Topic 7:
Using money to
make money
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Checklist for Topic 7
By the end of this topic, you will be able to:
 understand some ways of using money to make money,
 National Savings and Investments (NS&I);
 Premium Bonds;
 The National Lottery;
 Shares; and
 Gambling (including the possibility of losing your stake).
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including:
Taking Risks with Money
which you can take a chance to make a
lot of money.
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In this topic, we are looking at ways in
Risk and Reward
something, you have to consider
whether the potential reward is
worth it.
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When you take a risk on
Risk and Reward
As an extreme example, imagine that you
and across the other side is a bag with
£1m in it, but to get to it, you have to
swim across the river. The water is very
fast-flowing, many people have died
trying to cross it and you are not a very
good swimmer.
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are standing on the edge of a riverbank
Question
What do you think are the chances
all and getting the bag of money?
Is it ‘very likely’ or ‘not very likely’?
• The answer is ‘not very likely’.
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of you making it across the river at
Question
Is it worth risking your life for
• The answer is probably ‘no’ for most
people. In this situation, the reward
is very big, but the risk is high and
the chances of getting it are low.
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£1m?
Risk and Reward
Now imagine you are standing on a firstcontaining £50,000 on the floor beneath
you. You have to jump down to get the
money. The chances are that you will not
die; rather, you are likely to break some
bones (and, if you are lucky, you might
escape with no injuries whatsoever).
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floor balcony and that there is a bag
Question
What are the chances that you
‘High’ or ‘low’?
• The answer is ‘high’.
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will get the bag of money?
Question
Is it worth risking a few broken
• The answer is probably ‘yes’ for
most people.
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bones for £50,000?
Risk and Reward
smaller than before and so is the
risk – but the chances of getting
the reward are higher.
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In this situation, the reward is
Risk and Reward
you have to ask yourself: is the
reward worth the risk? This is
called the balance of ‘risk and
reward’.
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When taking risks with money,
If people think that the
If people think that
possible reward is
the possible reward is
greater than the risk,
less than the risk,
they probably will take
they probably will not
a chance.
take a chance.
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Risk and Reward
Risk and Reward
For all of the examples of taking a
to consider where they would be on
the risk line illustrated on the next
slide. This is only an opinion, but it
will allow you to compare risks.
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chance in this topic, you will be asked
Risk and Reward
HIGH RISK
Reward high, but unlikely
LOW RISK
Reward low, but certain
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The risk line
Shares
Company does well –
• receive part of the profits (called a
‘dividend’),
• value of your initial investment could
increase
Company does not perform very well –
• no dividends,
• value of your initial investment could fall,
or be lost altogether if company goes bust
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Taking a risk with money – but the potential
rewards much greater than those of an ordinary
savings account.
Premium Bonds
• National Savings and Investments (NS&I) sells
and manages Premium Bonds.
• Premium Bonds do not pay interest to holders
• Interest earned is used to fund cash prizes.
• Holders swap interest rate that they could earn
for chance of winning a big prize.
• Prizes vary according to the interest rate and
the number of Bonds that are eligible for the
draw.
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• When people buy Premium Bonds, they are lending
the money to the government.
Premium Bonds
• National Savings and Investments (NS&I) sells
and manages Premium Bonds.
• Premium Bonds do not pay interest to holders
• Interest earned is used to fund cash prizes.
• Holders swap interest rate that they could earn
for chance of winning a big prize.
• Prizes vary according to the interest rate and
the number of Bonds that are eligible for the
draw.
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• When people buy Premium Bonds, they are lending
the money to the government.
Premium Bonds
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The following table shows the estimated Premium Bond prizes
from the February 2014 draw, based on an interest rate of
1.3%
Premium Bonds
NS&I is backed by HM Treasury (a government
department), money is safe and bondholders will
always get money back.
Minimum amount of money people can put into
Premium Bonds is £100, maximum is £40,000
(from 1 June 2014). Get a Premium Bond number
for every £1 invested.
Every month, all of the eligible Premium Bond
numbers are entered into a draw and winners
are selected at random.
