page 2.4.4 the fundamentals of...

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© Take Charge Today – April 2014 – The Fundamentals of Investing Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona

RECOMMENDED GRADE

LEVELS AVERAGE TIME TO COMPLETE

EACH LESSON PLAN IS DESIGNED AND CONTINUALLY

EVALUATED “BY EDUCATORS, FOR EDUCATORS.” THANK

YOU TO THE FOLLOWING EDUCATORS FOR DEVELOPING

COMPONENTS OF THIS LESSON PLAN.

10‐12

Anticipatory Set & Facilitation: 100‐110 minutes

Conclusion/Assessment Options: 15‐45 minutes

Time does not include the vocabulary activity or potential modifications.

Lisa Bender, Business Educator, Oakland, Maryland

Shelly Stanton, Business Educator, Billings, Montana

NATIONAL STANDARDS LESSON PLAN OBJECTIVES

The curriculum is aligned to the following national standards: National Standards for Financial Literacy American Association of Family and Consumer

Sciences Council for Economic Education National Business Education National Jump$tart Coalition Common Core English Language Arts

Upon completion of this lesson, participants will be able to: Compare saving and investing Analyze the relationship between risk and return Distinguish between the most common types of

investments Choose methods that can be used to assist with

investment risk reduction Compare a full‐service brokerage firm and a discount

brokerage firm Analyze the pros and cons of utilizing a financial advisor

at a full‐service brokerage firm Assess the value of tax‐advantaged investments Explore the most common retirement plans

MATERIALS

MATERIALS PROVIDED IN THIS LESSON PLAN

MATERIALS SPECIFIC TO THIS LESSON PLAN BUT

AVAILABLE AS A SEPARATE DOWNLOAD MATERIALS TO ACQUIRE SEPARATELY

DEPENDING ON OPTIONS TAUGHT

Risk vs. Return Chart 2.4.4.A1 The Fundamentals of Investing

2.4.4.A2 Saving and Investing Interview

2.4.4.A3 Saving and Investing Interview

Essay Rubric 2.4.4.B1 The Fundamentals of Investing

Vocabulary List 2.4.4.E1 The Fundamentals of Investing

Information Sheet 2.4.4.F1 Life Events Activity Cards

2.4.4.H1

The Fundamentals of Investing PowerPoint presentation 2.4.4.G1

The Fundamentals of Investing Answer Key 2.4.4.C1

Saving and Investing Unit Multiple Choice Test Bank and Answer Key 2.4.0.M1 & C1

Jenga® with numbers on activity pieces

labeled dice Scratch paper or white boards

with markers Play doh (optional) Butcher paper Large bag of candies (skittles,

M&M’s, jelly beans) Plastic sacks or disposable cups

THE FUNDAMENTALS OF INVESTING Advanced Level

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Material List Continued on Page 2

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Saving vs. Investing Characteristics Cards 2.4.4.H2

Investment Tools Cards 2.4.4.H3 The Fundamentals of Investing

Note Taking Guide 2.4.4.L1

RESOURCES

EXTERNAL RESOURCES

External resources referenced in this lesson plan: Jump$tart Making the Case for Financial Literacy: www.jumpstart.org PBS Your Life Your Money video series: www.pbs.org/your‐life‐your‐money Common Craft – Investing Money: www.commoncraft.com/video/investing‐money Investopedia: www.investopedia.com

o Top 8 Ways Bonds Lose Money www.investopedia.com/articles/bonds/08/lose‐money‐bonds‐losses.asp E‐Trade Baby Commercials: available on YouTube Online Risk Tolerance Quiz: http://njaes.rutgers.edu/money/riskquiz

Virtual Tour of the Stock Market: www.discoveryeducation.com/nyse/index.cfm The Stock Market Game: www.smgww.org Virtual Stock Exchange: http://vse.marketwatch.com/Game/Homepage.aspx WeSeed: www.weseed.com FINRA (Financial Industry Regulatory Authority): www.finra.org SIFMA (Securities Industry and Financial Markets Association): www.sifma.org Invest Write: www.investwrite.org

TAKE CHARGE TODAY RESOURCES

Similar lesson plan at a different level: None available

Optional lesson plan resources: Rolling Jenga Active Learning Tool 3.0.14 A Little Goes a Long Way Visual Aid 4.4.1 Vocabulary Reinforcement Activities Active Learning Tool 3.0.36 Foldables Active Learning Tool 3.0.26 Tablet Applications for the Personal Finance Classroom Active

Learning Tool 3.0.52 Video Clips Relating to Financial Education Active Learning Tool

3.0.48 Technology Integration Options Active Learning Tool 3.0.50 Guest Speaker Active Learning Tool 3.0.22 ‘Round the Bases Active Learning Tool 3.0.27 Fun with Dick and Jane Active Learning Tool 3.0.46

CONTENT

EDUCATOR MATERIALS PARTICIPANT READING

Materials to support educators when preparing to teach this lesson plan are available on the Take Charge Today website.

The Fundamentals of Investing Information Sheet 2.4.4.F1

OPTIONAL ADVANCE INSTRUCTION

This lesson is designed to be taught as a stand‐alone lesson. However, background content knowledge from the following lesson plans is directly related to this lesson and may be helpful for participants.

Choose to Save 2.4.1 Savings Tools 2.4.3

http://takechargetoday.arizona.edu/lessonplans/rolling-jenga

http://takechargetoday.arizona.edu/lessonplans/little-goes-long-way-poster

http://takechargetoday.arizona.edu/lessonplans/vocabulary-reinforcement-activities

http://takechargetoday.arizona.edu/lessonplans/foldables

http://takechargetoday.arizona.edu/lessonplans/tablet-applications-personal-finance-classroom

http://takechargetoday.arizona.edu/lessonplans/video-clips-relating-financial-education

http://takechargetoday.arizona.edu/lessonplans/technology-integration-options

http://takechargetoday.arizona.edu/lessonplans/guest-speaker-active-learning-tool

https://takechargetoday.arizona.edu/lessonplans/round-bases

http://takechargetoday.arizona.edu/lessonplans/fun-dick-and-jane

http://takechargetoday.arizona.edu/lessonplans/choose-save

http://takechargetoday.arizona.edu/lessonplans/savings-tools

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LESSON FACILITATION

PREPARE

Visual indicators to help prepare the lesson INSTRUCT

Instructions to conduct the lesson facilitation

CUSTOMIZE

Potential modifications to lesson facilitation

VOCABULARY ACTIVITY

Rolling Jenga

Approximate time: 15 minutes before instruction and 30 minutes after instruction Materials to prepare: Rolling Jenga Active Learning Tool 3.0.14 Per group of 3‐5:

o 1 Jenga® with numbers on activity pieces o 1 The Fundamentals of Investing Vocabulary List 2.4.4.E1 o 1 labeled die o Scratch paper or white board with marker o Play doh (optional)

Before instruction: 1. Divide participants into groups of 3‐5. 2. Provide each group with one Jenga® with numbers on the activity pieces and

one The Fundamentals of Investing Vocabulary List 2.4.4.E1 3. The first participant begins by drawing a tower piece from a set‐up tower or

bag and describing what they know about the word. a. If the participant is not familiar with the word, encourage group

members to share their knowledge as well. b. Use the The Fundamentals of Investing Vocabulary List 2.4.4.E1 to

provide the definition if needed. 4. Rotate participants until all vocabulary words have been discussed. After instruction: 1. Conduct the Rolling Jenga activity. Directions are included in the Rolling Jenga

Active Learning Tool 3.0.14.

