Financial Markets

Section 1

 Investment- the act of redirecting resources from being used today so they can be used to create future benefits  When people save or invest, that money is used by business to expand=economic growth

 Financial assets are documents that show a person made an investment  A financial system allows the transfer of money between savers and borrowers

 Financial Intermediaries are institutions that help channel funds from savers to borrowers Banks, credit unions Finance Companies Mutual Funds Life Insurance Companies Pension Funds

 Diversification is the spreading out of investments to reduce risk  Financial Intermediaries save time/money because they do the research for investments

 Return is the money an investor receives above and beyond the sum of money initially invested

 Remember, investing in a friend’s company could double your money, but the company could fail  The higher the potential return of the investment, the great the risk involved

Section 2

 Bonds are loans that the government or a corporation must repay to the investor.  Bonds pay a fixed amount of interest for a set amount of time

 Advantages: Unlike stocks, bonds are not shares of ownership in a company, meaning the price does not go up or down

 Disadvantages: Whoever issues the bond must make fixed payments, even if times are tough If issuer cannot maintain financial health, difficult to sell bonds

 Savings- issues by the US government  Treasury- US Treasury Department  Municipal- state and local governments  Corporate- corporation issued (to expand business

Section 3

 Corporations raise money by issuing stock, which represents ownership in the company. A portion of stock is called a share.

 Stockowners earn a profit in two ways: 1) Dividends- payments made to the stockholder by the company (earned profit) 2) Capital gain- sell stock for more than they paid for it

 Those who buy common stock are voting members  Those who buy preferred are nonvoting members

 Buying stock is RISKY!  If the company experiences economic downturn, that means less dividends (profit) and reduces the value of the stock

 A stockbroker is a person who links buyers and sellers of stock  Stockbrokers work for brokerage firms, or business that specialize in trading stock  Stocks are sold on the stock exchange, which are markets for buying and selling stock

 The New York Stock Exchange (NYSE) is the world’s largest stock exchange.

 Bull Market- when the stock market rises steadily over a period of time  Bear Market- when the stock market falls steadily over a period of time

 The Dow Jones Industrial Average,”The Dow” measures how stocks are doing

 In 1929, the stock market crashed due to speculation, the practice of making high- risk investments with borrowed money in hopes of getting a big return  As of the 1980s, only 25% of American households own stock