Consumers, Savers & Investors Chapter 6 Consumers, Savers & Investors

Learning Goals Outline the structure and importance of the financial system. List the various types of securities. Define financial market, and distinguish between primary and secondary financial markets. Describe the characteristics of the major stock exchanges. Discuss the organization and functioning of financial institutions. Explain the functions of the Federal Reserve System and the tools it uses to control the supply of money and credit. Evaluate the major features of regulations and laws affecting the financial system. Describe the global financial system. 1 5 6 2 3 7 4 8

Spenders & Savers Teens spent $159 billion in 2005! Almost 2/3s was spent on consumer goods & services

Gross Domestic Product GDP is the final value of all goods & services produced in the country in one year If a country can increase its GDP it will see an increase in its standard of living The U. S. has the highest GDP in the world (it produces more goods & services than any other country)!

Sources of Income 2 Main Sources: Income from work: Paid by wage (hourly or by unit of production) or by a salary (paid weekly, monthly or yearly) Income from wealth Wealth is the value of the things you own. Net worth is a person’s wealth after debts & other obligations have been subtracted Use your wealth (interest) as income too!

Types of Income Disposable Income (or net pay) is the money you take home after taxes are paid (As a whole most Americans spent more than their disposable income in 2006!) Discretionary income is what may be spent on extras

Factors Affecting Savings Income -People save & invest more as income Expectations - What people think, or hope, will happen in the future Current interest rates – higher interest promotes saving; lower interest does not Taxes – tax rates encourage or discourage savings

Budget A budget can help you save money 3 Steps in preparing a budget: Setting financial goals Estimating income Planning expenditures (a spending plan)

Advertising Informs consumers, creates competition (lower prices) & pays for TV & newspapers Advertising is expensive & can raise prices, it can lead people to buy things they don’t need and businesses may not be objective because they support TV & newspapers

The 4 P’s of Marketing Product - a good or service being offered by a company. Ideally, a product should meet a certain consumer demand, or it should be so compelling that consumers believe they need it. Promotion – give the customers “reasons” to buy your product instead of another company’s (“differentiation”) Place – where can customers buy/get your product Price – How much does it cost; emphasize your company’s pricing strategy (value, quality, etc.)

3 Factors for Saving Safety - offers protection from risks Rate of return - “the higher the risk, the greater the return.” Liquidity – how easily it can be converted to cash - The more liquid, the less the rate of return

Compound Interest Compound interest – interest calculated on the sum of savings plus the accumulated interest $100 x .02 = $2 $102 x .02 = $2.04 $104.04 x .02 = $2.08

The Rule of 72 A useful tool to see how long it will take your money to double 72 is divided by the interest percentage per period to obtain the approximate number of periods (usually years) required for doubling: For example: 72 divided by 2 = 36 (It would take 36 years for your money to double if the interest rate was 2%)

Types of Savings Savings Deposits – low risk, very liquid, low interest Certificate of Deposit (CD) – pays more interest because you agree to deposit money in an account for a specific time period Money Market Deposit Accounts – interest-bearing checking account; your money is used in the money market

Types of Investments Pension & Retirement Funds – These provide tax deferment (payment of taxes on interest after the interest is earned) Corporate Stocks - shares of ownership in a corporation; most pay dividends & provide a way to invest to earn money over many years (if they appreciate) Corporate bonds – IOUs to allow business expansion

Types of Investments Mutual fund – a pool of money used by a company to buy assets (stocks or bonds) U. S. savings bonds – one of the safest investments which allow the Federal government to borrow money Risk is associated with investment but it can provide income for retirement!

What is credit? Credit – the ability of a customer to buy goods & services now and pay for them later Principal – the amount originally borrowed Finance charge – the total amount paid to use credit Annual Percentage Rate (APR) – is the cost of credit calculated as an annual percentage of the principal borrowed

Advantages of credit Immediate possession Flexibility Safety Emergency funds Character reference

Disadvantages of credit Overspending Higher cost Impulse buying

Obtaining Credit The 3 C’s of Credit Worthiness: 1. Character – honesty & willingness to repay debts 2. Capacity – your ability to repay debts 3. Capital – or collateral is what people own

Consumer Protection In 1962 President John F. Kennedy’s proposed a consumer “bill of rights” to Congress: 1. The right to safety 2. The right to be informed 3. The right to choose 4. The right to be heard

Federal Deposit Insurance Enacted by the Banking Act of 1933 Restore public confidence in the banking system Before deposit insurance, runs were common as people rushed to withdraw their money from the bank Deposit insurance shifts the risk of bank failures from individuals to the FDIC

Savings Banks and Credit Unions Offer a variety of consumer services 85% of their loans are real estate loans Credit unions are cooperative financial institutions that are owned by depositors/members. Credit unions are created to serve consumers. Insured by National Credit Union Administration (NCUA) which functions the same as the FDIC

Non Depository Financial Institutions Insurance Companies Pension Funds Finance Companies

The Role of the Federal Reserve Created In 1913 Central bank of the United States Regulate commercial banks Perform banking-related activities for the U.S. Department of Treasury Providing services for banks Setting monetary policy

Organization of the Federal Reserve 12 Federal reserve districts Own federal reserve bank District banks are run by a nine-member board of directors. The board of governors is the governing body. Politically independent Federal Open Markets Committee (FOMC) sets most policies concerning monetary policy and interest rates.

Check Clearing and the Fed Americans still write billions of paper checks. The process by which funds are transferred from the check writer to receiver The multiple-step process is managed and cleared by the FED. The Check Clearing for the 21st Century Act is making this process more electronic.

Monetary Policy Supply of money and credit Measures of the money supply: M1 & M2 The FED requires banks to maintain reserves. Set the discount rate Open Market Operations

M1 & M2 Graphic

Regulation of the Financial System Bank Regulation Government Regulation of the Financial Markets Industry Self-Regulation Rules of conduct by professional organizations like National Association of Securities Dealers Market Surveillance

The Financial System: A Global Perspective The financial system is more connected. Financial institutions are more global. Only 3 of the 30 largest banks in the world are US institutions. Most nations have a central bank.