ANTICIPATORY SET OPTIONS There are two anticipatory set options provided for this lesson. 1. Option 1: Planning for Life Events 2. Option 2: Start Saving – Saving for Retirement Video Clip

Option 1: Planning for Life Events

Approximate time: 15 minutes Materials to prepare: Per group of 3‐5:

o 1 piece of butcher paper o 1 marker o 1 set of Life Events Activity Cards 2.4.4.H1.

1. Split participants into groups of 3‐5. 2. Provide each group with a large piece of butcher paper and a marker. 3. Instruct participants to create a timeline by drawing a line across the center of

If additional vocabulary review is needed, use the Vocabulary Self‐Awareness Chart in the Vocabulary Reinforcement Activities Active Learning Tool 3.0.36 before, during and after instruction.

Use the A Little Goes a Long Way 4.4.1 Visual Aid to illustrate the importance of advance planning.

Double number the vocabulary list so each word/definition has a Jenga® block that corresponds.


http://takechargetoday.arizona.edu/lessonplans/vocabulary-reinforcement-activities



http://takechargetoday.arizona.edu/lessonplans/little-goes-long-way-poster

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their paper and adding the following life stages. a. Young adult ages 15‐25 b. Working adult with or without children ages 26‐45 c. Pre‐retirement 45‐64 d. Retirement ages 65+

4. Provide each group with a set of Life Events Activity Cards 2.4.4.H1. 5. Indicate that these are common life events for many individuals. Ask

participants to organize the cards in order of when they think most people experience that life event.

6. Ask participants to reflect on the types of events they have categorized. a. How many of the events require advance planning? b. How many of the events require more money than an individual or

family typically has available at one time? 7. Ask participants to reorganize their cards on the timeline to indicate when a

person should start planning for that life event. 8. Place a star on the life events that required less than 5 years of planning.

These are events that may be achieved through savings. For each card, ask participants to estimate how long it would take

9. Circle the life events that require more than five years of planning. These are events that may require investing to be achieved.

10. Remind participants of the curriculum principle “Your Present Self Impacts Your Future Self.”

a. Stress that many life events require advance planning. For example, although retirement is not until the 65+ life stage, individuals should start planning financially for retirement as early as possible.

b. Identify that having enough money for different life events is a result of having a financial plan that includes identifying financial goals, saving and investing.

Option 2: Start Saving – Saving for Retirement Video Clip Approximate time: 15 minutes Materials to prepare: Start Saving – Saving for Retirement of the PBS series Your Life, Your Money.

o The link to this video can be found in the supplemental resources section of the lesson plan.

1. This anticipatory set encourages discussion about where money can be

earned, savings goals, giving to others, and finding a work/life balance. 2. Show Chapter 4: Start Saving – Saving for Retirement of the PBS series Your

Life, Your Money. a. This is a six part series. Select Chapter 4: Start Saving‐ Saving for

Retirement i. Chapter 4 contains two sections Ways to Save with D. Woods

and Saving for Retirement with Maria Cortez. Only the second section (Saving for Retirement) should be shown for this lesson.

3. Discussion questions to use with this video include: a. Is Maria planning her future? If so, how? b. Is Maria saving or investing money? Explain.

Conduct the brainstorming activity electronically by using a brainstorming tool. Reference the Technology Integration Options Active Learning Tool 3.0.50.

Further illustrate the importance of advance planning by providing statistics about how much life events, such as retirement or higher education cost. Use the Jump$tart Making the Case for Financial Literacy document or an Internet search engine for current statistics.

http://takechargetoday.arizona.edu/lessonplans/technology-integration-options

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c. What methods is Maria using to invest for retirement? d. If you were Maria, would you have any worries about the money she

has invested in her retirement? e. Do you think Maria has thought too much about her retirement plans? f. Why is it necessary to invest for retirement? g. If you were Maria, would you change any of the financial decisions

that she has made so far?

RECOMMENDED FACILITATION

PowerPoint Presentation and Note Taking Guide Approximate time: 90 minutes Materials to prepare: 1 The Fundamentals of Investing Note Taking Guide 2.4.4.L1 per person Per person:

o Small plastic bag or disposable cup o 1 Risk versus Return Chart 2.4.4.A1

Per group of 3‐5: o 1 standard die o Large bag of candies (skittles, M&M’s, jelly beans)

Estimate using approximately 10 candies per participant to complete five rounds.

Optional: 1 set of Saving vs. Investing Characteristics Cards 2.4.4.H2 per participant

Optional: Common Craft Investing Money Video Clip 1 set of Investment Tools Cards 2.4.4.H3 per group of 3‐5 Present The Fundamentals of Investing PowerPoint Presentation 2.4.4.G1. Provide each participant with the The Fundamentals of Investing Note Taking Guide 2.4.4.L1. Part 1: Saving vs. Investing 1. Slides 1‐2: Investments

a. Explain that once an individual has established financial security and has enough liquid assets to meet their needs, it is recommended that they refocus their goals from saving to investing.

b. Stress that both savings and investments are important parts of a financial plan.

2. Slide 3: All Investments Have Some Risk a. Investments have the potential of earning higher returns. However, all

investments carry some type of risk. Therefore, a trade‐off to higher returns is that they are less secure with a greater chance of loss.

b. Savings tools have less risk but don’t have the potential for high returns.

Part 2: Saving vs. Investing 3. Slide 4: Investments Are Important to Building Net Worth

a. Saving tools provide the foundation for financial security and build net worth. However, investments have a greater potential to build net worth because of higher returns.

Play “The Gambler” by Kenny Rogers and ask participants to discuss how investing has risk.

Rather than using the note taking guide, have participants create a foldable. Reference the Foldables Active Learning Tool 3.0.26.

http://takechargetoday.arizona.edu/lessonplans/fundamentals-investing

http://takechargetoday.arizona.edu/lessonplans/foldables

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b. On a Statement of Financial Position, investments are investment assets. This is different than savings tools, which are categorized as monetary assets, because investments cannot be quickly converted to cash.

4. Slide 5: Investments Help Accomplish Long‐term Goals a. Ask participants to identify long‐term financial goals an individual may

have. i. Examples include buying a house, funding higher education

and retirement. b. Investments are often used for long‐term goals because of the

potential for higher returns and low liquidity. This is different than savings that is used for short‐term goals and emergencies.

c. If the Planning for Life Events anticipatory activity was conducted, have participants re‐evaluate if the different life events would typically require saving or investing to be achieved. Discuss why.

5. Optional: Common Craft Video “Investing Money” a. Show the 3 minute 21 second video (URL in the Supplemental

Resources Section). b. Provide each participant with a Saving vs. Investing Characteristics

Cards 2.4.4.H2. c. While they are watching the video, have participants sort their cards

into saving or investing categories. 6. Slide 6: Saving vs. Investing

a. Describe the differences between saving and investing. b. Ask participants to identify feelings that result from saving and

investing. i. Stress that their present self‐impacts their future self. Saving

and investing often results in positive emotions long‐term. Answers may include:

1. Lower stress 2. Higher financial well‐being 3. Security 4. Confusion (over choices)

Part 3: Rate of Return 7. Slide 7: Rate of Return

a. Discuss the definition of and equation for rate of return. b. Explain to participants that investments usually earn higher rates of

return than savings tools. 8. Slide 8: What is Mandy’s Rate of Return? 9. Slide 9: Inflation

a. Ask participants how they think inflation relates to investing. i. Explain that inflation risk is usually only a concern when

investing for long‐term goals because the purpose is to provide for future financial security by building net worth.

