Investment Club Introduction to Stocks, Bonds, and Real-Estate
1. Bits of Financial Advice for
Smart, Young Adults.
HANDSWORTH INVESTMENT CLUB
By Sam Purcell
Introduction to
the Basics of
Investing
2. What is the Handsworth Investment Club
• It is an introduction to the basics of personal finance and investing.
• We will talk about investing in real-estate, stocks, bonds,
borrowing money, interest rates, and terms like inflation.
• Why is this important?
• Because what you will learn here in Handsworth
Investment Club you will not learn in this school.
• It is important that people understand fundamental concepts of finance at
an early age so that you are equipped with knowledge once you start making money.
4. TODAY’S HIGHLIGHTS:
• 3 Common Ways to Invest.
• Investing in a House
• Investing in a Stock
• Investing in a Bond
Discussion Outline
5. What is Inflation?
• Inflation is generally defined as the decline in
purchasing power of money over time.
• In other words, inflation is the rise
in price of goods and services and
has historically increased over time.
6. A Few Examples of Inflation:
• Price of housing: For example, in 2005, the average house in North
Vancouver was roughly $700,000.
• Today, just over 15 years later, that same house would sell for
roughly $2,000,000.
• Price of a Big Mac: In the 1980’s,
a Big Mac would cost $1.60.
Now, that same burger is $5.70.
7. Wages!
The Main Cause of Inflation
• When one person asks for a raise that seems insignificant.
• What would happen if a million people got a raise?
• They would have more money to spend,
therefore increasing demands in
goods and services.
• When there is higher demand,
companies maximize this opportunity
by increasing the price of these goods
and services.
8. Because people will not be able to afford things!
Why is it bad for prices to keep rising?
9. • Interest is the cost for borrowing money.
• When you go to a bank to borrow money, the bank
will charge you interest.
• Interest is expressed as an annual percentage rate.
• Right now, we are in a low interest rate
environment.
What is Interest?
10. • Today, the prime rate in Canada is 2.45%.
• This is the rate banks give to their best customers.
• Usually when banks lend to their customers,
it is prime (2.45%) plus a certain percentage.
• Banks charge interest but also pay interest
to customers.
What is Interest?
11. • Savings Account: Pays next to zero interest.
• High interest savings: Pay a bit more than above but still low at .25%
interest per year.
• Guaranteed Investment
Certificates (GIC): One year
locked in rate 1%. Two year locked
in rate 1.3%.
Examples of Interest:
12. Saving Account:
• You put $1000 into a savings account.
• The bank will give you a percentage of
interest on the $1000 for holding your
money with them.
• Generally, savings accounts are for everyday
use.
13. High Interest Savings:
• Money that you might not use day-to-day.
• But you still want to have access to it in the short
term.
• Or it can be used as a holding place for emergency
use money.
14. GIC:
• Banks issue GICs so they can use the money to lend out to other customers.
• They are guaranteed because the rate does not change.
• If the interest rate is 2%, it will remain 2%.
15. GIC:
• Only way you lose your money is if the bank collapses.
• But deposits are government insured up to $100K per account (CDIC).
• GICS are from 1 day- 5 years.
17. Real-Estate
• When we looked at examples of inflation, you now understand that
houses are more expensive today than they were 20 years ago.
• Real-estate in more sought-after places, such as Vancouver, will tend
to always rise with inflation.
• The main reason real estate keeps pace with
inflation is that it is a primary human need.
• People need to live somewhere.
• Buying real-estate and paying it off overtime
is a great investment.
18. Example:
• You buy a house that is listed for $2,000,000.
• You have $500,000 in cash.
• To afford the house, you need to go to the bank for a loan.
• This loan is called a mortgage.
• The bank will give you a mortgage of $1,500,000 so you can invest in the
house; however, the bank will charge you interest.
• Let’s say this interest rate (the rate at which the bank will charge for their
loan) is 2%/year.
19. Example:
• This means that you need to pay back the
$1,500,000 that the bank lends + 2% interest
annually.
• Every year, you will pay 2% of the remaining balance owing.
• In the first year, interest cost will be $30,000 ($1.5m x 2%).
• These payments will be divided on a monthly basis.
20. Example:
• There is a schedule that calculates the
payment that people have to make for
the term of the mortgage.
• This is called the amortization schedule.
• Each monthly mortgage payment is made up of a portion of the annual
interest cost, and a repayment of the principal amount borrowed.
