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217 lines
9.7 KiB
HTML
217 lines
9.7 KiB
HTML
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<!-- Mirrored from www.mathsisfun.com/money/investing-introduction.html by HTTrack Website Copier/3.x [XR&CO'2014], Sat, 29 Oct 2022 00:32:22 GMT -->
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<title>Investing introduction</title>
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<meta name="description" content="Investing is where you use money to (hopefully) make more money!">
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<div class="mid">
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<div id="logo"><a href="../index.html"><img src="../images/style/logo.svg" alt="Math is Fun"></a></div>
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<article id="content" role="main">
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<h1 class="center">Investing (Introduction)</h1>
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<h2>Investing</h2>
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<p style="float:right; margin: 0 10px 5px 0;"><img src="images/coin-stack-add2.jpg" alt="coin stack add" height="" width=""></p>
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<p>Investing is where you use money to (hopefully) make more money.</p>
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<p>You can run a business.</p>
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<p>You can put the money in the bank to earn interest.</p>
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<p>You can buy something valuable, such as an antique or a rare coin, and sell it later.</p>
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<p>You can buy a share of a company (such as on the stock exchange):</p>
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<ul>
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<li>They can pay dividends (regular payments to you based on their profit).</li>
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<li>AND you can sell the stock later, maybe for a higher price.</li>
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</ul>
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<p>You can ... well there are <b>LOTS of choices for investing money.</b></p>
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<p>But how do you tell which are good and bad investments?</p>
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<h2>Risk and Reward</h2>
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<p>Unfortunately there is always RISK when investing.</p>
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<ul>
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<li>The company you put your money in might go bankrupt</li>
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<li>The people you loaned money to just disappear</li>
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<li>When you try to sell that rare coin no one wants to buy it, except at a very low price</li>
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<li>And that wonderful business might suddenly face big competition and lose money</li>
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</ul>
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<p>Often the investments that promise the biggest profits are also the ones with the biggest risk.</p>
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<p class="center larger">As Reward goes up, Risk usually increases too.</p>
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<div class="example">
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<p>Example: Banks pay low interest, but they are also low risk.</p>
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</div>
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<div class="example">
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<p>Example: That new gold mine that promises 30% profit? It may work out well, or it may just run out of gold and lose all the money.</p>
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</div>
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<p>Always remember: <b>risk is risky</b>! The more risk you take, the higher the chance that you will end up losing.</p>
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<p class="center80 center">A risk <b>can</b> be worth taking, just be realistic about it.</p>
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<p>How can you tell how risky an investment is? Ah! That is the million dollar question.</p>
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<p><b>Do research!</b> Find out all you can about how previous investments have worked out. Think about the future of the investment (things that are good now can turn bad), and also ... can you trust the people involved?</p>
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<p>A big warning sign is: did they advertise or approach you? If they are spending time and money to get <i>your</i> money then watch out.</p>
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<p>Before you hand over any money, stop being excited by the idea of profits and think what might go wrong. A wise friend once said it was the investments he <b>didn't</b> make that led to him being rich.</p>
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<h2>Comparing Investments</h2>
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<p>OK, you have some possible investments. The risks are about the same. How to tell<b> which is best</b>?</p>
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<p>The basic idea is to <b>add up all the money you receive, and subtract all the money you spend</b>.</p>
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<p>But you also need to think <b>when</b> you spend or receive the money.</p>
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<p class="center"><img src="images/coin-stack-grow.svg" alt="coin stack grows" height="155" width="265"></p>
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<p class="center larger">Money <b>now</b> is more valuable than money <b>later on</b>.</p>
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<p class="center">Why? Because you can use money to make more money!</p>
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<div class="example">
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<h3>Example: A bank pays 10% interest on your money.</h3>
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<p>So <b>$200 now</b> can earn $200 x 10% = <b>$20</b> in a year.</p>
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<p>Your <b>$200 now</b> can become <b>$220 in a year's time</b>.</p>
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</div>
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<p>In fact, at 10% interest, $200 now is <b>the same</b> as $220 next year!</p>
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<p>Learn more at <a href="present-value.html">Present Value</a></p>
