Financial Markets Investing: Chapter 11

Saving and Investing Investment – use of assets to earn an income or profit The Financial System Financial Assets (or securities) Flow of Savings and Investments Savers make deposits to Financial Institutions Financial Institutions make loans to Investors

Saving and Investing Financial Intermediaries Banks, Saving and Loan Associations, Credit Unions, Finance Companies Mutual Funds Hedge Funds Life Insurance Companies Pension Funds

Saving and Investing Sharing Risk Providing information Credit risk, liquidity risk, inflation rate risk, and time risk DIVERSIFY!!!! – spread out your investments Providing information Portfolio – collection of one’s financial assets Prospectus – investment report that provides info to potential investors Providing Liquidity

Saving and Investing Liquidity, Return, and Risk Liquidity and Return Return – the money an investor receives above and beyond the sum of money initially invested More liquid, usually lower return Return and risk Typically, higher return, higher risk Must weigh potential return with risk

Bonds and Other Financial Assets Bonds as Financial Assets Three components of Bonds 1. Coupon Rate – interest rate that bond issuer will pay to a bondholder 2. Maturity – time at which payment to a bondholder is due 3. Par value – the amount to be paid at maturity (face value or principal) - Yield – the annual rate of return on a bond if held to maturity

Bonds and Other Financial Assets Buying Bonds at a Discount Interest change, so price of a bond must change as well Bond Ratings Standard & Poor’s; Moody’s AAA (highest) Advantage of Bonds to Issuer Fixed coupon rate once sold Not part of a company Disadvantage of Bonds to Issuer Must make fixed payments Bonds can be downgraded

Bonds and Other Financial Assets Treasury Bond Treasury Note Treasury Bill Term Long-term Middle-term Short-term Maturity 30 years 2, 5, or 10 yrs 4, 13, 26, 52 weeks Liquidity and Safety Safe Liquid and safe Minimum Purchase $100 Denomination Types of Bonds Savings bonds Treasury Bonds, Bills, and Notes Municipal Bonds Corporate Bonds Junk Bonds

Bonds and Other Financial Assets Other Types of Financial Assets Certificates of Deposits (CDs) Very common; through banks; very flexible Money Market Mutual Funds Higher interest than savings account but no FDIC

Bonds and Other Financial Assets Financial Assets Markets Capital Markets and Money Markets Capital Market – market in which money is lent for periods longer than a year Ex: Long-term CDs and bonds (over 1 yr) Money markets – market in which money is lent for less than a year Ex: short-term CDs, T-Bills, and money market mutual funds Primary and Secondary Markets Primary Market- a market for selling financial assets that can be redeemed only by the original holder Secondary Market – a market for reselling financial assets

Buying Stock Shares – a portion of a stock Benefits of Buying Stock Dividends – portion of company profit (quarterly) Capital Gains – sell for more than purchased Capital loss

Buying Stock Types of Stock Stock Splits Income Stock Growth Stock or Common Stock Preferred Stock Stock Splits Split single shares to lower price of single stock

Buying Stock Risks of Buying Stock Company may lose money Dividend is smaller, stock price drops If Company goes bankrupt, shareholders are paid last

How Stocks Are Traded Stockbroker – person who links buyers and sellers of stock Brokerage Firm – a business that specializes in trading stocks Stock Exchange The market for buying and selling stock NYSE, Nasdaq

How Stocks Are Traded Futures and Options Day Trade?????? Futures – contracts to buy or sell commodities at a particular date in the future at a price specified today Options – contracts that give investors the right to buy or sell stock and other financial assets at a particular price until a specified future date Call/Put Option – contract to buy/sell stock at a particular price until a future date Day Trade??????

Measuring Stock Performance Bull and Bear Markets Bull Market – a steady rise in the stock market over a period of time Bear Market – a steady drop or stagnation in the stock market over a period of time Dow Jones Industrial Average 30 large companies in various industries Meant to represent the whole market S&P 500 500 stocks to measure performance