Financial Markets

Saving & Investing Investment: the use of assets to earn income or profit. – Ex. Paying for college. Financial System: the system that allows the transfer of money between savers and borrowers. Financial Asset: claim on the property or income of a borrower.

Does money grow on trees?

Saving & Investing Savers, financial intermediaries, and borrowers all function together to generate more money in our economy. Financial Intermediaries Include: – Banks, Saving and Loans Associations, and Credit Unions. – Finance Companies – Mutual Funds – Life Insurance Companies – Pension Funds

Saving & Investing What these financial intermediaries do is collect funds from savers. Savers entrust these financial intermediaries to take care of their money. The financial intermediaries then loan out some of this money to borrowers.

The Cycle Borrowers / Investors Financial Intermediaries Savers

The Cycle Saver Deposits money into Financial Intermediary. Frequently interest is earned while money sits. Financial Intermediary Saves a % of deposited money. Loans the rest out to borrowers who then pay interest on the loan. Borrower Takes out a loan from a financial intermediary, knowing they must pay interest in addition to the principal amount. Ideally the borrower uses the loan to make more money, thus continuing the cycle.

Saving & Investing There is always risk when investing, “no such thing as a sure thing”. Diversification, the strategy of spreading out investments, is the best way to lower risk.

Saving & Investing Savings Accounts are very low risk, and very liquid (easy access to cash), but they receive low interest rates. The return, or money received in addition to initial investment, is guaranteed. CDs, or certificates of deposit, give you less liquidity, but a higher interest rate and thus a greater return.

Bonds and Other Financial Assets Bonds are IOUs. – They are sold by the government or corporations. – They pay a fixed amount of interest at regular intervals. – They are established with a fixed amount of time.

Bonds and Other Financial Assets Three Components of Bonds: 1.Coupon Rate: the interest rate the issuer will pay the holder. 2.Maturity: the time at which payment to the bondholder is due. 3.Par Value: original amount paid for bond. AKA face value or principal.

Bonds and Other Financial Assets Bonds are frequently bought and sold at discounted price. This is usually done because of changing interest rates.

Types of Bonds Treasury Bonds, Bills, and Notes – Bonds: long-term, years, safe, min. purchase $1000 – Notes: intermediate term, 2-10 years, safe, min. purchase $1000 – Bills: short-term, 3-6-or 12 months, liquid and safe, min. purchase $1000.

Types of Bonds Municipal Bonds: bonds issued by state and local governments. – Relatively safe because government can tax. – Also are tax-exempt at state and federal level. Corporate Bonds: bonds issued by corporations to help them expand their business. – Sold in large denominations. – No tax base as guarantee places them in moderate risk levels.

Types of Bonds Junk Bonds: (AKA high-yield securities). They are bonds issued by companies that are rated low because they have a very high risk. However, they do potentially have a higher payout.

Other Types of Financial Assets Certificates of Deposit: (CDs) Available through banks. Banks lend out the funds for fixed time, 6 months or a year. – Available for as little as $100. Ex. Student Loan. Money Market Mutual Funds: (M4) Intermediaries buy short-term financial assets. May receive higher interest, but not covered by FDIC.

Financial Asset Markets

Capital and Money Markets – Capital Markets: Markets where money is lent for longer than a year. Long-term CDs, corporate and government bonds. – Money Markets: Markets where money is lent for less than a year. Short-term CDs, Treasury bills, and money market mutual funds.

Financial Asset Markets Primary and Secondary Markets Primary markets: financial assets that can be redeemed only by the original holder. – Secondary markets: financial assets that can be resold.

War Bonds

Stock Market Ch.11 Sec. 3 By: Mr. Skinner

Buying Stock Stock are also called equities, and issued in portions known as shares. Stockholders can make profit in two ways: 1.Dividends: corporations pay out profits to stockholders. 2.Capital Gains: When stock is sold for more than the owner paid. Can also have a Capital Loss.

Types of Stock Income Stock: Pays dividends at regular times during the year. Growth Stock: Pays few or no dividends. Earnings are reinvested in the business.

Types of Stock Common Stock: Voting owners of stock. 1 vote per share of stock. Preferred Stock: Nonvoting owners of the company. Receive dividends before owners of common stock.

How Stocks Are Traded? This guy is a stockbroker, he links buyers and sellers of stock. He works at a brokerage firm, a business that specializes in trading stocks.

How Stocks Are Traded? Where is stock traded? – At stock exchanges, markets for buying and selling stock.

Where are stocks traded? New York Stock Exchange: It handles the largest and most established companies in the country. – It began in 1792 OTC (over the counter) Market: an electronic marketplace for stocks and bonds.

Where are stocks traded? NASDAQ: American market for OTC securities. – Began in 1971 – By 1990 became second largest securities market in the United States. – It does not actually have a trading floor, but is connected by computer terminals across the world. U.S., Asia, and Europe

Measuring Stock Performance Bull Market: steady rise in the market over time. Bear Market: steady drop in the market over time.

Measuring Stock Performance The Dow Jones Industrial Average – Shown how certain stocks have traded every business day since – Today the Dow represents 30 large companies. S & P 500 (Standards and Poor’s 500) – Measures 500 different stocks and measures overall stock performance.

The Great Crash of 1929 Set-up by a long-term bull market. Did not result from a single cause, and lessons still used today from the collapse.

The Great Crash of 1929 Speculation: the practice of making high-risk investments with borrowed money in hopes of getting big returns. Too much of the wealth in only a few hands. Buying on margin: – Paying a fraction of price and borrowing the rest from the brokerage firm. – $5 million – $850 million

The Great Crash of 1929 Stocks reached peak in September, but began to slowly fall. October 23 rd the Dow dropped 21 points in an hour. Worry set in and investors began to sell the next day. Black Tuesday, October 29 th a record 16.4 million shares were sold. Nearly four times the average. This is the crash.

Aftermath The stock market was affected for years afterwards. Even in the 1980s only 25% of American households held stock. “Black Monday”- October 19 th, Dow lost 22.5% of its value. – The Fed assisted this time much more efficiently. Within two years returned to previous status. This again rose in the 1990s with the advent of new technologies and internet companies.