Chapter 11 Notes Financial Markets

Saving & Investing What is an Investment? The act of redirecting resources from being consumed today so that they may create benefits in future.

How does investing promote financial growth in the free enterprise system? Investing allows more money to be used by more people or firms, thus encouraging financial growth.

How do Investments work? In order for investments to take place the economy must have a Financial System. What is a financial System? A system that allows the transfer of money between savers and borrowers.

How does the Financial System bring savers & borrowers together? When people save money their ultimate goal is to accumulate funds for a set purpose. The more money they can save the closer they get to their goal. The financial system offers savers incentives to put their money into the system for borrowers to use fueling investment and economic growth.

The Flow of Savings and Investments Savers Households Individuals Businesses Savers lend out their savings in return for more financial assets Borrowers Governments Businesses Borrowers invest the money they borrow to build things like roads, factories and home.

In what ways can people save money using the financial system? Banks offer: Savings Accounts Checking Accounts Certificates of Deposit (CDs) Government or Corporate Bonds Savers have documents that prove they have money being held by a financial institution. Examples: Passbooks, Bank Statements, Bond Certificates, or other records Savers need these documents to make sure their money is returned when needed and so that the correct amount of interest is collected on their behalf. What are Financial Assets? Claim on property or income of a borrower.

How do savers and borrowers interact? Savers and Borrowers can interact directly, but it is more common for financial intermediaries to be involved. What are financial intermediaries? Institutions that help channel funds from savers to borrowers. What types of financial intermediaries exist? Banks Savings and Loans Associations Credit Unions Finance Companies Mutual Funds Life Insurance Companies Pension Funds

Financial Intermediaries Banks/S&LA/CU Take in deposits from savers, & then lend out some of these funds to businesses and individuals Finance Companies Make loans to consumers & small businesses with higher interest rates & fees to cover the potential losses Mutual Funds Pool money from many individuals and invest the money into a variety of stocks, bonds & other financial assets Life Insurance Companies Provides financial protection for beneficiaries of the insured if death should occur Pension Funds Income that a retiree receives after working a set number of years. In some cases the employers contribute to the fund and in many cases a percentage of the employees paycheck is withheld and deposited into the fund.