Saving vs Investing

• Saving money is important for needs like emergency funds, achieving financial goals, and preparing for retirement.
• Liquidity refers to how easily an asset can be converted into cash.
• Liquidity is key because it indicates when savings or investments can be accessed.

Examples of Liquidity

• High liquidity assets include savings accounts, CDs, and savings bonds.
• Medium liquidity assets include stocks and mutual funds.
• Low liquidity assets include real estate and collectibles.
• Simple interest is applied only to the initial principal.
• Simple interest is calculated and added back to the original principal.
• Daily interest compounding yields the highest ending balance.

Investing vs Saving

• Saving focuses on keeping money safe, ensuring its availability when needed.
• Investment aims to grow money, which involves risk.
• Savings accounts grow with additional deposits, besides small interest amounts.
• Regular savings accounts require a small initial deposit and have no minimum balance but offer low interest rates.
• Money market accounts need larger deposits and balances but feature higher interest rates.
• Certificates of Deposit (CDs) vary in amounts, promising higher interest for keeping money untouched for a specified period.

Risk Tolerance

• Risk tolerance reflects the ability and willingness to handle investment value declines.
• Ownership in a corporation is represented by owning shares of stock.
• Common stock gives each share a vote on corporate matters and offers potential capital gains from selling shares at a profit.
• Selling a share for more than its purchase price results in a capital gain.
• When a company decides to share its profits with shareholders, this is called paying a dividend.

Stock Types

• Blue Chip stocks are stable, well-established companies with reliable earnings.
• Growth stocks belong to burgeoning companies, often reinvesting instead of issuing dividends.
• Diversification reduces risk by spreading investments across various assets.
• Fully diversifying portfolios is difficult due to capital requirements, investment management complexity, and knowledge demands.

Mutual Funds

• Mutual funds pool investors' money to buy a portfolio of stocks and bonds.
• Mutual Funds provide the following benefits:
• Professional management
• Diversification
• Liquidity
• Accessibility for small investors
• A bond represents a loan to a corporation or government.
• The bondholder becomes a creditor.
• Bondholders receive fixed interest payments and the original principal when the bond matures.
• The SEC oversees the stock market.