Unit 2 Investing and Wealth Creation PDF

Unit 2: Investing and Wealth Creation Unit Overview Understanding wealth and investing The common methods people use to build their wealth; Shares Property Other methods (e.g. bonds, commodities, collectors items, cryptocurrency, non-fungible tokens) As...

Unit 2: Investing and Wealth Creation Unit Overview Understanding wealth and investing The common methods people use to build their wealth; Shares Property Other methods (e.g. bonds, commodities, collectors items, cryptocurrency, non-fungible tokens) Assessment: AT Stock Pitch 1. What is wealth? The value of all of the resources and possessions that a person owns 2. What does it mean to be wealthy? Someone who has a large amount of money or valuable possessions. Often used as a relative measure or a way to compare between people e.g. they are more / less wealthy than us 3. Why would someone want to be wealthy? So that we can; have a good life and a standard of living that we are happy with Afford better things Support ourselves, our families and communities as we age Generate passive income (particularly later in life) 4. How do we measure wealth? The most common way to measure the wealth of an individual is to calculate their net worth. Net worth A measure of how much you own minus the amount that you owe to other people. NOTE: Net worth does not equal income. Net worth calculations are a snapshot in time. A person’s net worth is always changing as a person gets older, earns more and buys and sells various things in their life (e.g. a car, house, business). The simple rules of wealth (easier said than done) Make more money than you spend (earn more and/or spend less) Avoid bad debt (we will come back to this later) and Invest your savings wisely This will be our focus areas for the next few weeks! Inflation The general increase in the prices of goods and services in the economy – this is known as inflation Over the past 30 E.g. years, the average inflation rate has been approximately 2-3% per year (per annum) It is not advised to put all your money into savings – or stick it under the floor – because the money you have today will not have the same value (or purchasing power) in the future. Inflation Exercise Visit the Inflation Calculator Choose a time period (between 1966 and now) and the value of your ‘basket’ of goods. Note down the total change in cost and the annual average inflation rate. Do this twice!  What is investing? Purchasing a financial product or other item of value with the expectation that its value will grow over time, and therefore give the owner favorable returns (profit). Turn and Talk What are the most common things that people invest their money into? (with the hope that they will make money…) What is the purpose of investing? To grow your money and wealth in order to improve financial well-being. To grow money faster than the rate of inflation to create real wealth. To earn passive income later in life. th To take full advantage of the 8 wonder of the world: compound interest Shares A share is a unit of ownership in a company. A share owner, or shareholder, becomes a part owner of the business that they own shares in. Also called a stock, equity or security People generally buy shares in public companies who sell their shares on the stock exchange / share market. A public company will have the letters ‘Ltd’ after its name. E.g. Nike Ltd. Videos Share Market There are more than 2000 publicly listed companies in Australia. Their shares are bought and sold through the Australian Securities Exchange (ASX). The ASX is like a big market where buyers and sellers can connect to trade shares. Commonly referred to as the ‘stock exchange’.  Share Price The price of a share represents what the market feel that share (and company) is worth. Share prices can change dramatically based on whether investors think the company is doing well and if they have the potential to do well in future. Share prices are likely to change several times every day. Just like in an auction, the price will change according to demand for the shares. If people expect that a company will do well and be profitable, the price of that company’s shares will rise as purchasers compete to buy them (the reverse is also true).  Shares There are two ways to make money from shares: Dividends: As a part owner of a company, the investor is often entitled to a percentage of any profits the company makes. These are called dividends and may be paid once or twice a year depending on how many shares you own. Capital gains: when you buy shares for a certain price (e.g. $50 per share) and sell them for a higher price (e.g. $75), this is known as capital gains ($25 in this case). Investors usually buy shares that they believe will increase in value over time. NOTE: a share price can also go down (even to $0!) so you can also make a capital loss. Mutual Funds and Exchange-Traded Funds (ETFs) Pools of money invested by an investment company in shares, bonds or other securities – or some combination of those investments. Benefits: Diversification, professional management, affordability Risks: Typically the same as the underlying investments Property Property is any item that a person or a business has legal title over (or ‘owns’), however usually refers to real estate; land, buildings and houses Most properties hold current or potential monetary value and are therefore considered to be assets. You can invest in real estate directly by purchasing a home, rental property or other property, or indirectly through a real estate investment trust (REIT). Investing in property There are a number of ways to invest in property. Some of the most common ways to invest directly include: Homeownership Rental properties ‘House flipping’ Growing wealth using property People who buy or invest in property make money in two main ways: 1. Income from rent or leases (measured as rental yield) and; 2. Appreciation of the real estate's value (measured as capital gains) 1. Rental Yield Rental yield is the income you receive each year from the tenant in your investment property, measured as a percentage of the value of the overall property. Gross rental yield is the amount of rent your tenant is paying, and net rental yield is the amount you pocket after all of your costs, such as management, maintenance, rates, water and insurance. E.g. If you have a property worth $1,000,000, your tenant pays $50,000 per year in rent and you pay $10,000 a year in costs, you have a gross rental yield of 5%, and a net rental yield of 4%. 