Unit 2: Investing and Wealth Creation

Unit 2: Investing and Wealth Creation

• Unit overview covers understanding wealth and investing
• Common methods to build wealth include shares, property, bonds, commodities, collectors items, cryptocurrencies, and non-fungible tokens (NFTs)
• Assessment: Stock pitch

What is Wealth?

• The value of all resources and possessions a person owns
• A relative measure, comparing wealth levels between people

Why be Wealthy?

• To have a good life and standard of living
• To afford better things
• To support oneself, family, and community as one ages
• To generate passive income (particularly later in life)

How to Measure Wealth?

• The most common way is to calculate net worth
• Formula: Assets - Liabilities = Net Worth
  • Assets: Examples include owned property
  • Liabilities: Examples include car loans
• Net worth is a snapshot in time, changing as a person ages, earns, and buys/sells items

The Simple Rules of Wealth

• Earn more money than you spend
• Avoid bad debt
• Invest savings wisely

Inflation

• The general increase in prices of goods/services in an economy
• Over the past 30 years, the average inflation rate has been approximately 2-3% per year.
• Example: Items costing $20 in 2016 could cost $20.50 in 2017, and $30 could cost $31.41.
• It's not recommended to keep money in a savings account without investing, since the amount will lose purchasing power

Inflation Exercise

• Use an online inflation calculator
• Choose a time frame (1966 onwards) and a "basket" of goods
• Note down the total cost change and annual average inflation rate
• Do this twice

What is Investing?

• Purchasing a financial product/item of value, hoping its value increases over time, creating a profit

What is the Purpose of Investing?

• Grow your money and wealth to improve financial well-being
• Grow money faster than inflation and create real wealth
• Earn passive income later in life
• Take advantage of compound interest

Shares

• A share represents a unit of ownership in a company
• A share owner (shareholder) becomes a partial owner of the business
• Also called stock, equity, or security
• People buy shares in public companies, traded on a stock exchange/share market
• Public companies' names usually end with 'Ltd' (e.g., Nike Ltd)

Share Market

• There are over 2000 publicly listed companies in Australia
• Their shares are traded through the Australian Securities Exchange (ASX)
• ASX is a large market where buyers and sellers can trade shares

Share Price

• Represents what the market believes the share (and company) is worth
• Prices change dramatically based on investor perceptions of company performance
• Prices fluctuate daily based on supply and demand

Dividends

• As a part owner, investors receive a percentage of company profits
• Usually paid once or twice a year, depending on ownership

Capital Gains

• Profit from selling shares/property for more than the purchase price
• Example: Buying property for $500,000 and selling it for $650,000

Mutual Funds and Exchange-Traded Funds (ETFs)

• Pools of money invested by an investment company in shares, bonds, or other securities
• Benefits: diversification, professional management, affordability
• Risks: generally the same as the underlying investments

Property

• Any item a person/business legally owns, often refers to real estate (land, buildings, houses)
• Often considered assets because of current or potential monetary value
• Can be invested in directly (e.g., buying a home, rental property) or indirectly (e.g. real estate investment trust)

Investing in Property

• Common ways include homeownership, rental properties, and house flipping

Growing Wealth Using Property

• Two main ways people make money from property investment:
  • Rental yield: Income from rent or leases
  • Capital gains: Appreciation of real estate value

Rental Yield

• Annual income from a tenant in your investment property, measured as a percentage of the property's value
• Gross rental yield: Total rent
• Net rental yield: Income after costs (management, maintenance, rates, water, insurance)

Capital Gains

• Difference between selling price and purchase price of a property (profit)
• Excludes expenses

Collectors Items

• Relatively rare items with potential to increase value (e.g., art, sports memorabilia)

Non-Fungible Tokens (NFTs)

• Unique digital items, not replaceable
• Recorded on the Ethereum blockchain
• Can be bought/sold like commodities
• Ownership is an important part of NFTs

Cryptocurrency

• Digital currency enabling direct payments
• Relies on cryptography and technology like blockchain for security
• Value is based on market demand, not on legal tender

Bonds

• Instruments used by governments/companies to raise money through borrowing from investors
• Similar to mini-loans with fixed interest over a specific time
• Bond types: government, corporate, municipal, bond funds, and others

Bonds (Benefits/Risks)

• Benefits: Receive regular interest payments, offer a safe and predictable income stream
• Risks: Generally low returns compared to other investments, do not typically outperform inflation, risk of issuer bankruptcy, although unlikely

Comparing Bonds and Stocks

• Bonds: Loans to companies/governments

  • More stable short-term
  • Tend to underperform long-term
  • Earn money through interest

• Stocks: Ownership of a business

  • More volatile short-term
  • Better performers long-term
  • Earn money through dividends

Commodities

• Basic good in commerce, interchangeable with other goods of the same type
• Examples include Energy (crude oil, gasoline, heating oil, natural gas), Grains and oilseeds (corn, soybeans, soybean meal, soybean oil, wheat), Livestock/meats (feeder cattle, live cattle, lean hogs), Metals (copper, gold, palladium, platinum, silver), "Softs" (cocoa, coffee, cotton, orange juice, sugar), other (lumber, dairy products)