Optional: Part 4: Risk vs. Return Activity 10. This activity introduces the concepts of investment risk versus potential return

and investment philosophy.

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11. Set‐up: a. Divide participants into groups of 3‐5. b. Pass out one standard, six‐sided die and a large bag of candies

(skittles, M&M’s, or jelly beans) to every group. c. Pass out a Risk versus Return Chart 2.4.4.A1 and a small plastic bag or

disposable cup (to hold their candies throughout the activity) to every participant.

d. Participants will assign one group member to be the “referee.” The referee will be in charge of rolling the die, ensuring participants are giving honest answers, and passing out candies after every round.

12. Play the activity: a. There will be five rounds of play. Before every round participants will

guess as many numbers as they want (1‐6). The number(s) chosen should be marked with an X on the appropriate round of the Risk versus Return Chart 2.4.4.A1.

b. After all group members have selected their number(s), the referee will roll the die. If one of the numbers chosen is rolled, participants will receive candies in return for a correct guess. However, the number of candies received is determined by the number of guesses made. The winnings chart determines the number of candies won for each guess. The winnings chart is provided below and also on the Risk versus Return Chart 2.4.4.A1.

Winnings Chart

Number of Guesses Made 6 5 4 3 2 1

Number of Candies Won 0 1 2 4 6 10

c. Explain to participants that the more guesses the participant has made the fewer number of candies they will receive.

d. After each round, participants should record the number of guesses made, the number rolled by the die, and the number of candies won.

e. Two activity charts are provided on the Risk versus Return Chart 2.4.4.A1. It is recommended that the activity is conducted twice, so the referee can be rotated and results can be compared between both rounds.

13. Follow‐up: a. Instruct participants to total the number of guesses they made and the

number of candies won for each activity. b. Ask participants to share their guesses versus candies won ratios. c. Ask participants the following discussion questions:

i. How did the number of candies won relate to the number of guesses made?

ii. Who had the largest return? Did you have a strategy for play? iii. Did anyone have a strategy for activity play? If so, did the

strategy work? iv. Did anyone choose only one number every time? If so, how

many candies did you win? v. Did anyone choose five numbers every time? If so, how many

candies did you win? vi. If you had to give up candies every time you chose a number

Other markers, such as beans, poker chips, or play money, can easily be used in replace of candy.

Have participants begin the activity with a certain number (may vary per participant) of candies to reflect money invested.

Play the activity “virtually” by not passing out candy until the end of activity. Make the point that this is how they could receive their return on a real investment – over time.

View a classroom demonstration of this activity on the Take Charge Today website.

Have participants respond to the discussion question in writing on the back of their Risk vs. Return 2.4.4.A1 chart.

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would you have played differently? vii. What do you believe your investment philosophy was?

Conservative? Moderate? Aggressive? viii. Did your investment philosophy change throughout the

activity/activities? ix. Do you think that your investment philosophy during the

activity reflected what your investment philosophy is/will be in real‐life?

Part 5: Types of Investment Tools 14. Slide 10: Types of Investment Tools

a. Ask participants to share what they already know about each investment tool.

15. Slide 11: Bond a. Bonds have the least amount of investment risk compared to other

tools, because they are purchased with fixed interest rates. An example of fixed interest is if an investor purchased a $1,000 bond with a 5% annual interest rate, they should receive $50 in interest each year until the maturity date.

b. The exact amount of risk depends on the type of bond purchased. 16. Slide 12: Stock

a. When a stockholder purchases a stock, they own a very small part of the company. Examples include Coca‐Cola, Apple, etc.

17. Slides 13 and 14: Stock Returns a. Returns may be paid on stocks with dividends and capital gains.

However, a return is not guaranteed. b. Dividends may or may not be paid depending on the type of stock and

if a company has made a profit. c. When selecting a stock, individuals try to choose stocks with a market

price that will increase, allowing them to later sell the stock for more than the purchase price. This is a form of unearned income called a capital gain.

d. In general, capital gains have the potential for high returns. But, as the potential for returns increases so does the investment risk and potential for loss.

18. Slide 15: Real Estate a. Examples of real estate investments include rental units or commercial

property. b. Many experts recommend that a primary residence not be considered

an investment asset. However, this depends on many different factors including location and financial situation.

19. Slide 16: Speculative Investments a. Because speculative investments are such a high risk, they are only

recommended for investors with an aggressive investment philosophy and high level of financial security.

i. Futures market – auction market in which participants buy and sell commodity/future contracts for delivery on a specific date. Examples include wheat and cattle.

ii. Options – contract to buy or sell a financial asset at a specified

Further explore features of investment tools using these educational resources: WeSeed Virtual Tour of the

Stock Market The Stock Market

Game Virtual Stock

Exchange FINRA SIFMA

Learn more about investing by watching videos in the Take Charge Today video library (designed for educators).

Read the Top 8 Ways Bonds Lose Money article for more information (link in supplemental resources section).

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point in the future at a specified price. An example is real estate.

iii. Collectibles – cultural artifacts that have value because of their beauty, age, scarcity or popularity such as antiques, stamps, etc.

20. Slides 17 and 18: Mutual Funds a. Discuss the definition of a mutual fund. b. Analyze the advantages and disadvantages.

i. Stress that mutual funds are popular because they reduce the amount of investment risk by spreading among a variety of investments.

ii. Investors are saved time because time is not spent choosing individual investments. Instead, a group of mutual fund managers constantly evaluate which investments to buy and sell. They work with the investors to manage their portfolio.

iii. Because mutual fund managers guide investors, fees are charged.

21. Slide 19 and 20: Ariana’s Investment – Stock vs. Mutual Fund a. Ariana has $150 to invest. She has multiple options with companies A

– G. In the first option, she chooses to invest all of her money in company C’s stock. However, company C has a bad year and the market price drops significantly. Therefore, at this time, Ariana has lost her $150 investment (assuming the company does not rebuild).

b. In option 2, Ariana chooses to invest in a mutual fund splitting her $150 among companies A‐G. Although companies C and F have bad years all other companies have profitable years. Therefore, Ariana has reduced her investment risk and may still have earned a profit.

22. Slide 21: Index Fund a. Ask participants what is the difference between a mutual fund and

index fund. i. The stocks and bonds that make up a mutual fund are chosen

by the fund managers. The stocks and bonds that make up an index fund are based upon a particular index.

ii. Standards and Poor’s 500 (S & P 500) is five hundred widely held common stocks whose average performance serves as a broad‐based measurement of changes in stock price.

iii. Dow Jones Industrial Average is a price‐weighted average of 30 actively traded blue‐chip stocks. It is the oldest and most widely used of all stock market indicators.

iv. NASDAQ 100 – a stock market indicator of 100 of the largest non‐financial companies listed on the NASDAQ.

