Answers - SEC

1 To Test YourMoney marts$ on Saving and Investing Campaign1. If you buy a company s stock,A. you own a part of the If you buy a company s bond,B. you have lent money to Over the past 70 years, the type ofinvestment that has earned the mostmoney, or the highest rate of return, forinvestors has beenA. you own stock, you own a part ofthe company. There are no guarantees of profits,or even that you will get your original investmentback, but you might make money in two , the price of the stock can rise if thecompany does well and other investors want tobuy the stock. If a stock s price rises from $10 to$12, the $2 increase is called a capital gain orappreciation. Second, a company sometimes paysout a part of its profits to stockholders that scalled a dividend. If the company doesn t dowell, or falls out of favor with investors, yourstock can fall in price, and the company can stoppaying dividends, or make them you buy a bond, you are lendingmoney to the company.

2 The company promisesto pay you interest and to return your money ona date in the future. This promise generallymakes bonds safer than stocks, but bonds can berisky. To assess how risky a bond is you cancheck the bond s credit rating. Unlikestockholders, bond holders know how muchmoney they will make, unless the company goesout of business. If the company goes out ofbusiness, bondholders may lose money, but ifthere is any money left in the company, they willget it before you had invested $1 in the stocks oflarge companies in 1925 and you reinvested alldividends, your dollar would be worth $2,350 atthe end of 1998. If the same dollar had beeninvested in corporate bonds, it would be worth$61, and if it had been invested in U. S. Treasurybills, it would be worth $15. (This informationcame from Ibbotson Associates, Inc.)One of the riskiest investments is buyingstock in a new company.

3 New companies go outof business more often than companies that havebeen in business for a long time. If you buystock in small, new companies, you could lose itall. Or the company could turn out to be asuccess. You ll have to do your homework andlearn as much as you can about small companiesbefore you invest. If you decide to buy stock ina new or small company, only invest money thatyou can afford to of the most important ways to lessenthe risk of losing money when you invest is todiversify your investments. It s common sense don t put all your eggs in one basket. If youbuy a mixture of different types of stocks, bonds,or mutual funds, your entire savings will not bewiped out if one of your investments fails. Sinceno one can accurately predict how our economyor one company will do, diversification helps youto protect your If you buy the stock of a new company,B.

4 You can lose all of the money youused to buy the Monique owns a wide variety of stocks,bonds, and mutual funds to lessen herrisk of losing money. This is calledC. diversifyingGet the the s your s your s your s your Carlos has saved some cash and facesthese choices. What would be the bestthing for him to do?D. pay off the balance on his creditcard that charges 18% Maria wants to have $100,000 in 20years. The sooner she starts to save, theless she ll have to save becauseC. interest on her savings will Jennifer wants to take some of hersavings and invest in a mutual fundbecause mutual funds areC. managed by experts at advisers suggest that before you startto invest, you should save cash for emergenciesand pay down any debt you have. If Carlos hasmoney in a savings account or buys a savingsbond, he ll earn 3 to 5% on his savings.

5 Mutualfunds are not guaranteed, and they may earn orlose money. But if Carlos pays off his credit card,it s like earning 18% because that s how muchhe s paying now to maintain the balance. If youowe money on your credit cards, you save moneyif you pay off the balance in full or as quickly you leave the interest in youraccount or reinvest the money you earn on yourinvestments, the money you earn starts to earnmoney too. Over time, the magic ofcompounding works, allowing your money togrow with dramatic results. The more time youhave to save, the less money you need to savebecause of compounding. And the longer youwait to start saving, the more you have to spendto reach your goal. For example, let s assumethat Maria s savings grow by 5% a year. If shestarts to save $243 a month now, it will cost her$58,320 to have $100,000 in twenty years.

6 Ifshe waits 10 years to start saving, she will have tosave $644 a month for 10 years, and it will costher $77,280 to reach $100,000 in twenty diversified mutual fund invests in a widevariety of stocks, bonds, or other securities. Themanager of the fund makes decisions about whichstocks or bonds to buy, based on the objective ofthe fund. When you buy shares of a mutualfund, you share in the profits and losses of theportfolio, and pay your share of the you read in the answer to questionthree, over the long term, stocks have earnedmore money than any other investment. SinceBob doesn t need his money for a long time, hecan afford to take on the risk of investing instocks. Even if the stocks in his fund go up anddown in value, chances are his savings will growin value over the long term. He lessens the riskof losing money by choosing a diversified mutualfund rather than the stock of one businesses that raise money from thepublic must register with the SEC or the statesand publicly report important information abouttheir businesses on a regular basis.

7 Federal andstate laws protect you by requiring thatthe people who seek your investmentdollars must tell you the truth about theirbusinesses, andthe people who sell securities must belicensed and treat you fairly and honestly,putting your interests Bob is 22 years old and wants to startsaving now for his retirement in 43 these choices, where should Bob putmost of his money now for this long-termgoal?C. a mutual fund that invests Federal and state laws protectinvestors by requiring companies toB. give investors the the s your s your s your s your future.