Major Financial Institutions

 Banks and Credit Unions  Federal Reserve  Types of Business:  Sole Proprietorship, Partnerships, and Corporations  Stock Market  Labor Unions

 The major financial institutions have several purposes  Help manage and invest our money  Help conduct our monetary policy  Help create wealth and innovation in order to grow the economy  Help develop our labor policy

 What is money?  Money refers to the medium of exchange used to conduct economic activity  No gold standard, so our money is not fixed to specific value  Money stock refers to supply of money in circulation  Fiat money refers to hard money-think cash  Most of the money stock is in the form of bank deposits  Beyond financial assets, such as stocks, and property also represent wealth but must be converted or liquidated into money in order to use that wealth as a medium of exchange

BANKSTHE FEDERAL RESERVE  Place to store and access money in form of deposits  More importantly, banks create wealth and enable the economy to grow  Wealth is created when banks issue loans and receive interests of those loans  Businesses and individuals receive loans for a variety of reasons but typically that loan is used to increase their wealth  The interests allow banks to earn a profit and invest more in the economy  The amount of loans banks lend is determined by two factors  Reserve Requirement  regulations on the amount of reserves that banks must hold against their deposits  A percentage set by the Fed of their total deposits  Judgment of Bankers  Banks manipulate the money stock through lending  The more they lend, the more money is in circulation, which causes inflation  The less the lend the less money is in circulation, which cause deflation  This is largely do to the reserve requirement  Established after a banking panic in the early 1900’s it serves as the central bank of the nation  It is the bank of the government  Bank of banks  Creates and manages our monetary policy  Enforces regulation on banking industry  The Fed has to balance the value of money by controlling long term inflation while maintaining short term goal of high employment and production output  Interest Rate (discount rate)  Rate they charge banks for loans  Higher the rate the less banks will borrow, reducing the money stock; vice versa  Reserve Requirement  Amount banks must hold in the Federal Reserve Bank  Higher the rate the more the have to hold, the less money stock  Open Market Operations  Buy or sell government bonds  Buying bonds increases supply; vice versa

SOLE PROPRIETORSHIP PARTNERSHIPS  Only one owner  Advantage:  Pride in business  All profit  Disadvantage:  All financial risk  Difficult to raise capital  More than one owner but traded publically  Duties and liability defined contractually  Advantage  Spreads financial liability and risk  Disadvantage  Conflict over decisions Multiple Ownership through sale of stock Advantage Disperse risk and liability Raise financial capital easily Disadvantage Lose total control More vulnerable to market conditions Corporations

LABOR UNIONS  Labor and entrepreneurship have conflicted over control historically  Labor has fought for the ability to collectively bargain for better pay, better wages, and better conditions, better benefits  Today they have a lot if political influence

 Stocks in publicly traded companies are bought and sold at a stock market(also known as a stock exchange ).  NYSE - New York Stock Exchange  AMEX - American Stock Exchange  NASDAQ - National Association of Securities Dealers  A share a piece of ownership in a company  Companies sell shares in order to quickly and cheaply gain financial capital, for loans cost the amount of interest

 Stock prices aren't fixed. From the second a stock is sold to the public, its price will rise and fall based on free market forces.  It is these ever-shifting market forces that make short-term movements of the stock market so difficult to predict. And that is precisely the reason why short-term stock market investing is so risky.  Prices rise and fall primarily because of changes in supply and demand.  In a free market system, the price of any commodity will rise as demand for it increases, as long as there's a fixed amount of the commodity in circulation. The same is true for stocks. If there are a fixed number of shares in circulation, then the price of the stock will rise as more people want to buy it, and fall as more people want to sell it.  Quarterly earnings reports also play a major role in the price of stocks; shortfalls in earning can drastically drop the price of a share  The value, or price of a share, can create or destroy wealth because you buy it at one value and it becomes another value; if you sell it and it is worth more it is called a capital gain; if it is less a capital loss.