2. Capital Gains When you buy a property for a certain price and sell it for a higher price. The capital gain is the difference between the price paid for the property and what it sold for (the profit made, not including expenses). E.g You buy a 3 bedroom apartment in Sunshine for $500,000 in 2022 You sell the same apartment for $650,000 in 2025 Your capital gain is $____________ Your capital gain per annum is ________% per year 2. Capital Gains Visit www.realestate.com.au and complete the following; 1. Think about some possible places (Melbourne suburbs) where you might like to live in the future. Look up the median house prices in these areas. 2. Search for TWO properties (One house, one apartment) that have recently sold in these areas Click on ‘Price History’ and note down the property sale history 3. Choose two points in the sale history and calculate the capital gains that the owners earned in that period.  Investing in property- downsides Buying, managing and selling an investment property can be costly and will affect your overall return. Some of the costs involved to buy and sell a property include: stamp duty conveyancing fees legal costs search fees pest and building reports If you borrow to invest, you will have to pay the property mortgage. Don't rely on rental income to cover the mortgage – there may be times when your property is empty! Investing in property- downsides Ongoing costs of investment properties include: council and water rates building insurance landlord insurance body corporate fees land tax property management fees (if you use an agent) repairs and maintenance costs Property Prices in Australia The average gross (before tax) return from residential property from 1995-2015 was 9.8% per annum. This rate of return roughly matches returns from the share market (and significantly beats inflation!). However, results vary dramatically depending on where you buy and what you are buying (house/apartment/unit). Factors such as employment rates, the local economy, crime rates, transportation facilities, school quality, municipal services, and property taxes can drive real estate prices up or down. What affects property prices? Read https://www.finder.com.au/what- influences-a-propertys-value and 1. Note down the 11 things that affect a property’s value. 2. Rank these 11 factors in order of most to least important. 3. Explain your reasoning behind why you placed your top and bottom 2 factors where you did. Bonds Bonds are an instrument used by governments and companies to raise money by borrowing from investors. Think of them like mini-loans or IOUs that needs to be paid back with interest over a fixed period of time. Bond types Government (or ’Treasury’) Bonds- issued by Corporate Bonds Municipal Bonds Bond Fund- similar to a mutual fund of shares Many other types Bonds Benefits: Receive income through regular interest payments Safe and predictable income stream (Principal investment and interest is guaranteed to be repaid) Risks: Generally low returns compared to other forms of investment (e.g. 2-3%) Returns often do not outpace inflation Issuers may go bankrupt (very unlikely)  Commodities A basic good used in commerce that is interchangeable with other goods of the same type. Three of the most commonly traded commodities include oil, gold, and base metals.  Collectors items These are items that are relatively rare in number such as works of art, sporting memorabilia, antique furniture etc. Some of these investments can rise by large amounts. E.g. the Australian Government bought the painting called ‘Blue Poles’ by the American artist Jackson Pollock in 1973 for $1.3 million. This was regarded as a huge amount of money at the time. Experts say the painting would now be worth more than 25 times the price paid for it.  Collectors items With the person next to you, make a list of as many of the things/items that you know people collect because they believe they are valuable and will grow in value over time. Non-Fungible Tokens (NFTs) “Non-fungible” means something that is unique and can’t be replaced with something else. A Non-fungible token is anything digital (song, video, artwork, gif etc.) that has been recorded and stored on the Ethereum blockchain. Ownership of these NFTs can be bought and sold like any commodity and the owners details are recorded. NFTs are designed to give you something that can’t be copied: ownership of the work. To put it in terms of physical art collecting: anyone can buy a Monet print. But only one person can own the original. Cryptocurrency Cryptocurrencies are a type of digital currency (or token) that allows people to make payments directly to each other via a digital ‘wallet’ online. These digital tokens rely on cryptography and technology such as blockchain for security and other features. Cryptocurrencies have no legislated or intrinsic value; they are simply worth what people are willing to pay for them in the market. This is in contrast to national currencies, which get part of their value from being legislated as legal tender. There are a number of cryptocurrencies – the most well-known of these is Bitcoin.