management fees to the investment company. company.

Additional fees may be charged for buying and Additional fees may be charged for buying and selling securitiesselling securities

The CDIC does not guarantee against any loss.The CDIC does not guarantee against any loss.

Mutual FundsMutual Funds

No-Load FundsNo-Load Funds Mutual funds which do not have additional Mutual funds which do not have additional

fees attached to buying and selling funds fees attached to buying and selling funds or to move investments around to other or to move investments around to other funds.funds.

Management fees are paid.Management fees are paid.

Why do businesses invest their Why do businesses invest their money?money?

To use excess money wisely so it canTo use excess money wisely so it can help the company earn additional help the company earn additional income. income.

Business Investment OptionsBusiness Investment Options1.1. Reinvest into the companyReinvest into the company2.2. Buy new businessesBuy new businesses3.3. Expand the current businessExpand the current business4.4. Put it in higher-rate savings accountPut it in higher-rate savings account5.5. Purchase Purchase treasury bills treasury bills – which are short-term – which are short-term

government bonds issued in large denominations up to government bonds issued in large denominations up to $1 million.$1 million.

6.6. Purchase back their own company shares if the shares Purchase back their own company shares if the shares are perceived as undervalued.are perceived as undervalued.

7.7. Insurance companies invest some of its customers Insurance companies invest some of its customers pools of money for insurance claims into stocks and pools of money for insurance claims into stocks and bonds.bonds.

8.8. Purchase the company’s competition, expanding its Purchase the company’s competition, expanding its customer base and eliminating one of its competitors.customer base and eliminating one of its competitors.

9.9. Purchase a major supplier of raw materials it uses to Purchase a major supplier of raw materials it uses to reduce costs.reduce costs.

SourceSource

Wilson, Jack et al. Wilson, Jack et al. The World of BusinessThe World of Business, , 55thth Ed., Nelson Education Ltd., Canada, Ed., Nelson Education Ltd., Canada, 20072007