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<p> </p>
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<p>So money is not as valuable in the future, so we <b>reduce the value of future payments</b>.</p>
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<div class="example">
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<h3>Example: Two investments that both cost $200: one pays $220 next year, the other pays $230 in 2 years time.</h3>
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<p>Even though the $230 looks better, it is in 2 Years time.</p>
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<p>The first investment pays $220 in 1 year. <b>Reinvesting that $220</b> for another year might get you more than $230 by the 2nd year.</p>
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</div>
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<p>There are many ways to compare investments, but two of the most popular ways are:</p>
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<p class="dotpoint"><a href="net-present-value.html">Net Present Value</a></p>
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<p class="dotpoint"><a href="internal-rate-return.html">Internal Rate of Return</a></p>
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<p>When you have compared the possible investments, <b>and thought about the risks</b>, you are better prepared to make a decision.</p>
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<div class="example">
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<h3><img src="images/bakery.jpg" alt="bakery" style="float:right; margin: 10px;" height="100" width="197">Example: you run a Bakery, and want to improve its income. You could:</h3>
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<ul>
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<li><b>Move</b> the bakery to a busier street nearby (more customers)</li>
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<li><b>Renovate</b> the kitchen (bake better things at less cost)</li>
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</ul>
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<p>You estimate the costs and benefits, and then calculate the "Internal Rate of Return" of each to be:</p>
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<ul>
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<li><b>Move</b>: IRR = 12%</li>
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<li><b>Renovate:</b> IRR = 9%</li>
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</ul>
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<p>So "Move" is best.</p>
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<p>But hang on ... there are different risks!</p>
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<ul>
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<li><b>Move</b> is more risky: will you really get more customers? What about the customers you lose? What if someone opens a bakery at your old location, they will take business away from you.</li>
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<li><b>Renovate</b> is much less risky, you know it will save money for your present operation.</li>
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</ul>
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<p>If the Move goes bad you could lose your whole business.</p>
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<p>So choose carefully!</p>
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</div>
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<h2>Diversify!</h2>
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<p>To <b>diversify</b> means to have different types of investments ("diverse" means "different").</p>
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<p class="center"><img src="images/investments.svg" alt="investments" class="center" height="" width=""></p>
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<p class="center larger">Why diversify? It reduces the risk of losing everything!</p>
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<div class="example">
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<h3>Example: the whole economy goes bad!</h3>
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<p>Your business and stock market investments are in trouble.</p>
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<p>But (hopefully) your money in the bank or with government bonds is still OK.</p>
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</div>
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<table style="border: 0; margin:auto;">
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<tbody>
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<tr>
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<td><img src="images/eggs-one-basket.jpg" alt="eggs in one basket" height="68" width="100"></td>
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<td>
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<p>There is an old saying: <b>don't put all your eggs in one basket</b>.</p></td>
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</tr>
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</tbody></table>
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<p>Some people recommend:</p>
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<ul>
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<li>one-third of your money into <b>cash</b> investments like a bank account or bonds,</li>
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<li>one-third into <b>property</b>, and</li>
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<li>one-third into the <b>stock market</b>.</li>
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</ul>
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<p>But that is only a guide, you should decide for yourself what the best "spread of investments" is (and it can change, depending on how the economy is going).</p>
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<p> </p>
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<p>One last thing ... good luck and good fortune!</p>
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<p> </p>
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<div class="related">
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<a href="investment-graph.html">Investment/Loan Graph</a>
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<a href="present-value.html">Present Value</a>
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<a href="internal-rate-return.html">Internal Rate of Return</a>
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<a href="net-present-value.html">Net Present Value</a>
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<a href="index.html">Money Index</a>
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</div>
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<div id="copyrt">Copyright © 2022 Rod Pierce</div>
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