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Bond holders can cash in all or some of their
Premium Bonds at any time.
Question
Do you think that someone wins the
Bond draw?
Someone wins the jackpot every time there is a
Premium Bond draw, because it includes only the
serial numbers of Premium Bonds that have
been issued.
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jackpot every time there is a Premium
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Did you know?
Question
win a prize on the Premium Bonds?
The odds of any one bond winning a Premium
Bond prize are 1 in 24,000. These odds
change from time to time.
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How likely do you think you are to
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Did you know?
The UK National Lottery
Government introduced the National Lottery in
1994.
• to raise money for good causes
• collect Lottery duty (a form of tax) for the
government.
People are encouraged to play the Lottery
because they could win a lot of money (although
this is very unlikely, as we will see later).
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Purpose
Question
How old do you think you need
Lottery games?
The minimum age for playing the
National Lottery games is 16.
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to be to play the National
The UK National Lottery
The main game, called Lotto, works as follows;
1. Choose six numbers between 1 and 49 – mark on a
pre-printed sheet at a Lottery play point.
2. Pay £2 for each Lottery line chosen.
3. Retailer feeds sheet into computer terminal.
4. Terminal reads sheet and prints out a Lottery
ticket showing numbers.
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Different Lottery games,
• Lotto
• Thunderball
• Scratch cards
The UK National Lottery
Two Lottery draws a week: Wednesday and
A special machine is used to select the six
winning numbers.
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Saturday.
Question
Lottery machine selecting a
particular number is the same for all
numbers between 1 and 49?
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Do you think that the chance of the
Question
Each of the numbers 1–49 has an equal
the first number has been drawn,
there are only 48 numbers left, so the
odds of the machine selecting the next
number are 1 in 48. And for the third,
the odds are 1 in 47, and so on.
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chance of being drawn. However, once
The UK National Lottery
Camelot
Lottery
• Works for the government, but is
separate from it.
• Part of role is to maximise the amount
of money raised for good causes
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• Organisation that runs the National
Question
Why do you think Camelot spends money
Camelot spends money to encourage people
to play the Lottery because part of the
'stake’ is going to good causes and is not all
profit for the company. This makes people
feel better about gambling.
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to encourage people to play the Lottery?
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Did you know?
The UK National Lottery
The Big Lottery Fund (www.biglotteryfund.org.uk)
distributes half of the money raised for good
between £600m and £700m a year.
Other half is distributed by other organisations.
Lottery money is used to support good causes in
the arts, sport, heritage, health, education,
environment, community and charity sectors.
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causes by the National Lottery – estimated at
Question
Lottery is an effective way of
giving to charity?
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Do you think that the National
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Did you know?
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Did you know?
How likely are you to win
a prize on the Lottery?
1 in 13,983,816
– that is, one chance in almost 14 million.
So, somebody would need to buy 13,983,816
tickets (one of each combination of six
numbers between 1 and 49) in a Lotto draw
to be certain of winning the jackpot..
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Chance of any one ticket winning the Lotto
jackpot is
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How likely are you to win
a prize on the Lottery?
The overall odds of winning any prize are 1 in
54.
How likely are you to win
a prize on the Lottery?
• match three numbers, you win £10.
• amount won for the other prizes depends on
the number of Lottery tickets bought for
that draw and how many other people
matched those numbers.
For example, the total amount of prize money is
half of the value of ticket sales for that draw.
The prize money at each level (for matching
four main numbers, five main numbers, etc) is
shared equally between all winning tickets.
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Lotto
Question
every time there is a Lottery
draw?
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Does someone win the jackpot
How likely are you to win
a prize on the Lottery?
The National Lottery draws numbers at random
Lottery ticket using all of those numbers.
When nobody has won a Lotto jackpot, the
money is ‘rolled over’ – that is, added to the
value of ticket sales for the next Lotto draw.
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- not guaranteed that any person has bought a
How likely are you to win
a prize on the Lottery?
The National Lottery draws numbers at random
Lottery ticket using all of those numbers.
When nobody has won a Lotto jackpot, the
money is ‘rolled over’ – that is, added to the
value of ticket sales for the next Lotto draw.
