The Free Market System Financial Markets

Saving and Investment investment: the purchase of an asset in hopes it appreciates or generates income ● Examples: purchasing real estate, buying into a company, 529 College Fund, 401K Retirement Account, purchasing bonds ● involves risk and reward ● key to economic growth in free market

“The Financial System” INTERMEDIARIES (Banks, Financial companies) SAVERS (Households, Businesses) BORROWERS (Governments, Businesses) Makes investment possible by allowing the transfer of money between savers and borrowers

Saving and Investment diversification: spreading investments to reduce risk return: the money an investor receives above and beyond the initial investment ● low risk and more liquidity = low return ● high risk and less liquidity = high return

Financial Assets bond: a loan given to an entity for a defined period of time at a fixed interest rate ● treasury bond: issued by U.S. government ● municipal bond: issued by State or local governments ● corporate bond: issued by corporations

Types of Bonds TYPE ISSUER RISK USE Treasury Federal Government Very Low Federal Projects Municipal State & Local Governments Low Local Projects Corporate Corporations Moderate Business Expansion

Financial Assets savings account: a deposit with a modest interest rate allowing frequent withdrawal certificates of deposit (CDs): a time deposit with a higher interest rate intended to be held until maturity (watch video) mutual funds: a holding that pools money from many people to purchase stocks and/or bonds

The Stock Market stock: a claim of ownership in a corporation that is sold in portions called shares Stockholders- Part owners of a corporation

The Stock Market Making a Profit ● dividend: a portion of a corporation’s profit paid to shareholders ● capital gains: the difference between a higher selling and lower purchase price ● capital loss: the difference between a lower selling and higher purchase price

Stock Split If the stock price is too high to attract investors, a company may “split” it stocks in half. This doubles the total number of stocks for the company, but doesn’t change the total value of the company Ex. 1 share of stock at 50 dollars, after the split becomes 2 shares worth $25 each

Crazy Kicks Co. $100 $50 $50 You Own: $100 $50 $50 $100 $50 $50 $100 5 shares at $100 per share 10 shares at $50 per share $100 $50 $50 $100 $50 $50 $100 $50 $50 $500 $500

The Stock Market 3. stockbroker: person who links buyers and sellers of stock

The Stock Market 4. stock exchange: a market for buying and selling stock

The Stock Market 4. stock exchange: ● NYSE: the largest exchange that handles transactions for “blue chip” companies ● NASDAQ: an electronic exchange that handles technology stocks ● AMEX: generally lists smaller companies (recently purchased by the NYSE)

The Stock Market 5. Market Trends ● bull market: a steady rise in the market associated with confidence and the purchasing of stock by investors in anticipations of higher prices in future

The Stock Market 5. Market Trends ● bear market: a steady drop in the market associated with pessimism and the selling of stock by investors in anticipation of lower prices in future

Bull vs. Bear Markets

The Stock Market 6. Stock Indexes ● Dow Jones Industrial Average: compiles the prices of the 30 largest and most widely held public companies in U.S. ● S&P 500: gives a broader picture of stock performance

The Stock Market 7. Determinants of Stock Price ● Corporate finances: corporations publish quarterly earnings reports ● Business news: acquisitions, mergers, restructuring, product releases, and estimates of the company’s future earnings made by corporate officers ● Perceived strength of the company’s services ● Strength of the company’s sector (health care, retail, auto, oil) ● Political Events: elections, war, bailouts ● Government statistics: unemployment, inflation, interests rates