23. Slide 22: Lending vs. Owning a. Identify that when investing, consumers either lend money to the

company/organization or they own the asset. b. An example of lending is a bond that earns interest. c. An example of owning is stock, real estate or speculative investments

which have returns in the form of dividends, rents or capital gains. 24. Slide 23: Knowledge of the General Risk Level Helps Manage Risk

a. By understanding the risk associated with an investment, the

Have participants compare the types of index funds using websites such as Investopedia.

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uncertainty of that risk can be better managed. b. Typically, if an individual owns an asset they have the potential for

higher returns, such as capital gains. However, the trade‐off is higher investment risk.

c. Some investments have multiple types of returns. Therefore, within a particular investment tool, the risk level may vary.

d. The type of return for a speculative investment depends on the investment. While speculative investments have the potential for high returns they are very risky.

25. Slide 24: Characteristics of Investment Tools a. Divide participants into groups of 3‐5. b. Give each group one set of Investment Tools 2.4.4.H3 cards. c. Although the exact level of risk and returns will vary among

investment tools depending on the type of tool, tools typically have the same characteristics.

d. Ask participants to order the cards from lowest to highest risk. Explain why.

i. High risk is speculative investments and the returns will vary. ii. Medium risk is stock, real estate, mutual funds and index

funds. The exact risk level varies depending on the type of investment. Mutual funds and index funds are typically lower risk because they include multiple investment tools.

iii. Low risk is bonds and the return is a fixed interest rate. e. Ask participants to order the tools from lowest to highest potential

returns. Explain why. i. Cards remain in the same order as they were for investment

risk. Higher risk typically means the potential for higher returns.

f. Ask participants to order the tools from lowest to highest inflation risk. Explain why.

i. The order of cards is reversed. Bonds have the highest inflation risk because their potential for returns is the lowest and therefore there is a greater chance their rate of return will not be higher than inflation.

26. Slide 25: Investment Philosophy a. The potential for higher returns often motivate people to take on a

higher level of risk. b. An individual’s personality will often influence their investment

philosophy. c. Investing for different purposes may influence their investment

philosophy. For example, a person with 30 years until retirement may have a more aggressive philosophy than someone who needs to access their retirement funds in 5 years and should be more conservative.

d. Ask participants if someone was an aggressive investor, what types of investment tools would they primarily have in their portfolio.

i. Higher risk tools including speculative investments, real estate and stocks.

27. Slide 26: Portfolio Diversification a. Portfolio diversification is one of the best ways to reduce investment

To visually illustrate the concept of portfolio diversification, create a visual of the saying “don’t put your eggs in one basket.” Place different colored plastic eggs inside a basket and label them with the various types of investments.

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risk. b. Most people diversify their portfolio to align with their investment

philosophy. Part 6: Brokerage Firms 28. Slide 27: Stock Exchange

a. In order to buy or sell an investment (other than real estate and certain speculative investments) they must utilize a brokerage firm.

29. Slides 28‐30: Brokerage Firms a. Edward Jones and Merrill Lynch are examples of full‐service brokerage

firms. E*TRADE is an example of an online discount brokerage firm. b. All brokerage firms charge a fee for their services. c. Full‐service firms often charge higher fees because they offer a

financial advisor and advice. d. Because the investing process is complex and requires an individual to

have knowledge of the market/economy, types of investments and time, many view the fees charged by a full‐service firm to be worth the cost.

e. Many firms offer automatic transfers and deposits. 30. Slide 31: Choosing a Brokerage Firm

a. It is important to always ask a financial advisor how they will be compensated (per transaction, commission, etc.) if you hire them. This information helps you to critically evaluate the advice they are providing.

i. Those working on for a commission based on the value of your portfolio have a greater incentive to make you wealthy.

Part 7: Tax‐Advantaged Investments 31. Slide 32: Tax‐Advantaged Investments

a. Stress that because savings and investments are a form of unearned income, they are subject to income tax.

b. Individuals may reduce their tax liability by investing in tax‐advantaged investments.

32. Slide 33: When are Taxes Paid? a. Taxes are typically paid when the money is invested, or on a tax‐

advantaged account when the money is withdrawn. The advantage is the money grows untaxed with help from compounding interest.

33. Slide 34: Investing for Retirement a. Mutual funds are typically an important part of an individual’s

retirement portfolio. b. When investing for retirement, invest as much money as possible in

tax‐advantaged accounts. There are often annual maximums that may be invested.

c. If an individual works at a place where an employer ‐sponsored plan is an option, they are highly recommended. Not only is it tax‐advantaged, but the deductions are often automatic and the employer will match a portion of the investment.

34. Slide 35: Retirement Accounts a. The trade‐off to tax‐advantaged accounts is there are penalties if the

Show the E‐Trade Baby commercials to discuss different types of brokerage firms. These commercials are available on YouTube. Refer to the Video Clips Relating to Financial Education Active Learning Tool 3.0.48 for additional information.

Use an Aging App to have participants create a picture of themselves in 40 years. Reference the Tablet Applications for the Personal Finance Classroom Active Learning Tool 3.0.52.

Use the Fun with Dick and Jane Active Learning Tool 3.0.46 to discuss the importance of a diversified portfolio.

http://takechargetoday.arizona.edu/lessonplans/fun-dick-and-jane

http://takechargetoday.arizona.edu/lessonplans/video-clips-relating-financial-education

http://takechargetoday.arizona.edu/lessonplans/tablet-applications-personal-finance-classroom

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money is withdrawn early. The most common plans in the workplace are 401(k) and 403(b) plans.

b. Individuals may also choose to personally invest in tax‐advantaged retirement accounts including Traditional and Roth IRA’s.

35. Slide 36: Summary a. Ask participants to describe why each point is important.

CONCLUSION OPTIONS There are three conclusion options provided for this lesson. 1. Option 1: Rolling Jenga 2. Option 2: ‘Round the Bases 3. Option 3: Risk Tolerance Quiz

Option 1: Rolling Jenga Approximate time: 30 minutes Materials to prepare: Rolling Jenga Active Learning Tool 3.0.14 Per group of 3‐5:

o 1 Jenga® with numbers on activity pieces o 1 The Fundamentals of Investing Vocabulary List 2.4.4.E1 o 1 labeled die o Scratch paper or white board with marker o Play doh (optional)

1. Conduct the Rolling Jenga activity. Refer to the Rolling Jenga Active Learning

Tool 3.0.14 for directions and materials. a. Rolling Jenga is an activity used to reinforce vocabulary by having

participants draw pictures of terms, define terms, use a term in a sentence and describe why a term is important.

Option 2: ‘Round the Bases Approximate time: 30 minutes Materials to prepare: ‘Round the Bases Active Learning Tool 3.0.27

o The Fundamentals of Investing Questions 3.0.27.E3 4 items to serve as bases such as:

o 4 orange spots or cones

o 4 chairs

o 4 signs detailing 1st base, 2nd base, 3rd base, and home plate taped to a chair in the classroom

1 chair to serve as the pitcher’s mound 2 clipboards or dry erase boards (1 for each team)

1. Conduct the financial baseball activity. Refer to the ‘Round the Bases Active

Learning Tool 3.0.27 for directions and materials. a. The purpose of ’Round the Bases is to provide an opportunity for

students to review important content from any lesson. The baseball game format is staged just like America’s favorite pastime and designed to be played in a friendly, competitive format that requires everyone in the class to be engaged (in other words, no one stays in





Page | 13 2.4.4


the dug‐out for this activity; everyone will eventually have a chance “at bat”).

