What makes share prices move?

The rise and fall of share prices has an impact on our lives even if we don't own any shares.  If your parents have a private or company pension it is more than likely invested in the stock market.

If the value of shares goes up the pension will be worth more and if the shares go down the pension will be worth less.

Understanding a little about the rise and fall of shares may help you make important financial decisions later in life.

It is clear to see when a company performs well their shares go up and when they under perform their shares go down.  This simple rule generally holds true but there can be times when the shares move in a way that goes against expectations.

When a company reports low profits investors may buy the shares because they hope things will improve.  This will force the share price to rise despite the report of low profits being bad news.

If a company is doing very well and has a very high share price investors only stand to lose money if they invest so the share price may fall.

These two examples demonstrate how important long term performance expectations are to the value of shares.

Why not take a look at some of the company performance charts on Junior Trader and see how much share prices have moved in the last year?

Share price changes are often very gradual but certain events can trigger huge rises or falls. If you find a company with a dramatic share price change try investigating a little further to see what caused this.

Tax Facts

Tax is one of the most important, but least popular aspects of money.

Tax is basically an amount of money that is paid directly to the government on any sum that you earn, or have in savings.

There are many different types of tax, but the key one we will cover here is called 'income tax'.

This is simply a tax on your income, and income can be described as money you earn (wages) or income from investments (interest).

An example of this would be if you earn £100 a week, then £20 of that goes to the government as tax, leaving you with £80.  The £80 is known as net pay or the money left after tax.

The government collects tax from everybody who works, or has investments.  They then use this money to pay for many different things such as schools, hospitals and roads that we all use.

Some people think that this is the fairest way of paying for things, as everybody contributes towards the things we all use.  Some however think it is unfair, because the more you earn, the more tax you pay.  In fact, if you earn over £150,000 per year, half of all your earnings goes to the government as tax!

The fact is though, there is no getting away from tax, and it is something that you will all pay as soon as you are earning money.

What is a Mortgage?

Mortgage.

This is a word that many of you have probably heard, but most won't know what it is.

Put simply, a mortgage is loan from a bank or building society, usually of a large sum of money, that is used to buy a house.

Mortgages are loans
used to buy a house.

The loan is paid back over a long period of time-normally 25 years. The bank then charges interest monthly on the loan, as a charge for lending the money.

Because the loan is usually large, and paid back with interest over a lot of years, the amount you pay back is often at least twice what was borrowed in the first place!

Because of the large sums of money involved, banks like to know that their loans are safe, and they will get their money back. To guarantee this, they place a charge on the house, called a security. This simply means, that if you don't pay the loan back to the bank, they can sell the house and get their money back that way.

A mortgage is the most common way of owning a house in the UK, as not many people have enough spare cash to be able to buy a house outright.

Banks work out how much they are prepared to lend, based on many different factors.

One of the main ways is by using an income multiplier. This is where they look at how much money you earn, multiply it by 4 and that's how much they will lend you to buy a house.

For example, if you earn £30,000 a year, the bank may lend you 4 times that amount (£120,000).

You will also need to pay some money towards the house, at the time you buy it. This is called a deposit. These start from 5% of the purchase price, and if you take the example above 5% of £120,000 is £6000.

So, as you can see, mortgages are often quite large, and can be very expensive, but still remain the most popular way of owning your own home.

Recession - What does it mean?

The word 'recession' has been used in the news almost everyday for the last 3 or 4 years.  When people talk about the economy being in recession do you know what it means?

The technical definition tells us the economy is in recession if it shows negative growth for two successive quarters.

Or, in simpler terms if the amount of services and goods produced by the UK (the Gross Domestic Product or GDP) falls every 3 months for a period of 6 months.

Types of Recession
Mild Recession - The economy may shrink for 2 successive quarters (6 months) but then recover over the remainder of the year to show an increase in productivity over a period of 12 months.

Severe Recession - When the economy shows a decline over 4 successive quarters (a full year) the recession is labelled as severe or full-blown.

Double-dip Recession - An economy may slide back into recession after appearing to have recovered. This type of longer term recession makes recovery more difficult.

This graph shows UK Economy Growth over recent years.  The areas highlighted in Red indicate recession as they cover 2 quarters or more.

The 2008/2009 recession is a Severe Recession as it continued for 5 consecutive quarters.

The large 3rd quarter increase of 2012 is thought to be due to the Olympics bringing money into the UK economy.

Interested By Interest?

What is Interest?  When you take out a loan you will have to pay back the amount you borrowed and some extra money called interest.  This interest is the charge for borrowing the money.

Interest is quoted as a percentage.  Here is an example to demonstrate how interest works when taking out a loan.

Oscar borrows £10,000 from his bank to buy a new car and the interest rate on the loan is 6%.  Can you see how much money Oscar has to repay to the bank?

6% of £10,000 is £600.

Oscar will have to repay a total of £10,600 to the bank

Why do we have to pay Interest?  The payment of interest is compensation to the lender to:

1. Cover the risk of the loan not being repaid.
2. Cover the cost of profits that could have been made investing the money elsewhere.

Why do I get Interest on my savings?  In the same way we can borrow money from banks they also borrow money from us.

When you have money in your savings account the bank uses it to lend to others.  The bank pay you interest for borrowing your money!

Inflation - What Does It Mean?

Inflation is a word we often hear on the news but what does it mean?

It is one of the most important functions of economics yet many people, including adults, don't understand what it means.

Inflation is defined as the rate of change in the cost of goods and services.

We can use a weekly shopping basket to demonstrate inflation.

Clare does all of her shopping online with one of the leading supermarkets.  As Clare uses the same shopping list each week the price should always be roughly the same, around £100.

Over the next year, Clare notices the price has gone up to £105 each week.

 

This £5 increase over a year is spread across each of the products in Clare's shopping basket.  Can you see the cost of each product has increased by an average of 5%?

This demonstration is a simple illustration of the Consumer Price Index (CPI) which uses hundreds of common items (bread, beer, clothing, tickets, etc...) to measure the rate of inflation.

Why is Inflation important?

The rate of inflation influences how the Bank of England sets the Interest Rate.

High Inflation (> 2%) = high Interest Rates
Low Inflation (< 2%) = low Interest Rates

These Interest Rate changes effect everything from bank accounts, mortgages, benefits and pensions.

Money, Who Knows Best?

Who are the experts, the
Stock Exchange, the
Banks or you?

The world around us changes all of the time, and the world of finance is no different.

In fact sometimes it changes so fast even the experts cannot keep up! But who are the experts, and what do they really know?

Some people think banks are the experts, some think its the government, whilst some think they know all the answers themselves.

In reality its a combination of everyone's opinions and ideas that are used to make important financial decisions. This is the case for everyone from Governments, to large companies, schools and even every single one of you!

A lot of decisions you make in life can be made using the knowledge gained by others. The best bit is, you can copy the part that went well, and learn from the mistakes that didn't quite work out. We never stop learning, even as adults.

Study what others have done before, and ask yourself what you would you have done differently?

It is important to point out though, that what is right for one person, isn't necessarily going to be right for everyone. There are lots of different options to every situation, which means there are lots of different outcomes too.

Lets take pocket money, as an example. If you are lucky enough to get it, some of you will spend it straight away, some of you will save it, whilst some of you may even give it away!

As you get older, it becomes clear that there are more and more demands on your money, such as taxes, bills and having fun. For most of us though, there is only one way to get money, and that is to earn it. Jobs are hard work, and if you are working hard to earn money, it is important to spend it wisely and look after it carefully......and that starts right NOW!

It is never too early to start learning responsible money management.