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- not guaranteed that any person has bought a
Question
Some people buy Lottery tickets
Why do you think they do this?
People are more likely to buy a ticket
when it is a rollover because the prizes
are bigger.
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only when there is a rollover.
Activity 7a
the National Lottery and Premium Bonds?
b) Where would you place each of them on
our risk line?
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a) What are the main differences between
Activity 7a
a)
• With Premium Bonds, you can get your
investment back, whereas with the National
Lottery, once you have bought your ticket,
you cannot get your money
• With Premium Bonds, the minimum investment
is £100; with the National Lottery, the cost
of one ticket is £1.
• The Premium Bond draw is monthly; the
National Lottery is drawn twice a week.
• The odds of any one Premium Bond winning a
prize are 1 in 24,000; the odds of any one
ticket winning a prize in the National Lottery
draw are 1 in 54.
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back.
Activity 7a
• The maximum prize with Premium Bonds is
£1m; the maximum National Lottery prize
depends upon how many tickets are sold and
can sometimes reach tens of millions of
pounds.
• The minimum prize with Premium Bonds is
£25; the minimum prize on the National
Lottery is £10.
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a)
• National Lottery funds go to good causes;
Premium Bond funds are loaned to the
government.
b)
• On the risk line, both the National
Lottery and Premium Bonds should be
placed at the far left – that is, ‘Reward
high, but unlikely’.
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Activity 7a
Gambling
(casino games, the National Lottery and betting
• Taking a chance - you could win or lose.
• Has a high element of risk:
• People do not know what the outcome of their
bet will be- could lose their money.
•The reward – may be high, but winning can be
very unlikely.
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on sports events)
Gambling
In the National Lottery, cost of playing is
£2. If you do not win anything, you do not
get your £2 back - it is lost forever.
When people decide whether or not to
gamble,
they weigh up the effect of
risk against possible reward.
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Example
Gambling
Other forms of gambling involve money
placed as a bet, called a ‘stake’.
People who bet on horse racing pay a stake
to the bookmaker.
•If their horse wins, they get back their
stake and extra money on top.
•If they lose, they lose their stake.
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Example
Case Study 1
His horse is first past the post, so Jimmy
gets back his stake and has winnings on
top.
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Jimmy has bet £10 on a horse called
‘Jenny’s Choice’ to win the 3.30 pm race.
Question
People gamble because, although chances of winning
are not always very high, there is a chance of
receiving a larger sum of money that would not
otherwise be obtained.
Gambling can be addictive.
When some gamblers lose a bet, they try another
bet, with higher potential winnings, to try to win
back the money that they have already lost.
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Why do you think people gamble?
Stocks & Shares
‘buying shares in the company’ - invest money in
Share prices are quoted on
• the London Stock Exchange
• in newspapers
• on websites
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other companies
Stocks & Shares
Investing in shares
• if share price goes up - able to sell share at a
• if share price falls - could make a loss.
• not guaranteed to get your money back
• cannot guarantee a certain rate of return
Risk can be reduced by using an expert to choose
the companies for you.
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profit.
Stocks & Shares
Some companies pay a dividend to
profit.
This depends on
• the company’s performance
• whether it makes a good profit.
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shareholders – their share of the company’s
Stocks & Shares
When buying stocks and shares,
remember that the value of your
investment can go down as well as
up.
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WARNING!
Question
different ways of investing
money about which you may
have heard?
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Can you think of any
Stocks & Shares
Different types of investment have different levels
of risk:
can be very risky, investor could lose all of their
money if the company fails
• buying into a pooled investment (such as a unit
trust) – a fund which many investors put their
money together to buy a range of stocks, shares
and bonds – is less risky.
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• buying stocks and shares in a particular company
Stocks & Shares
The idea behind pooled investments is that of ‘not
‘diversification’.
Risks are reduced because it is unlikely that all of
the investments will lose money and likely that some
will earn money.
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putting all of your eggs in one basket’ and is called
Stocks & Shares
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If we put shares on our risk line, you can see the following.