Option 3: Risk Tolerance Quiz Approximate time: 15 minutes Materials to prepare: Internet access Risk Tolerance Quiz (URL in the supplemental resource section)

1. Take a Risk Tolerance Quiz to determine personal investment philosophy and

tolerance for risk. A link to an online risk tolerance quiz is available in the supplemental resources section of the lesson plan.

a. Depending on knowledge of the participants, additional assistance or explanation from the educator may be necessary for a few of the questions.

b. Possible discussion questions following the quiz: i. What was your risk tolerance numerical score?

ii. What is your risk tolerance level? iii. Do you believe this score is accurate? iv. Do you think this will change throughout your life? Why or

why not? v. Why is it important for an individual to know their personal

investment philosophy? c. Poll participants to see how many have a below‐average tolerance,

average tolerance, or above‐average tolerance for risk.

ASSESSMENT OPTIONS There are two assessment options provided for this lesson. 1. Option 1: Reinforcement Worksheet 2. Option 2: Saving and Investment Interview

Option 1: Reinforcement Worksheet Approximate time: 20 minutes Materials to prepare: 1 The Fundamentals of Investing 2.4.4.A2 per participant 1. Complete the The Fundamentals of Investing 2.4.4.A2 reinforcement

worksheet.

Option 2: Saving and Investment Interview Approximate time: 20 minutes Materials to prepare: 1 Saving and Investing Interview 2.4.4.A3 per participant 1 Saving and Investing Interview Essay Rubric 2.4.4.B1 per participant 1. Participants must identify a retired person over 50 and interview them. The

Saving and Investing Interview 2.4.4.A3 is provided. In addition to the questions provided, participants must create two additional questions.

2. Participant will reflect on their interview by writing an essay using the Saving and Investing Interview Essay Rubric 2.4.4.B1.

Invite a guest speaker such as a Certified Financial Planner, individual preparing for retirement or securities broker to talk about investing. Reference the Guest Speaker Active Learning Tool 3.0.22 for support tools.

Create a graph illustrating the risk tolerance levels of participants. Discuss what types of investment tools would comprise a portfolio for each tolerance level.

http://takechargetoday.arizona.edu/lessonplans/guest-speaker-active-learning-tool

Page | 14 2.4.4.E1


The Fundamentals of Investing Vocabulary List

TERM DEFINITION

1 Bond A form of lending to a company or the government (city, state, or federal)

2 Brokerage firm Facilitates the buying and selling of investments from a stock exchange

3 Capital Gain Unearned income received from the sale of an asset above its purchase price

4 Discount brokerage firm

Only completes orders to buy and sell investments

5 Dividend The share of profits distributed in cash

6 Financial advisor A trained professional that helps people make investing decisions

7 Full‐service brokerage firm

Offer investment transactions as well as investment advice and a financial advisor

8 Index A group of similar stocks and bonds

9 Index fund A mutual fund that was designed to reduce fees by investing in the stocks and bonds that make up an index

10 Inflation The rise in the general level of prices

11 Inflation risk The danger that money won’t be worth as much in the future as it is today

12 Investment Assets purchased with the goal of providing additional income from the asset itself but with the risk of loss

13 Investment philosophy An individual’s general approach to investment risk

14 Investment risk The possibility that an investment will fail to pay the expected return or fail to pay a return at all

15 Market price The current price that a buyer is willing to pay

16 Maturity date The specified time in the future when the principal (or initial investment) amount of the bond is repaid to the bondholder

17 Mutual fund Created when a company combines the funds of many different investors and then invests that money in a diversified portfolio of investments

18 Portfolio diversification Reduces risk by spreading money among a wide array of investments

19 Rate of return The total return on an investment expressed as a percentage of the amount of money saved

20 Rent A fee charged for the use of property or land

21 Return The profit or income generated by saving and investing

22 Risk The chance of loss from an event that cannot be entirely controlled

23 Speculative investments

Have the potential for significant fluctuations in return over a short period of time

24 Stock A share of ownership in a company

25 Stockholder or Shareholder

The owner of a stock

26 Stock exchange An organized, central service to buy and sell stocks, bonds and other investments that are traded

27 Tax‐advantaged investments

Reduce, defer, or adjust the current year tax liability

Page | 15 2.4.4.H1


Life Events Activity Cards

Receiving Higher Education

Retiring

Establishing a Savings Fund

Getting Married

Buying a Home Buying a Vehicle

Starting a Family Going on Vacation

Starting a Career Building Net Worth

2.4.4.H1 2.4.4.H1

2.4.4.H1 2.4.4.H1

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2.4.4.H1 2.4.4.H1

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The Fundamentals of Investing Note Taking Guide Total Points Earned

Name

Total Points Possible

Date

Percentage

Class

Investments have the potential for

____________ returns.

Define return:

All investments have some

_____________.

Define investment risk:

Characteristics of Investments

Investments are important to building

____________ _____________.

Define investments:

Investments are for

___________ __________ goals.

Why are investments less liquid than savings tools?

Two examples of long‐term goals are:

Rate of return:

Strive to have the rate of return on an

investment be _________________

than the rate of inflation.

Define inflation risk:

Page | 17 2.4.4.L1


Bond

Definition:

Description:

Risk level:

Type of return:

Stock

Definition:

Dividend returns are:

Capital gain returns are:

Risk level:

Real Estate

Definition:

Types of returns include:

Risk level:

Speculative Investments

Definition:

Examples include:

Returns:

Risk level:

Page | 18 2.4.4.L1


Mutual Fund & Index Fund

Definition:

What is included?

Types of returns:

Risk level:

Advantage:

Disadvantage:

How is an index fund different than a mutual fund?

Lending vs. Owning

Lending

Type of investment tools:

Type of returns:

Owning

Type of investment tools:

Type of returns:

Typically, investments that are a form of owning have:

_________________

potential for high returns

________________

inflation risk

______________

investment risk

Page | 19 2.4.4.L1


Investment Philosophy

Each individual has a

tolerance for the

amount of

_________________

Generally divided into three categories:

May be influenced by:

Portfolio Diversification

Definition:

Purpose:

Impact it has on risk:

Brokerage Firms

What is a stock exchange?

What is a brokerage firm?

What is the difference between a full‐service and discount brokerage firm?

All brokerage firms charge

____________ for their services.

What is one question to ask when choosing a firm?

Tax‐Advantaged Investments

How do tax‐advantaged investments benefit

consumers?

When are taxes paid?

Why should an employee invest in an employer‐sponsored

plan?

What are examples of retirement accounts?

Page | 20 2.4.4.A1


On the correct round row, mark which numbers you would like to guess. Roll the dice.

If the number rolled matches one of the numbers you chose, you will receive tokens!

Use the winnings chart to determine the number of tokens won based upon the number of guesses you made.

If the number rolled does not match one of the numbers you chose, you will receive no tokens.

Risk versus Return Chart Directions: Use the Activity 1 and Activity 2 charts to record guesses and winnings from the Risk versus Return activity. Follow the directions in the flow chart below for each round.

