STARTER  What kind of risks may be involved in putting money in a bank savings account?  Think of a way to balance risk and return when making investment decisions.

SAVINGS AND INVESTMENTS CHAPTER 11.1, 11.2

THE FINANCIAL MARKETS- IMPORTANT?  When you open a savings account, you play an important role in our economy.  Your savings will be borrowed and invested by businesses and the government.  The new products created by these investments help to fuel the nation's economy.

THE FINANCIAL SYSTEM  Savings--income not used for consumption  Investment--use of income now in a way that provides a future benefit - economic investment: money lent to businesses  personal investment: individuals putting savings into financial assets  Financial system--transfers funds between savers and investors  Financial market--where buyers and sellers exchange assets directly  Financial intermediary--collects funds from savers, invests in financial assets

FINANCIAL INTERMEDIARIES  Includes banks, S&Ls, credit unions  also finance companies, pension funds, life insurance companies  Mutual fund--pools individuals' money to buy range of financial assets  investors own shares of entire fund

FINANCIAL INTERMEDIARIES  Banking Financial Intermediaries  Provide checking, savings, money market deposit accounts, CDs  depositors earn interest  federal government insures deposits up to $100,000  Make loans; to make profit charge higher interest than pay depositors  Offer uninsured money market mutual funds, stocks, bonds, insurance  Nonbank Financial Intermediaries  Finance companies make small loans to households, small businesses  Mutual funds let individuals own many assets; managers make decisions  Pension funds invest employees money, so will have more at retirement  Life insurance companies invest income in financial assets  let people save by building cash values, protect them against loss

FINANCIAL ASSET MARKETS  Financial markets categorized according to time, resalability  Capital market--for buying and selling long-term financial assets  Money market--for buying and selling short-term financial assets  Primary market--for financial assets that original buyer must redeem  Secondary market--where financial assets are resold

FINANCIAL ASSET MARKETS  2 Factors  Factor 1- Time  Capital markets--assets held for over a year  include stocks, bonds, mortgages, long-term CDs  Money markets--loans made for less than a year - include short-term CDs, Treasury bills  Factor 2- Resalability  Primary markets--financial assets can be redeemed only by original buyer - include savings bonds, small denomination CDs  also market where first issue of stock sold through investment bankers  Secondary markets--resale markets; offer liquidity to investors  include stocks, bonds

WHY INVEST?  Personal investing is saving  Individual must first determine own investment objective:  financial goal investor uses to decide if an investment is appropriate  Investment Objectives  Main considerations: when money will be needed, available income  Other issues: need to pay off debts, tax concerns  Savings for emergencies should be liquid  Long-term investments good for retirement and college  Can choose CDs to coincide with timing of savings goals

RISK AND RETURN  Risk--possibility for loss on an investment  Return--profit or loss on an investment  refers to interest paid on savings or increase in value of stock  Diversification--investing in different financial assets  purpose: maximize returns, minimize risk

WHAT KIND OF RISK ARE YOU WILLING TO TAKE?  Risk usually means loss of part of initial investment, or principal  no-risk investments: insured savings and CDs, U.S. government bonds  Safe investments risk interest rate may not keep up with inflation  Return on riskier investments depends on how profitable company is  bonds less risky than stocks; bondholders paid off first

WHAT KIND OF RETURN DO YOU WANT?  Safe investments have lowest return through fixed interest rates  Stocks, bonds--no guaranteed rates; stocks--higher return over time  If investing over long period, can risk losses in stock some years  if less time and money, may want safer investment  Diversification gives better chance of offsetting a loss with a gain