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Financial Markets and Risk

Financial Markets and Risk. The higher the risk the greater the potential return. Junk Bonds. Growth Stocks. RISK. Income Stocks. Corporate Bonds. Municipal Bonds. Savings Bonds. Treasury Bills. RETURN. Types of Risk. Credit Risk – you may not get paid back all of your money

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Financial Markets and Risk

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  1. Financial Markets and Risk The higher the risk the greater the potential return. Junk Bonds Growth Stocks RISK Income Stocks Corporate Bonds Municipal Bonds Savings Bonds Treasury Bills RETURN

  2. Types of Risk • Credit Risk – you may not get paid back all of your money • Inflation Risk – the longer you have your money in savings the more inflation erodes its value • Liquidity Risk – you may need cash and if your money is tied up in a long term investment you may not be able to get it without paying a penalty • Time Risk – a better investment opportunity may present itself

  3. Bonds as Financial Assets Bonds are basically loans, or IOUs, that represent debt that the government or a corporation must repay to an investor with interest.

  4. Bonds and Risk • Bonds have different levels of risk depending on: • Who issued the bond • Federal government is the lowest risk • Length of time before bond matures • Longer the time frame the greater the risk

  5. Making Money with Bonds • Bondholders earn interest for the life of the bond. • Bondholders can sell their bond for a higher price then for what they bought them. • Bond ratings and currentinterest rates can change demand for bonds and thus their selling prices

  6. Government Bonds • Savings bonds are the least expensive bond; they cost only $25, but they take 18 years to mature making them an inflation risk. • U.S. Treasury Bills are more expensive - $1000, but they mature in 26 weeks, making them one of the safest of all investments

  7. Government Bonds • Municipal bonds are issued by state or local governments to finance improvements. • Municipal bonds are tax free so they have less inflation risk. • These take 5-15 years to mature.

  8. Corporate Bonds • Corporation issue bonds to raise money to expand their business. • They mature in 10-30 years. • Corporate bonds are rated according to risk • AAA is lowest risk • CCC is highest risk • Corporate bonds cost $1,000 and up.

  9. Corporate Bonds • Junk bonds are the lowest-rated type of corporate bond, but they are potentially higher-paying bonds. • These bonds usually are being sold by companies on the verge of bankruptcy

  10. STOCK

  11. Why do companies issue stock? • By selling SHARES, corporations can raise money to: • Start • Run • Expand their business

  12. There are TWO ways for shareholders to make a profit! • DIVIDENDS • A portion of the corporation’s profits are paid to shareholders • Higher Profits = Higher Dividends per share • CAPITAL GAINS • The difference in the purchasing price & selling price • Selling @ a HIGHER price = gain • Selling @ a LOWER price = loss

  13. HOW DO I PURCHASE STOCK? • Contact a STOCKBROKER • This is a person that links potential sellers & buyers. • Stockbrokers charge fees for conducting the sale.

  14. TYPES OF STOCK • Income stock • Pays dividends. • These are usually large well-established firms. • Growth stock • Pays few dividends, profits are reinvested in the company. • These are new start-up companies

  15. STOCK EXCHANGES MARKETS FOR BUYING AND SELLING STOCK • New York Stock Exchange (NYSE) • The oldest, largest and most prestigious exchange in the US • The largest companies are known asBLUE CHIPstock

  16. STOCK EXCHANGES • Over-the-Counter (OTC) Markets • Stocks are bought and sold over computer terminals, not on the floor of an exchange • Stocks are listed on NASDAQ (the 2nd largest exchange in the US)

  17. MEASURING STOCK PERFORMANCE • BULL MARKET • Stock market is rising steadily over a period of time. • BEAR MARKET • Stock market is steadily falling over a period of time.

  18. MEASURING STOCK PERFORMANCE • Dow-Jones Industrial Average (DIJA) • Publishes a daily average of the closing prices of 30 stocks listed on the NYSE • Standard and Poor’s 500 • Uses the closing prices of 500 stocks listed on NYSE and NASDAQ

  19. DOW Jones Industrial Average

  20. Risk IS Involved!!! • Corporations cannot guarantee profits • The Stockholder may experience a CAPITAL LOSS • Bond holders are paid FIRST!!! • ***Remember*** • A BOND represents DEBT that is owed by the corporation

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