Activity 1

Activity 2

Number on Die

1 2 3 4 5 6 Number Rolled

Number of

Guesses

Candies Won

Round 1

Round 2

Round 3

Round 4

Round 5

Total:

Winnings Chart

Number of Guesses 6 5 4 3 2 1

Number of Candies Won 0 1 2 4 6 10

Page | 21 2.4.4.H2


Saving vs. Investing Characteristics Cards

Emergencies Long‐term goals

More Liquid Less Liquid

Limited Risk Higher Risk

Lower Returns Higher Returns

Financial Security Net Worth

2.4.4.H2 2.4.4.H2

2.4.4.H2 2.4.4.H2

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2.4.4.H2 2.4.4.H2

2.4.4.H2 2.4.4.H2

Page | 22 2.4.4.H3


Investment Tools Cards

Investment Tools Investment Tools

Speculative Investment Stock


Real Estate Mutual Fund


Index Fund Bond

2.4.4.H3 2.4.4.H3

2.4.4.H3 2.4.4.H3

2.4.4.H3 2.4.4.H3

Page | 23 2.4.4.A2


The Fundamentals of Investing Total Points Earned

Name

44 Total Points Possible

Date

Percentage

Class

Directions: Define each of the following types of investment tools. Indicate if each tool is a form or lending or owning. (2 points each)

Investment tool Definition Is it a form of lending or owning?

Stocks

Bonds

Mutual funds

Index funds

Real estate

Speculative investments

Page | 24 2.4.4.A2


Directions: Match the following words with the correct definition. (1 point each)

1. _____ The possibility that an investment will fail to pay the expected return or fail to pay a return at all.

2. _____ The rise in the general level of prices.

3. _____ The uncertainty regarding the outcome of a situation of event.

4. _____ The danger that money won’t be worth as much in the future as it is

today.

Directions: Complete the following questions.

5. Provide three examples of how the purpose of investing is different than the purpose of saving. (4 points)

6. Complete the pyramid by order the following from high risk to low risk. (4 points) o Bonds o Stock and Real Estate o Speculative o Mutual funds and index funds

7. Describe the four types of returns. (4 points)

o Interest:

o Dividends:

o Rents:

o Capital Gains:

A. Inflation

B. Inflation risk

C. Investment Risk

D. Risk

High Risk

Low Risk

Page | 25 2.4.4.A2


8. Describe the concept of investment philosophy and how it relates to portfolio diversification. (2 points)

9. What is the difference between a full‐service brokerage firm and a discount brokerage firm? (2 points)

10. What are two questions you should ask before hiring a brokerage firm? (2 points)

11. What are two benefits of a tax‐advantaged account? What is a trade‐off? (3 points)

Directions: For the following questions, please indicate if the statement is True or False by writing a T or F on the line. (1 point each)

12. ____ Taxes must be paid on all investment profits in the year the unearned income is received.

13. ____ When focusing on wealth accumulation, the rate of return earned on an investment should be

higher than the rate of inflation.

14. ____ An individual’s investment philosophy changes throughout their lifetime.

15. ____ Individuals with an aggressive investment philosophy are not willing to take on risk for the potential of higher returns.

16. ____ Portfolio diversification is a method that helps an individual receive the highest return on

investment.

17. ____ In order to buy and sell investments (except for real estate and certain speculative investments), an individual needs to utilize a brokerage firm.

18. ____ A full service general brokerage firm usually charges lower commission fees than a discount

broker.

Page | 26 2.4.4.A3


Saving and Investing Interview Total Points Earned

Name


Date

Percentage

Class

Directions: Interview a retired adult over the age of 50. This person should be someone you know and care about. In addition to the interview questions below, develop two additional questions to ask. (14 points for

completion)

1. Were you able to save and invest money in your 20’s, 30’s, 40’s and 50’s?

a. If so, what saving and investment tools did you use at each stage?

2. What were your greatest challenges to saving money? 3. What is a financial goal you have achieved in your lifetime and how did you approach this goal?

4. Financially, what do you worry about the most when thinking about retirement?

5. What advice would you give someone my age about saving and investing for the future?

6. Additional question:

7. Additional question:

Name of adult

Signature

Date

20's

30's

40's

50's

Page | 27 2.4.4.B1


Saving and Investing Interview Essay Rubric

Total Points Earned

Name


Date

Percentage

Class

Directions: Write a reflective essay about your Saving and Investing Interview 2.4.4.A3. The essay must

answer these questions:

In your opinion, what was the most interesting response you received in the interview process? How did this interview influence your perspective about saving and investing for the future? As a result of the interview, what is one thing you will begin doing today to prepare for your financial

future?

Exemplary Satisfactory Unsatisfactory No Performance

Score

Content: All three reflective questions are

addressed Answer are thoughtful and reflective

12‐9 8‐5 4‐1 0

Writing Skills: Sentences are fluent and effective Very few errors in mechanics,

punctuation and word choice Essay includes an introduction, body,

and conclusion

6‐5 4‐3 2‐1 0

Effectiveness of Presentation: Clearly prepared Easily read and neatly assembled Minimum of one‐page, double‐

spaced with 12 font and 1‐inch margins.

3 2 1 0

Total Points Earned Total Points Available 21

Percentage

© Take Charge Today – August 2013 – The Fundamentals of Inves ng – Page 1 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Ins tute at The University of Arizona

2.4.4.F1

Advanced Level

Saving money for future consump on is an important factor of your financial plan. You can save money in a savings tool

(savings account at your depository ins tu on) or in an investment. Investments are assets purchased with the goal of

providing addi onal income from the asset itself but with the risk of loss. Your financial plan would not be complete without

both savings and investments.

Saving vs. Inves ng

You shouldn’t use investments for savings or short‐term goals/expenses because of two primary reasons:

1. Unlike insured savings tools, investments are not secure. There is a chance that some or all of your money invested could

be lost.

2. Investments are less liquid than savings tools. That is, investments may not be easily converted

to cash or you may have to pay a penalty to access the money. In fact, with some investments

you may have to wait a long me, even years, to access the funds.

Investments help build your net worth because they have the poten al to earn higher returns than

savings tools. A return is the profit or income generated by saving and inves ng. Your trade‐off to

earning higher returns is higher investment risk. Risk is the chance of loss from an event that cannot

be en rely controlled. Unlike savings tools, all investments carry investment risk, which is the

possibility that an investment will fail to pay the expected return or fail to pay a return at all. As the

poten al return rises, generally, so does the investment risk involved.

Investments are assets because they have monetary value. On your Statement of Financial Posi on, investments are listed as

investment assets. Saving tools are listed as monetary assets, assets that can be quickly and easily converted into cash.

Inves ng helps you

cope with risk and

uncertainty.

Knowledge of the

general risk level for

investment returns

helps you manage

your risk.

As a result of the poten al for higher

returns and low liquidity, money invested is

usually used to pay for long‐term (more

than five years) goals and expenses such as

a down payment for a house in ten years, a

young child’s higher educa on in fi een

years, or re rement income in thirty years.

As a guide to spending, it is recommended

that you dedicate at least 10% of net

income to savings and investments each

me income is received.

More Liquid

Emergencies Limited Risk

Lower Returns (0‐4%)

Financial Security

Less Liquid

Higher Risk

Higher Returns (8‐12%)

Net Worth

Long‐ term goals

Inves ng

Saving


2.4.4.F1

Rate of Return

The amount of return you earn on a savings tool or investment

is determined by calcula ng the rate of return, the total return

expressed as a percentage of the amount of money saved.

