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Financial Markets

Financial Markets. Chapter 11. Saving and Investing. Chapter 11, Section 1. Save Now (Interest Compounds). http://www.econedlink.org/interactives/interest.html. Investing. The act of redirecting resources for benefits in the future…use of assets to earn income or profit

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Financial Markets

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  1. Financial Markets Chapter 11

  2. Saving and Investing Chapter 11, Section 1

  3. Save Now (Interest Compounds) • http://www.econedlink.org/interactives/interest.html

  4. Investing • The act of redirecting resources for benefits in the future…use of assets to earn income or profit • Investing is very important to the Free Enterprise System • Promotes economic growth and contributes to the nation’s wealth

  5. Financial Systems • Financial systems are needed for investment to take place • They allow for the transfer between savers and borrowers

  6. Financial Assets • Anything of value owned by an individual, organization, or institution

  7. Flow of Savings and Investing • Savers and borrowers are connected to fuel investment • Linked directly or through financial intermediaries

  8. Financial Intermediaries • Banks…take deposits from savers and then make loans • Finance Companies…loan money at higher interest and risk • Mutual funds…pool money together from many investors to invest in a variety of opportunities • Stocks, Bonds etc… • Lower risk because they are diversified

  9. Financial Intermediaries • Life Insurance…provide financial protection for family or beneficiaries of the insured • Collect premiums • Lend money to investors • Pension Funds…exist to aid retirement • Take premiums and invest them for retirement income

  10. Sharing Risk • Risk…the chance you take on investment • Diversification…spreading out your money into many different options • High risk…high return • Low risk…low return

  11. Types of Risk • Credit Risk…borrower may be late or unable to pay back • Liquidity Risk…hard to turn asset into cash • Inflation Risk…money may lose value • Time Risk…giving up other option due to time requirements (opportunity cost) • Return Risk…may not get back what you invested

  12. Providing Info • Portfolios…collection of stocks and assets • Prospectus…investment report • Return…money investor receives beyond the initial investment

  13. Risk, Liquidity, and Return • Giving up liquidity and taking on risk will result in a higher return.

  14. Review 1. Investment is (a) providing money for your family. (b) the act of redirecting resources from being consumed today so that they may create benefits in the future. (c) an institution that helps channel funds from savers to borrowers. (d) a collection of financial intermediaries. 2. The money an investor receives above and beyond the money initially invested is called (a) investment. (b) savings. (c) return. (d) prospectus.

  15. Bonds and Other Financial Assets Chapter 11, Section 2

  16. Bonds • Loans or IOU’s to the government or a corporation • Government and Companies will sell bonds (borrow money) to raise money for investment • Usually pay a fixed rate of interest • Generally lower risk (especially government issued)

  17. Components of Bonds • Coupon rate...the interest rate that the bond issuer will pay the bond holder • Maturity...the time at which payment is due to the bondholder • Par value...the face value or amount that an investor pays for the bond • Yield (return)...the amount the bond holder retains if the bond is held to maturity

  18. Buying and Selling Bonds • Many bonds (not government) are transferable...that is, they may be bought and sold by and from third parties • Investors earn money from interest rates

  19. Bond Ratings • 2 firms publish bond ratings: • Standard and Poor’s (AAA) • Moody’s (Aaa) • Rate bonds on a number of factors...most of all, the ability for the issuer to re-pay the bond • Higher rated bonds pay lower interest • Lower rated are known as junk bonds

  20. Advantages and Disadvantages to the Issuer • Advantages • Payments are fixed...coupon rates do not fluctuate • Do not have to share profits with the bondholders like they do with stockholders • Disadvantages • Company has to make fixed interest payments even in bad years • Always face the ratings and may be downgraded

  21. Types of Bonds • Government issued bonds: http://www.savingsbonds.gov/indiv/indiv.htm • Savings Bonds...ones that we are most familiar with...purchased for less than par value...do not pay dividends...not transferable

  22. Types of Bonds • Treasury Bonds, Bills, Notes... • Bonds investing in the US government (denominations of $1000) • Also known as T-bonds, T-Bills, T-notes • Among the safest of investments • T-bond…long term (10-30 years) • T-Note…mid-term (2-10 years) • T-bills (3,6,12 months)