• So, each payment is a combination of both principal repayment and
interest cost.
21. • Real estate income is income earned from
renting out property.
• This works well with inflation.
• As inflation rises, so does property values and
the amount a landlord can charge for rent,
earning a higher rental income over time.
• This concept helps keep pace with the rise in
inflation.
Real-Estate Income
22. Recap:
• Investment in property.
• Housing prices tend to rise over time.
• When you buy property, often you need a mortgage.
• This mortgage is paid off over a long period of time and you will pay
interest.
• Money is made in real-estate through appreciation and renting.
23. • A bond is a loan, but it is also referred to as a type of fixed income
investment that represents a loan made by an investor to a borrower.
• An investor gives a company, government, bank, or any entity that wants to
borrow money a certain sum of money, called principal.
• The borrower must pay interest to the lender while the principal is being
used by the company.
• When the bond matures,
the company must pay back
all the principal.
Bonds (Lender)
24. How do bonds differ from GICs?
• GICs are a contract given between the investor and the bank.
• Unlike GICs, government and corporate bonds can be bought and sold
on the bond market.
• Therefore, their value can fluctuate between the time the bond is
issued and the time it matures.
• Bonds always mature at par (their original issue
price).
25. Why do bond prices go down when interest rates go up?
• A company issues 10000-dollar bond that gives 3% for 5 years.
• How much do you get each year on that $10000 bond?
• 300$ every year for 5 years.
• Now suppose we have had the bond for 1 year (one year in the bond).
• Interest rates have gone up 2%.
• That same company wants to raise more money
to expand business, but now, to attract investors
they offer bonds at current rates that pay 5% a
year.
26. Why do bond prices go down when interest rates go up?
• Why do interest rates go up?
• Because of inflation.
• Now you have one $10000 bond that pays $300 a year, and one $10000 bond that pays
500$ a year.
• Which one of these bonds would you rather have?
• You want to have the one that pays the higher
interest rate (500$).
• You have to lower the price of the bond to
compensate the 200$ difference in interest.
27. Why do bond prices go down when interest rates go up?
• There is your bond that pays 300$ a year, and the new bond pays $500.
• How much difference a year?
• $200.
• If there is 4 years left to your bond how much less
will it pay over the time?
• 800$.
• If somebody were to buy this bond from you,
you will need to sell it at a discount, which would
be $800 dollars less to a price of $9200.
28. • Starbucks wants to expand in China.
• They plan to open 50 stores per month for 5 years.
• Let’s say this will cost them 1 billion dollars.
• Banks do not have the resources or ability to fund these big projects,
so Starbucks will need to issue a bond to raise 1 billion dollars for
5 years.
• To compensate investors for the payment risk and their money being
tied up in the company for 5 years, Starbucks is willing to pay a 4%
interest rate.
Why do companies need money?
29. Government Bond:
Example:
• Federal Government of Canada wants to build a new hospital in
Vancouver.
• This idea will cost them $100 million over the 10 years it will take to
build the hospital.
• They will issue bonds in $10 thousand increments.
• To make the bond more appealing, they will give
a 2% interest rate.
• Every year, you will gain $200 to a total of $2000
increase at the end of the 10 years.
30. Why can’t the government just print money?
• It causes inflation.
• There is no economic growth or productivity, but the government is giving
people/workers money.
• When there is too much money
chasing too few goods, prices of
these goods will rise.
31.
32. Recap:
• A bond is a loan/fixed income.
• Governments, companies, and banks issue bonds when they want to raise
money.
• You can trade bonds.
33. • Investment that represents an ownership share in a company.
• When you purchase a stock, you own a portion of the company.
• By owning shares, you participate
in profits and growth, or loss in the
business.
Stocks (Business Ownership)
34. What is a Public Company?
• Trades on a stock exchange.
• Investors are public/anyone can invest.
• When a private company wants to grow from the support of outside
investors, they will go public through an initial public offering (IPO).
35. Public vs. Private
• A private company is owned by an individual or group of individuals
whose shares are not traded on the public market.
• Small businesses like Hardy’s are private companies, and large business
like The Jim Pattison Group that owns Save On Foods and car dealerships
are private too.
• The public cannot invest in them.
36.
37.
38. Recap:
• Stocks are investments that represent
partial ownership in a company.
• You participate in growth and losses.
• There are public companies (companies you can invest in on a stock
exchange) and private companies (companies the public cannot invest
in).
• Some companies pay dividends which are payments made by a
company to its shareholders.