Example: Mandy saved $2,200 in a money market deposit

account. A er one year, she has a return of $110. What is

Mandy’s rate of return?

You should strive to have the rate of return earned on an

investment be higher than the rate of infla on. Infla on

is the rise in the general level of prices. If you invest

money at a 2% interest rate, and the infla on rate is 2%,

then your purchasing power will not be increased. In fact,

a er you pay taxes on your investment income, you will

actually be losing money. Infla on risk is the danger that

money won’t be worth as much in the future as it is

today. Infla on risk is a concern with investments

because it defeats the objec ve of providing for future

financial security by building net worth.

Most Common Types of Investments

Bond

A bond is a form of lending to a company or the government (city, state, or

federal). When you purchase a bond, you are lending money to an organiza on in return for a fixed interest rate. The

organiza on (usually a company or the government) pays interest (usually bi‐annually or annually) to you un l the maturity

date is reached. The maturity date is the specified me in the future when the principal amount of the bond is repaid to the

bondholder. In general, bonds have the least amount of investment risk. Bonds are the most predictable investment since

bonds are purchased with a fixed interest rate. However, there is a risk that interest won’t be paid and/or the principal

amount of the bond won’t be repaid. The specific investment risk level depends on the type of bond; higher risk bonds tend

to have higher interest rates.

Bond example:

A $1,000 five year bond with a 5%

annual interest rate.

You should receive: $50 in

interest each year for five years

and at the end of five years, your

$1000 principal investment.

Stock

Stock is a share of ownership in a company, and the owner of the stock is called the stockholder or shareholder. The

amount of stock you purchase determines how much of the company you own (usually a small percentage). If the company

makes a profit, then you may receive part of that profit as a return. This is called a dividend, which is the share of profits

distributed in cash. When you own a stock, you expect that the market price (the current price that a buyer is willing to pay)

of the stock will increase. Therefore, if you are able to sell stocks for a market price higher than what was paid, you will

receive a return, known as a capital gain (unearned income received from the sale of an asset above its purchase price). In

general, capital gains have the highest investment risk of all returns, but also have the poten al for the highest amount of

return. For example, if the company performs poorly or goes out of business, you could lose part or all of your principal

investment, depending on the market price at which you were able to sell the stocks.

Total Return

Amount of Money

Invested

Rate of Return

$110 $2,200 .05 = 5%


2.4.4.F1

More Types of Investments

Real Estate

Real estate can include ownership of residen al or commercial property or land as

well as the rights accompanying that land. When you invest in real estate, you may

earn returns in the form of capital gains and rents. Capital gains come from selling

the real estate for more than what you paid. Rent is charged for the use of the

property or land. For example, if you own a residen al real estate property you can

rent it to a family in exchange for them living there. Real estate can be more me

consuming than other forms of inves ng.

Many experts recommend that a

primary residence not be

considered an investment asset.

However, this depends on several

factors including where you live

and your personal financial

situa on.

Specula ve Investments

Specula ve investments have very high levels of investment risk. Specula ve investments have the poten al for

significant fluctua ons in return over a short period of me. Some examples of specula ve investments are futures,

op ons, and collec bles. These are recommended for people with an aggressive investment philosophy and a high level

of financial security.

Mutual Funds

A mutual fund is created when a company combines the funds of many different investors and then invests that money in

a diversified por olio of investments. Mutual funds may include stocks, bonds, real estate, and/or specula ve

investments. The return from a mutual fund may include interest, dividends, rents, and/or capital gains. When you invest

in a mutual fund you receive a percentage of the total return based upon the amount of mutual fund owned. Mutual

funds reduce your investment risk by spreading risk among a variety of investments. If one investment within the mutual

fund fails to pay a return, chances are high that another investment within the fund will s ll pay a return. Mutual funds

save you me, because me is not spent choosing individual investments. Instead, a group of mutual fund managers

constantly evaluate which investments to buy and sell. Therefore, mutual fund managers charge fees which can be higher

than if you purchased individual investments. However, fees charged vary depending upon the type of mutual fund and

the company that offers it.

Index Funds

An index fund is a type of mutual fund that was designed to reduce fees by inves ng in the stocks and bonds that make

up an index. An index is a group of similar stocks and bonds. For example, the Standard and Poor 500 is an index that

includes the 500 largest companies that sell stock. By buying and holding a specific set of stocks and bonds, index funds

require very li le management compared to mutual funds and can charge lower fees.

What is an example of an investment goal you have?

What types of investment tools would you use to achieve that goal and why?


2.4.4.F1

Lending vs. Owning

Investment Philosophy

Increasing poten al for higher returns Increasing investment risk Decreasing infla on risk

You are lending money with some investments, such as bonds. Your returns are in the form of

interest. You own something with other investments, such as stocks, real estate, and specula ve.

When you own an investment, your returns are in the form of dividends, rents, and capital gains.

Typically, when you lend,

both your returns and level

of investment risk are lower.

On the other hand, when

you own you have greater

investment risk, but also the

poten al to earn higher

returns and experience the

least infla on risk.

The poten al for higher returns can be what mo vates you to accept higher amounts of investment

risk. Everyone has a personal tolerance level for the amount of investment risk they are willing to

assume. This is known as an investment philosophy, or an individual’s general approach to investment

risk. Investment philosophies are generally divided into three main categories: conserva ve, moderate,

and aggressive. If you have an aggressive philosophy you are willing to take on more investment risk

for the poten al of higher returns. The amount of me you have may also influence your investment

philosophy. Your philosophy may be different with a fi een year investment than a thirty year

investment.

Por olio diversifica on is a method to assist you with risk reduc on. Por olio diversifica on reduces

your risk by spreading money among a wide array of investments. Chances are if one investment is

losing money, another will be earning a return. The goal of diversifica on is to create a collec on of

investments that will provide you with both an acceptable return and an acceptable exposure to risk.

Most people diversify their por olio according to their investment philosophy. For example, a person

with an aggressive investment philosophy will most likely include a larger amount of high investment

risk in his/her por olio.

How Do You Purchase Investments?

When you purchase an investment (except for real estate and some specula ve investments) you are doing so from a stock

exchange. A stock exchange provides an organized, central service to buy and sell stocks, bonds, and other investments that

are traded. Worldwide, there are many different stock exchanges and a limited number of people are allowed to buy and sell

directly from each stock exchange. Therefore, if you want to purchase an investment, a brokerage firm must be u lized. A

brokerage firm facilitates the buying and selling of investments from a stock exchange. Brokerage firms act as an

intermediary between the stock exchange and the investor. You will pay a brokerage firm a fee for their services. There are

two types of brokerage firms that differ in the fees charged and services provided:

Discount brokerage firm ‐ provides limited services. A discount brokerage firm only completes orders you give them to buy

and sell investments; they do not provide you with advice as to which investments to buy and sell. Because of this, discount

brokerage firms usually charge lower fees and/or commissions than full‐service brokerage firms.

What type of

investment

philosophy would

you have?

Lending Owning

Interest Dividends Rents Capital Gains


2.4.4.F1

Full‐service brokerage firm (also known as

tradi onal brokerage firms) – offer you investment

transac ons as well as investment advice and a

financial advisor. A financial advisor is a trained

professional that helps people make inves ng

decisions.

