Chapter 11 Financial Markets

Saving and Investing Investing – using assets now to make profit later. – Promotes economic growth – Contributes to a nation’s wealth HOW? Your $$  Banks  Businesses  Better products/Jobs…

Investing continued Financial Assets – you lend your $$$ thru savings accounts, bonds, c.o.d.’s, etc. Financial intermediaries – banks, credit unions, life insurance, pension funds, etc. – Share risk (diversification) – Provide info (prospectus) – Liquidity (savings acct. vs. c.o.d.) Return vs. Liquidity

The Stock Market Corporations sell stock to raise money – Start up costs – Running company or expanding business Why buy stock? – Dividends (paid ~4 times annually) – Capital Gains

Types of Stock Income stock (pays dividends) Growth stock (profit reinvested…) Common stock (1 vote per share) Preferred stock (non-voting; receive $$ 1 st ) Greater risk = greater rate of return Lesser risk = lower rate of return (Like horse racing)

Stock Exchange Contact stockbroker – links buyers/sellers of stock. -brokerage firm gets fee/commission *New York Stock Exchange (largest companies) *Nasdaq – OTC (electronic) *Daytrading (very risky)

Measuring Performance >Bull market (80’s and 90’s) >Bear market (2000’s…) Dow Jones Industrial Avg. – ~30 large companies/various industries Standard & Poor’s 500 (S&P 500) – Measures ~500 different stocks

From Jay Gatsby to Tom Joad The Roaring 20’s (only for the super wealthy) – Stock values skyrocketing – Flappers, Speakeasies, and the Charleston – “Get rich quick – buy stocks” Speculation (some used life savings) Buying on the margin – Farmers and workers were suffering

The Great Crash September 2, 1929 – Dow reached all-time high then began to fall October 23 – worried investors began to sell – prices fell more – panic ensued October 28 – stock prices plummeting October 29 – Black Tuesday – Record 16.4 million shares sold in single day

The Great Depression Millions lost jobs, then homes and farms. Unemployment rate = ~ 25% Millions homeless, starving, etc. Help on the way??? FDR and the New Deal? Get rid of prohibition! WW-II

Market today October 18, 1987 – “Black Monday” 2000 – Dot com bubble – 9/11 attacks 2002 – Enron, WorldCom, etc. – Falsified financial reports 2008 – Subprime mortgage bubble – Citibank, Bear Stearns, Lehman Bros., Fannie Mae, Freddie Mac, AIG – “Too big to fail…” = $700,000,000,000 bailout Auto industry bailouts???