Title: Description: Financial Investing (TEACHER ONLY)
Course: Personal Finance Sample "STANDARD" Syllabus > Section: Unit 6: Financial Investing

Financial investing includes buying financial assets with the aim of increasing wealth in the future. Students will learn how financial investing can help meet long-term financial goals. They will learn about the relationship between risk and reward in investing. By evaluating investment options, they will also learn how to reduce risk through diversification.

Talking Points
1. After people save enough of their income to cover emergencies, they must make choices about investing their savings so that it might grow at a higher rate of return.

2. A financial investment involves the purchase of a financial asset. Financial assets include a variety of financial instruments, such as bank deposits, stocks, bonds, and mutual funds. Real estate and commodities are also often viewed as financial assets. Depositors receive interest on money deposited in bank accounts. Investors also receive interest when they own a corporate or government bond or make a loan.

3. When people buy corporate stock, they are purchasing ownership shares in a business. If the business is profitable, share owners expect to receive income in the form of dividends and/or an increase in the stock’s value. An increase in the value of an asset such as a stock is called a capital gain. If the business is not profitable, share owners could lose the money they have invested.

4. As with other goods and services, buyers and sellers in financial markets determine the price of financial assets and thus influence the rates of return on those assets. The prices of financial assets reflect what is known about the assets. These prices adjust to new financial news/information. The prices of financial assets are also affected by interest rates, changes in domestic and international economic conditions, monetary policy, and fiscal policy.

5. The rate of return on financial investments includes interest payments, dividends, and capital appreciation expressed as a percentage of the amount invested.

6. Risk is the chance of loss or harm. In the case of financial investments, there is financial risk, with a range of possible outcomes including loss of the investment. Higher-risk investments have a wider range of possible returns. The rate of return earned from investments varies with the amount of risk. In general, the higher the expected rate of return, the higher the risk of loss and vice versa.7. Some people are more willing to take risk than others. How much risk people are willing to take depends on factors such as personality, income, and family situation.

8. The real return on a financial investment is the nominal (stated) interest rate minus the rate of inflation.

9. Any expenses associated with buying, selling, or holding financial assets decrease the rate of return from an investment. Federal, state, and local tax rates vary on different types of investments and affect the after-tax rate of return on the investment.

10. In general, an investment with relatively high risk will have a lower market price and therefore a higher rate of return than an investment with relatively low risk.

11. Short-term investments generally have lower rates of return than longer-term investments.

12. Diversification involves investing in different types of financial assets in order to lower investment risk.

13. People planning to invest should be aware of the following common poor choices based on faulty logic:

- a. selling assets at a loss based on the belief that losses weigh more heavily than gains and
- b. investing only in assets that are more familiar (i.e., employer’s stock or domestic stocks).

14. People planning to invest should recognize that “If it sounds too good to be true, it is.”

15. There is a role for government when individuals do not have access to competitive financial markets or do not have complete information about alternative investments. The Securities and Exchange Commission (SEC), the Federal Reserve, and other government agencies regulate financial markets.

Standard and Benchmarks
National Standards for Financial Literacy
Standard 5: Financial Investing
Financial investment is the purchase of financial assets to increase income or wealth in the future.
Investors must choose among investments that have different risks and expected rates of return.
Investments with higher expected rates of return tend to have greater risk. Diversification of investment
among a number of choices can lower investment risk.

Grade 12 Benchmarks
1. The real return on a financial investment is the nominal return minus the rate of inflation.
2. Federal, state, and local tax rates vary on different types of investments and affect the after tax rate of return of an investment.
3. Expenses of buying, selling, and holding financial assets decrease the rate of return from an investment.
4. Buyers and sellers in financial markets determine prices of financial assets and therefore influence the rates of return on those assets.
5. An investment with greater risk than another investment will commonly have a lower market price, and therefore a higher rate of return, than the other investment.
6. Shorter-term investments will likely have lower rates of return than longer-term investments.
7. Diversification by investing in different types of financial assets can lower investment risk.
8. Financial markets adjust to new financial news. Prices in those markets reflect what is known about those financial assets.
9. The prices of financial assets are affected by interest rates. The prices of financial assets are also affected by changes in domestic and international economic conditions, monetary policy, and fiscal policy.
10. Investors should be aware of tendencies that people have that may result in poor choices. These include avoiding selling assets at a loss because they weigh losses more than they weigh gains and investing in financial assets with which they are familiar, such as their own employer’s stock or domestic rather than international stocks.
11. People vary in their willingness to take risks. The willingness to take risks depends on factors such as personality, income, and family situation.
12. An economic role for governments exists if individuals do not have complete information about the nature of alternative investments or access to competitive financial markets.
13. The Securities and Exchange Commission (SEC), the Federal Reserve, and other government agencies regulate financial markets.