Financing and Investing

Securities Three major asset classes Cash Bonds (fixed income) Equities Asset allocation The percent of your assets in each asset category

Securities Risk Return Cash Very low Low Bonds (fixed income) Moderate – High Moderate Stocks High

Equities Stock Common Stock Share of ownership in a company. Common stock owners can vote on major company decisions They expect to receive cash dividends and to benefit from capital gains. (Often no dividends are issued.)

Equities Stock Preferred Stock Stock whose holders receive preference in the payment of dividends Seldom confers voting rights Dividends are fixed

Securities Purchasers Investment Motivations Primary Investment Objectives by Type of Security 1. Growth in Capital - in terms of potential growth in capital over time, specifically long periods of time, common stocks are the most widely accepted. 2. Stability of Principle - Treasury bills and other money market instruments are the clear winners when it comes to stability of principle. 3. Liquidity - a measure of the speed at which assets can be converted into cash. 4. Current Income a. money market interest rates experience up and down swings in response to economic conditions b. the interest rate on a bond remains constant. c. investors who seek high current income should invest a large portion of their funds in bonds. 5. Growth in Income a. when you buy a bond, the interest rate you receive is fixed for the life of the bond. b. interest rates on money market instruments can increase over time - and decrease as well.

Asset Allocation Determined by: Risk you are willing to take Investment objectives Rule of thumb Cash = 3 to 6 months of expenses (for emergencies) % Equities = 100 – your age

Securities Exchanges Stock Exchange—centralized marketplace where primarily common stock are traded. Stock exchanges are secondary markets, selling securities which have already been issued by firms and sold in the primary market

Securities Exchanges The New York Stock Exchange NYSE (Big Board)—the largest, and probably the most famous, stock market in the world Also one of the oldest, founded in 1792 1. is the largest, and probably most famous, stock market in the world 2. Today more than 4,000 common and preferred stock issues are traded on the NYSE, and represent most of the largest, best-known companies in the U.S. 3. Buying and selling takes place face-to-face on a trading floor, and buy and sell orders are transmitted to one of 42 posts - each stock is assigned a post - on the floor of the exchange. 4. Even though the NYSE retains a trading floor, the exchange has become highly automated in recent years. 5. Its computer systems automatically match and route most orders, which are typically filled in a few seconds.

Securities Exchanges The NASDAQ Stock Market NASDAQ stock market—second-largest stock market in U.S., trading stock issues of firms that are typically smaller, less well-known than those on the NSYE Made up of many technology companies

Securities Exchanges Foreign Stock Markets Virtually all developed, and many developing, countries have stock exchanges Examples include Bombay, Helsinki, Hong Kong, Mexico City, Paris, and Toronto

Buying and Selling Securities Brokerage Firm—financial intermediary that buys and sells securities for individual and institutional investors. E*trade: An Online Brokerage Firm Choosing a brokerage firm, and a specific stockbroker, is one of the most important decisions investors make.

Buying and Selling Securities Placing an Order A market order instructs a brokerage firm to obtain the highest price possible – if the investor is selling – or the lowest price possible – if the investor is buying A limit order instructs the brokerage firm not to pay more than a specified price for stock if the investor is buying, or accept less than a specified price if the investor is selling An investor’s request to buy or sell stock at the current market price is called a market order, which instructs a brokerage firm to obtain the highest price - if the investor is selling, or the lowest price - if the investor is buying.

Costs of Trading When investors buy or sell securities through a brokerage firm, they pay a fee These costs vary widely among brokerage firms A full-service firm charges higher fees, but provides a large number of services and offers investment advice A discount firm charges lower fees, but offers less advice and fewer services Online brokerage firms charge some of lowest fees of all brokerage firms, and give their customers access to a wide range of investment information, though they do not provide advice to investors directly.

How’s the Market Doing? Bull market Bear market

Business News and Information Bloomberg radio, AM 1170 CNBC The Wall Street Journal Online: cnn.money.com, finance.yahoo.com google.com/finance bloomberg.com vanguard.com, fidelity.com 1. At least four or five pages of most daily newspapers are devoted to reporting current financial news. 2. Focuses on the previous day’s securities transactions 3. Stocks and bonds traded on the various securities markets are listed alphabetically in the newspaper. 4. Separate sections exist for each of the major markets. 5. Numerous Internet Resources