  23. Municipal Bonds • Issued by state and local governments to improve public ventures • Assume they are safe because they are backed by tax payers

  24. Corporate Bonds • Issued by corporations to expand their capital • Have higher risk • Monitored closely by S&P, Moody’s and SEC • SEC…Securities and Exchange Commission…government agency that monitors financial markets and fraud

  25. Junk Bonds • High yield, low rated securities • High risk • May pay as high as 12%

  26. Other Financial Assets • CD’s…certificates of deposit • Issued by banks • Pool of money that is lent to customers • Choice of different maturity rates • Money Market Mutual Funds • Pool money and intermediaries invest it • Higher yield than savings or CD’s but not insured by FDIC

  27. Review 1. A bond is a (a) loan that represents debt that the government or a corporation must repay to an investor. (b) portion of ownership in a corporation. (c) system that allows the transfer of funds between savers and borrowers. (d) collection of financial assets. 2. How does the risk involved in a money market mutual fund compare with the risk of a certificate of deposit? (a) The risk of the money market mutual fund is less than the certificate of deposit. (b) There is no risk involved. (c) The risk of the money market mutual fund is much greater than the certificate of deposit. (d) The risk of both is about the same.

  28. The Stock Market Chapter 10, Section 3

  29. Stock • Share of ownership in a company • How to make money off stock • Dividends...pay out profits to shareholders • Capital gains...the profit that is made from selling stock • Capital loss...the money that may be lost when selling stock

  30. Types of Stock • Income Stock...stock that pays dividends • Growth Stock...stock in which the company re-invests that earnings and does not pay dividends • Common Stock...stock where investors are voting members of the company • Preferred Stock...stock where holders do not have a vote...but they receive dividends first

  31. Stock Splits • A stock split is a splitting of shares. • Stock splits usually happen when the stock price becomes too high for people to frequently buy • This is good for the company and the shareholder

  32. Risks of Stock • Higher returns but higher risks • If a company goes bankrupt, creditors (including bondholders) are paid off first. • If the company does not grow you may take a capital loss • It may take time for your stock to gain value and to receive a capital gain

  33. Trading of Stock • Stockbrokers • Link buyers and sellers of stock • Earn money by charging commissions • Stock Exchanges • Markets for buying and selling stock • NYSE, NASDAQ, Internet (OTC)

  34. NYSE • New York Stock Exchange • Largest physical exchange • Handles exchanges for only the largest and most established companies • Blue chips

  35. Floor of NYSE

  36. Floor of NYSE

  37. Closing Bell

  38. OTC Market • Over the Counter Market • Majority of trades happen in this market • Has grown immensely with the introduction of the internet

  39. NASDAQ • Nations Association of Securities Dealers Automated Quotations • Specializes in energy stocks • No trading floor (all electronic)

  40. Futures • Contracts to buy or sell at a specific date in the future at a price that is set today • Can be risky for both the buyer and seller • Often happens in the agricultural market

  41. Options • Option to buy or sell stock at a set price for a certain amount of time • Call option...option to buy shares • Put option...option to sell shares

  42. Daytrading • Daytraders try to predict minute by minute changes and buy or sell to maximize capital gains • Very risky • Need a lot of $$

  43. Bull and Bear Markets • When the stock market rises steadily over time it is referred to as a bull market • In contrast, if it declines over time it is referred to as a bear market

  44. Dow and S & P • Indexes that show how stocks are performing • Dow Jones Industrial Average • Shows the performance of 30 large companies over time • Stocks represent various industries • S & P • Reports on price changes of 500 different stocks and gives a broader measure of performance

  45. Review 1. A share of stock represents (a) debt that the government or a corporation must repay to an investor. (b) a portion of ownership in a corporation. (c) a system that allows the transfer of funds between savers and borrowers. (d) a collection of financial assets. 2. Which of the following represents a way to profit from buying stock? (a) capital gains (b) portfolios (c) speculation (d) capital losses

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