The process of inves ng is complex. Choosing investments and crea ng a

personal inves ng plan requires knowledge of the market/economy,

knowledge of the specific investment, me to monitor the investment, etc.

An advantage to a full‐service brokerage firm is that you have access to

financial advisors who use their exper se to help you with the inves ng

process as well as ensure you are mee ng personal financial goals. Financial

advisors may also inform you of investment op ons that you may have not

known about otherwise. For many, the advice and me of a financial

advisor are worth the fees paid.

Just as with saving, inves ng money is most successful when you make it

automa c. Brokerage firms provide automa c transfers/deposits to make

inves ng automa c. You may find that developing a rela onship with a

financial advisor also helps you stay on track with a personal financial plan

Edward Jones and Merrill Lynch are

examples of full‐service brokerage firms.

E*TRADE is an example of an online

discount brokerage firm. Many discount

brokerage firms are online only.

Discount

Broker

Full‐service

Brokerage Firm

What are two advantages and

disadvantages to a discount broker and full‐

service brokerage firm?

When choosing a brokerage firm, you should understand how that firm charges fees. Full‐service and discount brokerage

firms charge fees in different ways:

Discount brokerage firm – Will usually charge a fee for comple ng a buy/sell transac on for you (o en referred to as an

order). Other fees will vary but may include: ○ Service fee – This is usually a quarterly or annual fee charged to the consumer to use the service. ○ Maintenance fee – This fee is usually charged if the value of an investment(s) is below a specific minimum

balance requirement. ○ Inac vity fee – If you haven’t completed an order within a certain period of me. ○ Fees specific to an investment – Discount brokers may charge fees specific to the type of investment you are

trading (stock, bond, mutual fund, etc.).

Full‐service brokerage firm – Financial advisors for full‐service brokerage firms are compensated

for the me and knowledge provided to investors. Therefore, fees are charged in a different

manner than discount brokerage firms: ○ A percentage of the investment value – Financial advisors receive a percentage of the

total value of an investment. For example, an investor’s mutual fund is worth $1,000.00.

A financial advisor charging a 2% value fee would earn $20 ($1,000.00 * .02).

○ A percentage of the amount deposited – financial advisors receive a percentage of the

amount invested. For example, an investor contributes $1,000.00 to an investment

worth $5,000.00. A financial advisor charging a 4% deposit fee would earn $40.00 ($1,000.00 * .02=4). ○ Hourly rate and flat fee – A brokerage firm will charge the consumer an hourly rate or flat fee to give advice or

complete a project.

Most financial

advisors charge a

percentage on

either the value of

the investment or

amount deposited

– not both.

Choosing a Brokerage Firm


2.4.4.F1

In addi on to fees, financial advisors may earn commissions. The investor does not pay commissions; companies pay

commissions. For example, if you decide to invest in a specific company’s mutual fund through a financial advisor, the

company will pay the financial advisor a commission. Even though commissions aren’t a direct cost to you it is s ll

important to know whether or not a financial advisor is compensated via commissions. A financial advisor that earns

commissions may be biased towards a specific product rather than offering inves ng advice that is best for your financial

goals.

How financial advisors are compensated (fees and/or commissions) depends on the brokerage firm the financial advisor

works for. Therefore, when choosing a financial advisor, begin by researching brokerage firms.

Always ask financial

advisors for a clear

explana on of how they will

be compensated.

Tax‐Advantaged Investments

Savings and investments are a form of unearned income and are therefore subject to income

tax. However, the government encourages you to invest in certain types of investments by

making them tax‐advantaged. Tax‐advantaged investments are structured with tax benefits to

investors in mind. Tax‐advantaged investments are usually not tax free and instead reduce,

defer, or adjust the current year tax liability. You most likely pay taxes the year money is put into

the investment or the year money is taken out, whereas other investments are subject to

income tax every year. The money that you would have paid in taxes can remain in the tax‐

advantaged investment to earn interest on interest and increase value faster. The most common

tax‐advantaged investments are offered for those who wish to invest in re rement and

educa on; however, there are tax‐advantaged investments for other purposes.

There are usually limits to

the amount of money per

year that can be invested

in a tax‐advantaged

investment.

Choosing a Brokerage Firm con nued…

What are two reasons

you would want to use

a tax‐advantaged

investment?

It is very important to research a financial advisor and the firm he/she works for. The FINRA Broker Check

(h p://www.finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm) is a free tool to help investors research the

professional backgrounds of brokerage firms and financial advisors.

Ques ons To ask:

How are the firm’s financial advisors compensated?

How long has the firm been in business?

Does the firm have a history of posi ve reviews and success?

How does the firm rank in comparison to other brokerage firms?

Tax‐advantaged investments

reduce, defer or adjust the

current year tax liability

Most common: Re rement Educa on


2.4.4.F1

Inves ng for re rement is an important financial goal and must be carefully planned over a long period of me.

To help you invest in re rement, the government and many employers have created investment plans specifically for

re rement. The inves ng process is similar to other investments. You choose investments, which are usually mutual funds.

Then, the money contributed is deposited into the investment(s) of your choice. Re rement plans are tax‐advantaged to

encourage you to save for re rement. If it is an employer‐sponsored re rement plan, the employer helps you invest by

automa cally deduc ng money to invest from wages earned. The employer may also contribute a por on of money to the

investment (also known as matching funds) with no addi onal cost to you.

However, the trade‐off to the tax advantages is that most re rement plans have penal es if money is withdrawn before you

reach a specific re rement age (the specific age depends on many factors). The most common re rement plans are:

Employer sponsored re rement plans

○ The most common employee sponsored re rement plans are called a

401(k) and 403(b). Both plans are very similar; the specific plan your

employer offers will depend on what type of employer you have (a

private business, public en ty, non‐profit organiza on, etc.). 403(b)

plans are designed for tax‐exempt organiza ons.

Personal re rement accounts

○ There are re rement plans that offer tax benefits without employer sponsorship. The most common personal

re rement accounts are the Tradi onal IRA (Individual Re rement Account) and the Roth IRA. The difference

between a Tradi onal IRA and Roth IRA is when taxes are paid on the investment. Taxes are paid on a Tradi onal

IRA in the year money is withdrawn from the account. Taxes are paid on a Roth IRA in the year money is

deposited into the account. Your personal financial situa on will determine if a Tradi onal IRA, Roth IRA, or a

mixture of both accounts is best for you.

There are many other types of re rement plans. Your employment status as well as your personal financial situa on will

determine which re rement plan(s) is best for you.

When available, use an employer‐

sponsored re rement account as

much as possible.

Inves ng for Re rement

It is recommended to u lize

employer‐sponsored

re rement accounts as much

as possible if available.

Your present self impacts your future self!

Investments have the poten al to earn higher returns than savings tools and are thus important to building net worth

(wealth). However, a trade‐off to higher returns is lower liquidity and higher investment risk. This makes investments ideal

for a long‐term me frame (generally more than five years). Discussing your financial goals with a financial advisor is a great

step to begin inves ng. Taking advantage of por olio diversifica on, tax‐advantaged investments, and the benefits of

employer‐sponsored re rement plans will maximize your return.

page 2.4.4 the fundamentals of...

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