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Year 8 Financial Literacy

Introduction to Investing

Understand why people invest, explore different investment types, learn about risk vs return, and discover the power of compound interest.

Why Invest?

Investing means putting your money into something that can grow in value over time. While saving keeps your money safe, investing aims to make it grow faster than inflation (rising prices).

Saving vs Investing

Saving

  • + Very safe
  • + Easy to access your money
  • - Low returns (2-5% per year)
  • - May not beat inflation

Investing

  • + Higher potential returns (7-10%+)
  • + Beats inflation over time
  • - Some risk of losing money
  • - Best for long-term goals

Types of Investments

Savings Accounts

Lowest risk, lowest return. Your money is safe and earns a small amount of interest. Good for emergency funds.

Risk: Very Low | Return: 2-5% per year

Bonds

Lending money to a government or company. They pay you back with interest. Safer than shares but lower returns.

Risk: Low to Medium | Return: 3-6% per year

Property (Real Estate)

Buying houses or land. Property tends to grow in value over many years. Requires a lot of money upfront.

Risk: Medium | Return: 5-10% per year (varies)

Shares (Stocks)

Buying a small piece of a company. If the company does well, your shares increase in value. But they can also fall.

Risk: Medium to High | Return: 7-12% per year (average, long-term)

Risk vs Return

There is a key rule in investing: higher potential return = higher risk. Investments that can make you more money can also lose you more money.

The Risk Ladder

HIGH RISK
Shares (Stocks)
HIGH RETURN
MED RISK
Property
MED RETURN
LOW RISK
Bonds
LOW RETURN
VERY LOW
Savings Account
VERY LOW

The Power of Compound Interest

Compound interest is when you earn interest on your interest. It is like a snowball — the longer it rolls, the bigger it gets. Albert Einstein reportedly called it "the eighth wonder of the world."

$1,000 invested at 8% per year

Simple Interest (no compounding)

Year 1: $1,000 + $80 = $1,080

Year 5: $1,000 + $400 = $1,400

Year 10: $1,000 + $800 = $1,800

Year 20: $1,000 + $1,600 = $2,600

Compound Interest

Year 1: $1,080

Year 5: $1,469

Year 10: $2,159

Year 20: $4,661

After 20 years: Simple = $2,600 vs Compound = $4,661. That is $2,061 extra just from compounding!

Visual: How $1,000 Grows (Compound at 8%)

Yr 0

$1,000

Yr 5

$1,469

Yr 10

$2,159

Yr 15

$3,172

Yr 20

$4,661

Diversification: Don't Put All Your Eggs in One Basket

Diversification means spreading your investments across different types. If one investment goes down, others might go up, protecting your overall money.

Not Diversified (Risky)

100% in one company's shares

If that company fails, you lose everything!

Diversified (Safer)

25% Savings
25% Bonds
25% Property
25% Shares

If shares drop, your other investments may hold steady.

Key Vocabulary

Compound Interest

Interest earned on both the original amount AND previously earned interest.

Diversification

Spreading investments across different types to reduce risk.

Risk

The chance that your investment could lose value.

Return

The profit or growth you earn from an investment, usually shown as a percentage.

Worked Examples

1

$500 invested at 10% compound interest. What is it worth after 2 years?

Year 1: $500 x 1.10 = $550

Year 2: $550 x 1.10 = $605

Answer: $605 (earned $105 total, vs $100 with simple interest)

2

Which is riskier: a savings account or company shares?

Savings account: Very low risk — your money is protected by the government (up to $250,000).

Company shares: Medium to high risk — the value can go up or down depending on how the company performs.

Answer: Shares are riskier, but they also have higher potential returns over long periods.

3

Why is diversification important? Give an example.

Example: You invest $1,000 — $500 in shares and $500 in a savings account.

If shares drop 20%: shares = $400, savings = $500. Total = $900 (lost only $100).

Without diversification: All $1,000 in shares would be worth $800 (lost $200). Diversification protected you.

Knowledge Check

Select the correct answer for each question. Click "Check Answer" to see if you are right.

Question 1

$1,000 at 10% compound interest for 1 year. What is the total?

Question 2

Which investment type generally has the HIGHEST risk?

Question 3

What does "diversification" mean in investing?

Question 4

$2,000 at 10% compound interest for 2 years. What is the total? (Hint: multiply by 1.10 twice)

Question 5

What is the main advantage of compound interest over simple interest?

Key Concepts Summary