FINANCIAL MARKETS Chapter 11

SAVING & INVESTING Section 1

Investing  Use of assets (money) to earn income or profit  Redirecting resources today so they can create benefits for future  Possibility of making a profit leads to investing  Financial Systems include savers & borrowers which allow money transfers between them

Financial Assets  AKA securities  Documents that prove you own property, money, etc.  Serve as proof in court  People use funds to develop new products, create new businesses, save for retirement, etc.

Mutual Funds  Uses lots of people’s savings  Invest in several different stocks, bonds, etc.  Ability to invest in range of companies allows for fewer financial losses

Life Insurance Co.  Financial protection for beneficiaries of the insured  To make up for lost income  Insurance Co. collects payments (premiums) each month to pay for payout incase something happens to the insurance purchaser  Insurance Co. lends out part of the premium to investors and collects interest on the loans

Pension Funds  Income a retired person receives after working at a company for a long period of time or after they reach a certain age  Employers may keep a % of a persons paycheck & put it in a fund for the employee until they retire  Fund does collect interest over the years

Diversification  Spreading money around to different types of investments  Reduces risk of loosing all money invested  Portfolios show people’s & business’…  gains and losses  what they invested in

Return & Risk  Money investor receives from investment  Minus your initial money invested  Run a Risk if investing in a company or an account NOT insured by the government (FDIC)  Possibility of loosing all of your money invested

BONDS & OTHER FINANCIAL ASSETS Section 2

Bonds  Loans to a business or company  Must repay investor  Usually pay out fixed amount for certain period of time  Low risk investment  Characteristics …  Coupon Rate – interest rate lender/investor will receive  Maturity – date/time period in which lender will be repaid Usually 10, 20, or 30 years Usually 10, 20, or 30 years  Par Value – amount investor paid for bond & will get back Face Value Face Value Principal Principal

Savings Bond  Low Denominations  $50 to $10,000  Issued by United States Government  No Risk / Will always get principal back  Pays interest  Buy bond for ½ of face value  Receive face value on maturity date  Example: Pay $25 and get $50 back

U.S. Treasury Department  T- Bond…  years  $1,000 minimum  T- Note…  2 – 10 years  $1,000 minimum  T-Bill…  3, 6, or 12 months  $1,000 minimum * All are extremely safe!

Municipal Bond  Issued by state & local bonds  Roads  Bridges  Schools & other buildings  Safe depending on health of town &/or state  Not subjected to income tax

Corporate Bonds  $1,000 to $10,000  Have to pay tax on them  Moderate risk b/c payout depends upon success of business

S.E.C.  Security and Exchange Commission  Government Agency  Regulates Financial Markets & investment companies  Enforces all market laws

Markets  Capital Markets – loans for more than a year  Money Markets – loans for less than a year  Primary Markets – only purchaser can redeem them  Can not sell them to someone else  Secondary Markets – assets that can be sold to another person

THE STOCK MARKET Section 3

Buying Stock  Way for corporations to earn money  Sold in shares  Dividends – pay out to owners of stocks  Usually pays 4 times per year  Capital Gains – sell stock for more that originally paid for it  Capital Loss – sell stock for less than the original amount paid for

Types of Stock  Income – pays dividends throughout year  Common –  Investors are voting owners of company  One vote for every share owned  Preferred –  Nonvoting owners  Receive dividends before common stock owners

Trading Stocks  Stockbroker –  links buyers & sellers of stock  Advises people to buy or sell stock  Work for brokerage firm  Stock Exchanges –  Markets for buying & selling stocks

New York Stock Exchange  Located in New York  Largest & most powerful in the country  Began in 1792, informal & outside  Only largest & most established companies can sell  Largest & best known are known as “blue chip”  In highest demand

Nasdaq  National Association of Securities Dealers Automated Quotations  OTC Market are those that are traded electronically  Created in 1971  2 nd largest market in U.S. / 3 rd in the world  No trading floor, but info broadcasted to over 360,000 computers around the world

Bull & Bear  Bull Markets  Market rises steady over time  Bear Markets  Market drops over a period of time

The Dow  The Dow Jones Industrial Average  Started in 1896  Makes sure stocks remain representative of market as a whole  Represents 30 of the largest industries of all markets

S & P 500  Standard & Poor’s 500  Gives picture of stock performance  Tracks price changes of 500 different stocks

Crash of 1929  1929 Stock Market had combined value of $87 billion  Small # of companies & families had much of the money  Ordinary people were having hard times & went into debt buying electric goods on credit  Industries producing too many goods  Large surpluses & low prices

Crash of 1929  Too many investors were using borrowed money to pay for stocks  Many who couldn’t afford it were “buying on the margin”  Less wealthy ppl were purchasing a stock for a faction of the price & borrowing rest from stock brokers  Brokers loans went from $5 million in mid to $850 million in Sept. 1929

Crash of 1929  Sept. 3, 1929 Dow reached an all time high  Stock prices went well above their real value  Prices based upon company’s earnings & assets  Stock prices started to fall in late Sept. and brokers wanted their loans repaid  PPl started to sell their stock fast & prices of stocks started to come down dramatically  “Black Tuesday” Oct. 29, million shares were sold  Prior average was 4-8 million per day

Aftermath of Crash  4 million had invested in stock market & felt 1 st affects  Eventually crash would affect EVERY American some way  Millions (many who didn’t even own stock) lost homes, farms, jobs, and became penniless  Very little money in circulation & businesses couldn’t spend to put people back to work  WWII eventually led the U.S. out of the Great Depression by putting people back to work making war supplies